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Commercial Metals Company (NYSE:CMC)

F2Q08 Earnings Call

March 25, 2008 11:00 am ET

Executives

Murray McClean – President, CEO

Bill Larson – CFO

Stan Rabin – Chairman

Analysts

Bob Richard – Longbow Research

Barry Vogel – Barry Vogel & Associates

Greg Fortune – RBC Capital Markets

Brian Yu – Citigroup

Aldo Mazzaferro – Goldman Sachs

Chris [Haberland] – Davenport & Co.

Michael Willemse – CIBC World Markets

Wayne Atwell – Pontis Capital Management

Charles Bradford –Bradford Research

Sal Tharani – Goldman Sachs

Rajul Aggarwal – Marathon Asset Management

Eric [Privy] – [Canaccord]

Operator

Hello and welcome to today’s Commercial Metals Company second quarter 2008 earnings results conference call. Your host for today’s call is Mr. Murray McClean, President and Chief Executive Officer of Commercial Metals Company. Mr. McClean, please begin your call.

Murray McClean

Good morning and welcome to CMC’s second quarter 2008 conference call. With me this morning is Stan Rabin our Chairman and Bill Larson our Chief Financial Officer. I’ll start with an overview of the second quarter and then Bill will follow with further details. We previously gave guidance of $0.50-$0.60 per share with no LIFO impact. Obviously as forecasters of LIFO we weren’t particularly good. The taken at face value if you add back the LIFO expense of $0.32 per share the result would have been $0.66 per share, our net result is actually better than the second quarter of last year. However we are a LIFO reporter and the earnings were $0.34 per share including the LIFO expense of $0.32 per share.

As mentioned previously in our guidance our winter quarter, that’s December to February is normally our weakest quarter. The huge LIFO expense was clearly the dominating factor. And this was the result of ferrous scrap prices increasing in December by approximately $35.00, that’s a gross ton and then huge jump in January of over $80.00 per gross ton. Following that rebar and merchant bar prices here in the US increased by $25.00 a short ton and $60.00 a short ton in January and February respectively.

The reason for these large increases in ferrous scrap and then steel prices is the demand which has been driven mainly by China and other emerging countries, particularly in the Middle East. We’ve seen just extremely strong demand for steel and all sorts of raw materials clearly, iron ore, pig iron, ferrous scrap, et cetera. Also another key factor is the global supply of steel products, particularly semi products, billets and slabs has tightened dramatically since China’s last round of export taxes increased them by 25% for billets and slabs on January the 1st of 2008.

This led to actually zero exports of billets and slabs from China in February of this year and when you consider their exports of semis in 2007 calendar year were around 6 million tons, this is a dramatic impact on the global supply situation for steel products. And clearly the settlement of the iron ore contract prices at 65% in February and there’s been further settlements on pallets just recently in March at 87%. This set off a wave of further increases in scrap prices and steel prices. In the US non residential construction was still good, rebar fabrication is strongest in the Gulf area, Texas and California, softer in some of the East coast markets and Florida.

Our joist business is the weakest when you consider the demand in user of box retailer type companies, shopping centers like commercial work, et cetera. Now we saw an acceleration of business in Poland in the last few weeks of the quarter. Croatia remains a turnaround, the sales were slower than we anticipated, plus higher costs. And we’re addressing both these areas in the future. And on the supply side here in the US rebar and merchant bar imports were down roughly 40% from the same period last year. So overall was a good quarter, in particular if you add back that LIFO event for our winter quarter, we were quite happy. So now I’ll hand it over to Bill.

Bill Larson

Thanks Murray, good morning. Let me call to your attention the detailed Safe Harbor statement included in our press release and in our August 31st 2007 10K that in summary says that in spite of managements 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 third quarter of fiscal 2008 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’re aware of non GAAP financial measures, some of these have derived fairly straightforward from our financial statements or in common business use can be the subject of our discussions today and in our visits, our website at CMC.com, there’s more information. But there may be other items that may be outside of our ability for discussion and please bear with us. Well it’s obvious if my life depended on accurately estimating LIFO I would be six feet under.

I feel like that Chicago paper headline, Dewey Defeats Truman, only this time it would be Larson nails LIFO, both of them wrong. As we’ve always said, live by LIFO die by LIFO. You know not all of our steel brethren are on LIFO and it’s impossible to flip a FIFO company onto LIFO by way of just pure analysis. To be comparable you’d have to add the LIFO charge back and put us all on FIFO. From speaking with many of you over the years I know that some of you model us with LIFO and others model us without LIFO, which is of course FIFO, and I’ll leave that up to each of you as we presented the numbers to accommodate all of you.

What is clear enough is that LIFO occurs in periods of rising prices, rising prices mean that demand and supply are balancing at higher levels, higher levels are not the exclusive prevue of the American market as Murray mentioned. I will now add another word to the pantheon of hackneyed expressions that an attempt to rename things that you know perfectly well, words like space, words like paradigm, words like Emperor’s Club, the new word is decoupling. Decoupling, now to the point, will steel markets collapse under the weight of a US recession? I think LIFO and other indicators are telling you rather strongly no. That the US is not driving this bus and will not be for some time.

Let me liberally plagiarize from a Merrill Lynch report of February 28th of this year from their global metals and mining group, 73% of global economic demand is driven by emerging markets. By emerging markets, the US is only 10% and the share of emerging markets for commodities is even higher, so overall the international steel markets are extremely bullish. Safety is number one at CMC, we cannot emphasize it enough, steel making can be a dangerous profession if you do not have a culture of safety, our mills combined rank as the safest in North American in 2007. Congratulations to all of those who make life last by keeping safety first. Looking at the numbers, sales are up substantially across all of our segments.

It is of course a combination of both higher volumes and the rather extraordinary price environment we’re in. If you look at our segment operating profit for the quarter, the two segments with significantly reduced operating profit have pretty straightforward explanations, if you look at the domestic fabrication, they were pretty much trashed by LIFO and the startup cost of CMCS, that’s Croatia, they are a drag on the international mills. The LIFO reserve as it stands at 2/29/08 is $295 million, $295 million which equates to around $1.68 a share. The LIFO effect as shown in the press release, it decreased net earnings some $38 million or $0.32 per share versus last year’s $12 million of $0.10 per share.

Year to date for the six months it decreased net earnings of about $35-$35.5 million of $0.30 per share versus last year’s first six months of about $19 million or $0.16 per share. Depreciation and amortization for the quarter was $32.351 million, for the year that makes it $63.873 and the expectation is that we’ll probably have about $128 million for depreciation for fiscal 2008. If you look at selling, general and administrative expense, we’re up $20 million quarter to quarter and about $38 million or so six months to six months.

The explanations are the same for both periods of time, in the main they’re related to our SAP project combined with two acquisitions that would be our decking operation and Croatia which are in this year’s numbers but they are not in the comparable numbers of last year. Finally a few other statistics, our current ratio is 1.9, long term debt to total cap 27.5%, I mean we’re in good shape from a balance sheet standpoint, no doubt about that. The book value is $13.72 a share. The average shares for the quarter, diluted were 118 028571 and year to date the average shares diluted were 119 200422.

The actual shares outstanding are 114 060280. Obviously we bought some treasury shares back during the quarter, in the second quarter we bought back 3,667,093 shares at an average price of $27.36. That means year to date we bought back 5,412,238 at an average price of $28.00 a share. The remaining authorization at 02/29/08 is roughly 813,000 and I’ll just make a comment that the Board has never left us without significant ammunition, so should we in the future use the 812, I am certain that they will give us more. Murray.

Murray McClean

Thanks Bill, just a couple of comments on the outlook for our third quarter, that’s March through the end of May period. We’re anticipating a strong quarter and we gave a guidance of $0.70 to $0.80 per share, including a LIFO expense of $0.11 per share. As I mentioned earlier, the prices have moved up sharply and certainly after the Chinese New Year they really have taken off. And we’ve seen price, rapid price increases almost weekly during March. We anticipate ferrous scrap prices in the US to be up significantly in April based on global demand and also good demand from the US mills.

Our rebar and merchant bar prices are increasing $25.00 a ton, that’s a short ton on April the 1st and most likely we’ll increase again on May the 1st. The big question is, will there be a correction? Historically every year there’s a seasonal correction on ferrous scrap, it’s normally around that April through June period. This year if there’s a correction, most likely it’ll be through May June period. A couple of reasons, there will be, there’s obviously higher flows of scrap during spring and summer months and particularly if there’s a demand pullback globally this could cause a correction.

But we anticipate any correction prices will stabilize at a higher level than they have in the past and there’s certain discussions by the Chinese government to shut down mills in China during that May to August period with the Olympic Games coming up and that may have some impact. As I mentioned earlier, supply is to us the critical aspect in what’s happening globally and with the big cut back on exports from China that’s having a huge impact on markets particularly in the Middle East and also in Asia.

We believe in the Americas our recycling operation, our mills will have a strong quarter. Internationally Poland should be particularly strong and our distribution operations led by our raw materials business will also be very good. The one segment we highlight of which will have a margin squeeze because of these higher steel prices will be our fabrication and distribution segment here in the Americas. With those comments I’ll now open up the conference for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question will come from the line of Bob Richard with Longbow Research.

Bob Richard – Longbow Research

Good morning and thank you for taking my call. Bill I understand the difficulty in LIFO forecasting, it can be difficult, but if you had to hazard a guess, did you miss more on pricing or volume as far as your inventories?

Bill Larson

No doubt about it, pricing, absolutely, we probably anticipated ferrous scrap prices to go up $30 or $35 or $40 a ton at the beginning of the year and cumulatively during the quarter they’re up $97, so shred it. So I blew it, clearly from a pricing standpoint.

Bob Richard – Longbow Research

Okay, thank you for that and I’ll get back into queue.

Operator

Your next question will come from the line of Barry Vogel with Barry Vogel & Associates.

Barry Vogel – Barry Vogel & Associates

Good morning gentlemen.

Bill Larson

Barry number two?

Barry Vogel – Barry Vogel & Associates

I had a power outage in your wonderful state of North Carolina about a half an hour before your call and therefore I was concerned I wouldn’t be on the call so I wouldn’t even be number anything. But they knew that you were going to say that on the call so therefore the electricity went on.

Bill Larson

I thought everybody was celebrating the big victories by North Carolina in the tournament.

Barry Vogel – Barry Vogel & Associates

Well, that’s another story, the electricity they don’t get right but maybe they get it right in college basketball.

Bill Larson

Yeah but you’re overlooking Duke, my Duke had a power outage.

Barry Vogel – Barry Vogel & Associates

But I don’t root for Duke. Okay, first of all I got to congratulate Bill Larson because he finally stepped up to the plate and bought $100 million worth of stock in the quarter, congratulations Bill. Does that mean that you’re going to be more aggressive as your value of your company has expanded over the last few years in terms of your stock buyback program?

Bill Larson

Well I think what it says is A, the company gets more valuable every quarter and therefore the price that the company might be willing to buy its shares back you know rises with the earning power of the corporation. But as far as any future expectations I think as we’ve discussed in the past it’s a question of the best use of the money at any particular point in time and that call will be made at that time.

Barry Vogel – Barry Vogel & Associates

Okay, secondly do you have an updated capital expenditure estimate for this year at this point?

Bill Larson

It hasn’t changed Barry it’s just a notch shy of the half billion that we’ve talked about before.

Barry Vogel – Barry Vogel & Associates

Alright so what’s that, you say it’s what, $490 million?

Bill Larson

$494, yeah.

Barry Vogel – Barry Vogel & Associates

$494, okay and could you tell us about the SAP costs, what do they look like as you speak for this year? Somebody told me, I don’t know who it was, somebody who knew somebody said you’re having problems with the SAP installation?

Bill Larson

You’ve been reading the Yahoo message boards, stay away from that thing Barry.

Barry Vogel – Barry Vogel & Associates

It wasn’t the Yahoo message, somebody was working for one of your consultants, happens to know Michael and he mentioned it that to him the other day.

Bill Larson

Yeah well if he did he’s no longer a consultant with Commercial Metals. I want a name. No listen we have rolled this thing out at our mill in Texas, we have rolled it out in payroll for the entire domestic subsidiaries, we’ve done it here in corporate, God willing on April 1st, Poland will go on it. I mean the rollout has gone about as well as and you don’t have to take my word for it, IBM, SAP, other consultants that we have used, you know indicate that its gone as well as any that they had seen. We’re very pleased with the results on it.

Yes it costs a lot of money but this system is going to last us beyond my career, you know I’ll be gone and SAP will still be here. So we could not be happier with it given the way that these projects work. Now look these things are not all straight line, anybody who’s ever implemented a tier one ERP system realizes that you know it’s the two steps forward and the half a step back but it’s the nature of the beast and anyone who hasn’t gone through one of these things and would offer criticism, I’ve got to tell you is ignorant.

Barry Vogel – Barry Vogel & Associates

Okay, so how much is going to be the, rough estimate of the cost this year in pretax dollars and per share and your best estimate for the decline in costs next year.

Bill Larson

I think Barry we’re going to stay at that $14 million for the third and the fourth quarters. It will tail off next year, I wish I had a number, I’m not trying to, well I guess I am trying to evade you but not intentionally, I have not seen the budget. It changes with the way that we rollout and that’s kind of a fluid rollout as to who goes when. So you know I don’t have a number yet for next year, I apologize.

Barry Vogel – Barry Vogel & Associates

Alright so the $14, is that a net after tax figure?

Bill Larson

No, no, no, no, no that’s pretax.

Barry Vogel – Barry Vogel & Associates

Alright so what’s pretax for the year look like?

Bill Larson

Well, let’s see, according to the press release we’re sitting at what $25 million so tack on another $25, $26, $27 to that.

Barry Vogel – Barry Vogel & Associates

Okay, $52 million and next year it’s going to be lower?

Bill Larson

Yeah it would be lower but I don’t have an order of magnitude yet Barry.

Barry Vogel – Barry Vogel & Associates

Okay I have a question for the senior person in this phone call and it’s called Mr. Rabin.

Stan Rabin

I’m clearly the senior.

Barry Vogel – Barry Vogel & Associates

Okay. We’ve seen a number of new consolidations in North America over the last few weeks. One was the move by [Ed Razarg] on steel to buy tubular assets from the former IPSCO owners or let’s say the Swedish company and we also saw Arcelor Mittal buying the Sparrow Point facilities, I’m sorry they didn’t buy it, they sold it to [Servicestal].

The Russian seems to be, the Russians are coming and keep on coming. What do you think of the consolidation process and more importantly what do you think of the fact that the Brazilians and the Russians have been the most aggressive using their very strong currencies and what impact do you think that’s going to have going forward if the dollar remains weak versus those currencies?

Stan Rabin

Well I think that as we’ve indicated, that the consolidation will continue, it’s certainly abetted by the currency and in the case of the Russians I think it’s also been clear they want to get assets in other parts of the world so that will continue as well, I think not just in the US. But there seems little question and it’s also clear the consolidation will continue to occur not just at the mill level but at the scrap level and downstream in the fabrication businesses.

Barry Vogel – Barry Vogel & Associates

Okay, thank you very much, you guys did a great job, I appreciate it and hopefully you’ll be on another call Stanley.

Stan Rabin

One more anyhow.

Barry Vogel – Barry Vogel & Associates

Okay, thanks.

Operator

Your next question will come from the line of Greg Fortune with RBC Capital Markets.

Greg Fortune – RBC Capital Markets

Hi, how are you guys. Just continuing the consolidation theme, can you discuss where you stand, which side will you be on the buy side or the sell side or where are the opportunities for you? Thank you.

Bill Larson

Well it’s tough to say if we’re going to be on the sell side, you have to have somebody else to do that.

Murray McClean

Well Greg I mean we see, it’s not just the mills but there’s a lot of consolidation going on. If you look at rebar fabrication we will, be one of those consolidators, I think the three of us [Nea], Nucor, Gerdau and [Merry] Steel and CMC, we have probably 50% of that market. There’s been a lot of consolidation in joist and there’s a lot of consolidation going on globally. So we hope to be part of that.

Greg Fortune – RBC Capital Markets

So you think you’ll be a buyer possibly?

Murray McClean

We are, we continue to be, we want to grow our company and you know we have a certain strategy that we’re following.

Greg Fortune – RBC Capital Markets

Okay, thank you very much.

Operator

Your next question will come from the line of Brian Yu with Citi.

Brian Yu – Citigroup

Good morning Murray, Bill. I have a question regarding the fabrication segment, I know inherently there’s a lag in there just with the timing issue, can you remind us what the lag is, is it six months if we can assume that steel prices stabilize at current levels or?

Bill Larson

Yeah I would say it’s two quarters worth and the first quarter is always, the first of those quarters is always the worst because then some of the backlog at higher prices begins to seep into the average statistics, but they’ll hurt this quarter and then a little bit more into the fourth quarter.

Brian Yu – Citigroup

Okay and then the second question, can you provide us with some color on your order books, order entry rates and what the mill lead times that look like here.

Murray McClean

Yeah our backlogs are still very good Brian, not as good as they were in 2006 period but still very good and our rate of bookings are still good. There are obviously a couple of areas that are down, like joist is down and clearly the steel import business into the US is down. But overall it’s holding up well.

Brian Yu – Citigroup

Okay and what about the lead times at your mills, where are they at now, 7, 8 or how many weeks?

Murray McClean

The mills are running flat out so anything that you book on the mills, March I mean you would have to wait for May’s rolling on a lot of products now. The only area that’s it’s a little weaker is merchant products and that some of that’s to do with the joist business and service end is also as you know, their inventory levels are pretty low and they’re only buying what they need. We don’t see any surge in the service end is buying you know as they do typically in a rising price environment, they tend to increase their inventory. We don’t see it this time around.

Bill Larson

One other thing to keep in mind is the ability to sell billets in this market, but as Murray mentioned with the global pullback in availability and even Poland with the strong currency, we’re able to profitably sell billets.

Brian Yu – Citigroup

Alright, great thanks.

Operator

Your next question will come from the line of Aldo Mazzaferro with Goldman Sachs.

Aldo Mazzaferro – Goldman Sachs

Hi gentlemen, it’s Aldo, how are you. I just had a question on Poland specifically, I wondered you know that $16 million that you mentioned for earnings was actually pretty surprisingly positive given the seasonality and I’m wondering, could you tell us how the monthly trends went in profits, were you in the red for a couple of months and then made it all in the month of February or how would you say you exited the quarter versus the average?

Bill Larson

I don’t have it right in front of me but I suspect it went 15% of the earnings, 20% of the earnings, you know 65% of the earnings. The second half of January and all of February and February of course was a historic month were very strong. The prices went up and we gave you know several, every other week for four weeks we were presenting at various conferences here and we had to update the current pricing schedule every week for those conferences and even today unfortunately the prices I’ve put into the presentation that you’ll all see tomorrow you know, they’re going to be a little low. So it unquestionably, February made it the bulk of that. That’s why we’re so optimistic as we go forward into March, April and May.

Aldo Mazzaferro – Goldman Sachs

Based on what I hear, the pricing is likely to be quite a bit higher, right, February, March, April, May.

Murray McClean

That’s right Aldo. You know looking now Poland rebar prices are around $950.00 a metric ton. They’re not the highest, I mean Russia and the Middle East are like $1,100.00 a metric ton.

Aldo Mazzaferro – Goldman Sachs

And how does that compare with the average for the quarter?

Murray McClean

Well that’s well up, that’s, we’re talking US dollars here, we obviously not only look at Poland zlotys but we’re just looking at what their number is up but it’s probably up in US dollars close to $200.00 a ton.

Aldo Mazzaferro – Goldman Sachs

Anyway, Bill how about a question on LIFO, I don’t know if you, what do you bet, over or under $0.32 for the next?

Bill Larson

Yeah, I boldly predicted $0.11 and $20 million pretax and if I had to guess I’ll be too low. But that’s my best shot at it right now.

Aldo Mazzaferro – Goldman Sachs

So what’s your assumption in the quarter, $0.11, $0.12?

Bill Larson

$0.11 yeah, based strictly upon higher prices, there’s no volume inherent in that.

Aldo Mazzaferro – Goldman Sachs

Okay and then finally on the global seen, you know you’re looking at, this might be more for Stan and Murray but on the surprising development to me is while you’re seeing extremely strong demand and high record prices around the world, you’re seeing lower supply from a lot of traditional exporters and I wondered if you could just maybe take a stab at what you think some of the reasons for this might be.

Murray McClean

Well Aldo, clearly the China’s cut back in steel exports and it’s not just semi products, they’ve cut back probably 50% on rebar and wire rod you know and other lower commodity type finished goods, most of that was going into the Asian markets and to Middle East and also some into Europe, a little bit here into the US. So these are dramatic cut backs and we’re seeing a lot of supplies in Asia.

The rolling mills who were buying billets and slabs from China and then re-exporting say like plate to markets like the US, well they’re completely out now and are no longer exporting those products. And we see countries like Taiwan, there’s a temporary ban on the exports of rebar or billets et cetera. It’s very unusual. So you know the supply side is quite tight and obviously demand is strong in these emerging countries. So you add those two factors together and that’s why I guess the iron ore producers were pretty bullish on what they could get in terms of their iron ore price increases which you know those contract price increases are still maybe $30, $40 a ton below spot iron ore prices.

Bill Larson

And the Australians still haven’t [overlay] Chinese. The only thing I would add would be, Murray’s comment about Taiwan is there are a number of government, particularly with state owned mills who are putting a lot of pressure on these mills to keep their steel domestic. So because of the inflationary pressure it causes.

Aldo Mazzaferro – Goldman Sachs

And there’s something on the tape today about India doing that as well.

Murray McClean

Yeah, it’s incredible Aldo the demand in the Middle East. I mean there’s a rolling mill there. They could take a million tons of billets a year from us if we had them available at these extraordinary prices. So demand is there and I think you’ll see a trend in Asia with China cutting back on their exports, I think you’ll see more melt capacity go in Asia outside China. And you know a lot of this mini blast furnace technology which comes from China, you’ll see that type of technology will go into countries like Vietnam and Malaysia, Thailand, et cetera. But you know that takes a couple of years to put a new mill in, put a new blast furnace in and so the supply side could be interesting for the next year or two.

Aldo Mazzaferro – Goldman Sachs

Great so how quickly can you start your micro mill?

Murray McClean

Well as fast as we would like to. We’re just having some issues on the [thermoting], obviously it’s pretty tough, Arizona is aligned with California, there have been some delays there getting our air permits. But we’re figuring on the end of summer of next year.

Aldo Mazzaferro – Goldman Sachs

I guess you enjoy the pricing in the meanwhile. Well thanks very much.

Operator

Your next question will come from the line of Chris [Haberland] with Davenport & Co.

Chris [Haberland] – Davenport & Co.

Good morning guys. Got a couple quick questions here. First, could you talk a little bit about the international fab and distribution segment, we were a little bit surprise to see a sequential decline in revenues given the high global demand and high steel prices.

Bill Larson

Yeah what you’ve got is the discontinued operation and there’s two operations that had been in there formally, one is the domestic import business, the other is the one that’s in discontinued operations. And so that’s going to be the majority of it. I think it’s just more of a reclassification question than it is, because clearly the operations that are still in there, particularly the raw materials operation you know which is dealing with the iron ore and the floor spar and coke and all the other projects, I can tell you they’re going gangbusters. And the other ones, the service centers in Australia and the intra-Asian business is still strong as well. It’s probably more a classification question.

Chris [Haberland] – Davenport & Co.

Okay and then correct me if I’m wrong but in the last call I believe you all had said that you were expecting the Croatian mill to be break even this year. Are you still expecting that?

Murray McClean

No. It’s going to take longer than we thought, it’ll be into next year. A couple of reasons, sales have been a lot more difficult than we anticipated, particularly on seamless. And also costs have jumped up there with labor costs, energy costs et cetera. But you know we have a plan to address these two issues and you know the losses we’re making there will decline. I mean you have to bear in mind we only acquired it in September last year and we think we acquired it at a very good price. There’s a lot of negative goodwill associated with the assets and it’ll take us longer than we anticipated.

Chris [Haberland] – Davenport & Co.

Okay and then last question here, can you just give us your share count at quarter end?

Bill Larson

The actual number that was outstanding was 114.

Chris [Haberland] – Davenport & Co.

114, is that fully diluted?

Bill Larson

No that’s the actual shares that are outstanding. The fully diluted for the second quarter was 118 million.

Chris [Haberland] – Davenport & Co.

Okay, thank you very much.

Bill Larson

Okay.

Operator

Your next question will come from the line of Michael Willemse with CIBC World Markets.

Michael Willemse – CIBC World Markets

Great, thank you, good morning. Just Murray you mentioned you know $950.00 per metric ton in Poland, $1,110 in Russia Middle East, I think in North America we’re still at around $780.00 per metric ton. Do you think there will be a convergence between pricing? Or do you think North America historically was at a premium to the global market, how long do you think it’ll be at a discount?

Murray McClean

Well I think we could be there for some time. I mean obviously on the demand side here in the US it’s pretty flattish, Michael, so you know the prices are likely to move here somewhat in the US but I don’t see US prices getting to the level that they internationally. So most likely the international prices will come off at some stage.

Michael Willemse – CIBC World Markets

Right and if you were to look at North American mills, you know what percentage of the production is going to export, is it still you know pretty low single digit?

Murray McClean

Yeah it’s very low, we were really only exporting billets. You know we do have some extra melt capacity and with the very attractive prices we have been exporting billets. But it’s highly unlikely that we would export products like rebar and merchant products. You know we can sell those within the US market.

Bill Larson

The exact statistics for the six months we exported 78,000 tons of billets and only 14,000 tons of finished goods and the finished goods went to Canada and Mexico so it’s not kind of, well that’s export but it’s all NAFTA type stuff.

Michael Willemse – CIBC World Markets

Okay and could you just go over in your outlook for scrap, did you say up in April and then maybe down in May June?

Murray McClean

Well we, the indications are strongly that they will be up in April. We don’t know what will happen May June but the last two or three years if you track scrap prices, they have come off because flows do increase and then you have seasonal factors come into play as well. So even globally normally in Asia you have monsoon season, construction slows down from May through to August period and Europe obviously they have holidays, typically July August period. So there’s often some slowdown seasonal slowdown. But who knows, this year may be different but the trend is definitely up, you know based on those very high, those big increases in iron ore prices.

Michael Willemse – CIBC World Markets

So for April are we talking a $40.00 per ton increase? Or $60.00?

Murray McClean

I don’t know Michael, if you asked us a week ago we probably would have $20.00 or $30.00 a ton and now it would be more like over $50.00 a ton the way the market’s going.

Michael Willemse – CIBC World Markets

Right, yup, okay. And then just one last question on the Croatian mill, what were the shipments from that mill, I guess what have they been for the first six months of the year?

Bill Larson

You’re going to force me to add two press releases together.

Michael Willemse – CIBC World Markets

Okay, we can just do the last fiscal [overlay].

Bill Larson

The press release has got, we rolled 12,100 tons and we sold 9,200 in the quarter.

Michael Willemse – CIBC World Markets

And what would, what’s the loss there, is it a couple million in the quarter?

Bill Larson

No, it was 6.4 I believe, let me just double check that, yeah, 6.4 was our operating loss.

Michael Willemse – CIBC World Markets

6.4, okay, so if we took the 9,200 annualized say we’re around 35-40,000 shipments, what do you think you could get shipments up to you know once you kind of got it at your desired level?

Bill Larson

You know annualizing these numbers could be real dangerous right now because I think we’re on a ramp up and I think you’re probably coming up a little short. Mainly because when the seamless kicks in it’s not going to kick in with 500 here and there, the orders when they typically come, they come in the thousand and two thousand and three thousand ton orders. And we’ve got a lot of irons in the fire and you know we are anticipating that to pick up. Right now I’ll be honest Michael I wouldn’t give you a prediction other than I think if you annualize where we are right now, you’re going to be too low.

Michael Willemse – CIBC World Markets

Okay just if you could remind me what was the rated capacity when you bought the mill?

Bill Larson

300,000 metric tons spread over all the product lines.

Michael Willemse – CIBC World Markets

Okay.

Murray McClean

The good news Michael is March we’ll have a record production month out of that mill, so it is improving from obviously a very low level.

Michael Willemse – CIBC World Markets

Okay, great, thank you.

Operator

Your next question will come from the line of Wayne Atwell with Pontis Capital Management.

Wayne Atwell – Pontis Capital Management

Thank you and good morning. Most of my questions have been answered. One or two quick questions. Do you ever do portfolio reviews and think about what’s underperforming that you might think of disposing of?

Murray McClean

Wayne we do, we look at all our business units and we obviously look at where we can grow those businesses in the future so we do that on a pretty regular basis.

Wayne Atwell – Pontis Capital Management

And remind me, there’s nothing on the launching pad that I’m aware of, is that correct?

Bill Larson

The discontinued operation of our semi finished import business in the United States that’s been in the press release the last couple of quarters.

Wayne Atwell – Pontis Capital Management

Okay but that’s really the only asset?

Murray McClean

Right.

Wayne Atwell – Pontis Capital Management

And in terms of acquisitions, you’ve done a great job building the company in recent years with what you’ve done in Eastern Europe and such, it seems like the easy acquisitions or the obvious ones are pretty much behind us and you’re obviously not going to give us any names but can you sort of talk in generalities, is there much left out there to buy?

Murray McClean

There’s plenty of opportunities but obviously the valuation of the assets is much higher than it was. So I’d say any easy pickings are now gone. But there’s still good companies out there and there’s still opportunities.

Wayne Atwell – Pontis Capital Management

And any strategic area that you might be interested in?

Murray McClean

I mean we obviously look in the global markets where we’re strong and we’re continuing to make acquisitions and also invest in green field in Poland we’re going to invest quite a lot on Croatia, in Asia, particularly Southeast Asia we’re looking pretty seriously and here in the US, particularly recycling upstream and fabrication downstream, we continue to look.

Wayne Atwell – Pontis Capital Management

Would you ever think about building anything in either Vietnam or India?

Murray McClean

Possibly with a partner in Vietnam. Maybe not India at this point in time.

Wayne Atwell – Pontis Capital Management

Right, okay, thank you very much.

Operator

Your next question will come from the line of Charles Bradford with Bradford Research.

Charles Bradford –Bradford Research

Good morning. Could you talk a little bit about non residential construction because there’s a lot of mixed stories about the Federal government maybe running out of gas tax highway revenues and maybe having to cut back next year and office building construction turning down in the second half. What are you seeing these days?

Murray McClean

Well Chuck we’re seeing the market as I mentioned pretty flattish but still quite good. It’s a little bit mixed, obviously on the joist side as I mentioned, it’s definitely weaker there, which you would expect. On the rebar fabrication area, depending on the markets where you’re servicing, it’s still very good and in the Gulf states, Texas and right through to California. In Florida obviously with the downturn in residential and condos it’s weaker. Some of the east coast markets are weaker. Heavy commercial still looks pretty good overall. So it’s a bit of a mixed bag but certainly the public works is still quite strong and you know there’s some states where there’s talk about funding problems into next year but at this point in time we don’t see it.

Bill Larson

Chuck, one things that’s clear, you will see a change over time, it’s already begun in how transportation projects are funded. There’ll be more with bonds, you’ll see more tow projects, a lot of private investment. And even in states which are fighting it for political reasons and we’ve had this in Texas that, oh we don’t want a Spanish company coming in and being able to buy a particular highway project, that’s just going to change out of necessity. And it’s clear it’s starting to happen already.

Charles Bradford –Bradford Research

Is there any way to split your shipments to non res between highway and commercial or office?

Bill Larson

Yeah, in fact we have a slide in our presentation now that has that. It says that 30% of what happens here in the United States and that’s both mills and domestic fabrication, you know deals with the infrastructure Chuck. And you know after that about 15% is heavy commercial and 10% is the light commercial that’s particularly the joists. 15% is service centers. 5% is agriculture, there’s another 5% in residential, that’s our copper tube mill. And the rest which if I’ve added it up right is 20% goes to OEMs and others.

Charles Bradford –Bradford Research

Thank you. See you tomorrow.

Operator

Your next question will come from the line of Sal Tarani with Goldman Sachs.

Sal Tharani – Goldman Sachs

Good morning guys. On the scrap prices, you’ve seen scrap pricing moving up from $60-$80 in the export market over the last three weeks, is that what you’re hearing also?

Murray McClean

Yes.

Sal Tharani – Goldman Sachs

Do you think that the rebar prices you gave out, especially from $30, the fact that higher scrap prices, you think there still has room that they will as the process these new scrap or higher cost scrap, prices can go up even further?

Murray McClean

Well Turkey has been pretty aggressive, the mills in pushing out their rebar prices. If they continue to get their prices even higher than the $1,100 a ton, yeah they’ll have an appetite to buy scrap at a higher price.

Sal Tharani – Goldman Sachs

And the billet prices which was gone up, what’s the billet price right now in the export market?

Murray McClean

It’s on a C&F basis it’s like $900.00 a ton in some markets.

Sal Tharani – Goldman Sachs

Were you able to get billet prices as close to as your domestic rebar merchant bar prices when you sold in the export market?

Murray McClean

Well I mean it depends where you, from the US mills no, they would have been lower, but form Poland we’ve been able to get particularly selling to the Middle East, very, very high billet prices.

Sal Tharani – Goldman Sachs

As high as the US rebar prices you would say?

Murray McClean

Yeah, well higher I mean the last prices we got you know close to $900.00, if you take that back to close to on a FOB basis a bit over $800.00 a metric ton which is $727.30 a short ton. So yeah, at this point in time a bit higher than the domestic rebar price.

Sal Tharani – Goldman Sachs

And the scrap costs in Poland, is that also going to be up you think over the coming months as you’ve seen in the US?

Murray McClean

Yeah it’s slightly higher than the US price at the moment but we don’t anticipate a huge jump in Poland.

Sal Tharani – Goldman Sachs

Okay and another thing is if the scrap prices do go up $50.00 or so next month, do you think that domestic mills including yourself will have, there is enough room out there to raise the steel prices, the rebar, merchant bar, et cetera by that amount to cover the cost?

Murray McClean

Well as you know Sal we’re not the price leader, that would be Nucor would make that decision but it’ll be interesting. I mean when scrap prices went up $80.00 a ton in January, rebar prices went up $60.00 a ton, so they may not increase the price to the same level. We don’t know. I mean there would be a concern if you increase prices too much and then as I mentioned the possibility of a scrap correction over the summer months and then you have to reduce your price shortly thereafter which happened in April last year, that’s not a good signal for the market.

Sal Tharani – Goldman Sachs

Great, thank you very much.

Operator

Your next question will come from the line of Rajul Aggarwall with Marathon Asset Management.

Rajul Aggarwal – Marathon Asset Management

Hi, thanks for taking my question. I was looking at the operating profit for the Americas recycling segment and there was a tremendous increase in the price realization on the US scrap side. But somehow it doesn’t flow down to the operating profit, I was trying to figure out as to what happened there.

Bill Larson

LIFO.

Rajul Aggarwal – Marathon Asset Management

I think your release has $5 million of LIFO expense?

Bill Larson

That’s right.

Rajul Aggarwal – Marathon Asset Management

So but for LIFO the operating profit would have been by $5 million, that’s all the benefit you get from a 33% increase in realized price on scrap?

Bill Larson

Well you’ve got to realize that you don’t get all 33%, I mean people you know with the exception of the peddler who came by and well they almost stole my lawnmower, I did chase him down and got it back. But you know they are, even the small dealers are pretty sophisticated right now and they realize what the pricing is. So you do not get that increase in margins.

Rajul Aggarwal – Marathon Asset Management

I mean I’m trying to see as to how much do you get. Is there an easier way to figure that out given what you’ve disclosed or is there something else you can tell us?

Bill Larson

No, purchasing is the art of making money in ferrous and non ferrous recycling and every purchase is a negotiation each day. So no it’s not possible to tell that.

Rajul Aggarwal – Marathon Asset Management

Got it and one last one on that one, you made a comment in the release saying that the freight costs had some impact, could you give us some idea as to what kind of impact the freight costs had in the recycling segment?

Bill Larson

I’m sorry, yes the exports, I’m sorry I’m with you now, yeah it’s a question, this goes back to the container exports with ferrous scrap and the fact that when we talked about this last quarter it was still kind of this cottage industry and you know things have kind of picked up. Well the freight haulers caught on to that and the prices although there is still a bit of a premium to be able to ship by container, it has shrunk some. That was the reference, I’m sorry.

Rajul Aggarwal – Marathon Asset Management

Got it, how much of a change was there form a year on year basis on a per ton basis if you look at per ton metrics in terms of cost of exporting?

Bill Larson

You know I don’t know because the container exporting it just wasn’t being done last year at this time. It was just starting.

Rajul Aggarwal – Marathon Asset Management

Okay and just one last question, in your prepared remarks you made a comment that China might shut some mills from May to August and there was some implications you thought that would have, could you just expand on that?

Murray McClean

Yeah the Chinese government has announced, not just steel mills but [para] alloy plants and others that tend to pollute the environment that pollute the air will be shut down from that period. So that’ll have an impact on the local market in China. There will be clearly less steel available. We know, we were in China just two weeks ago and inventory levels, depending on the product are actually low.

And obviously you have the disruption period at the end of January and all those heavy snowfalls in Shanghai and China area, so all those factors sort of indicate to us that you know on the demand side, it’s still good and supply could be reduced for a short period of time. And we’re seeing even the specs on products like rebar, their actual production capacity increases are flat, I mean they used to be increasing at 15% plus a year. And it’s flattish the last three months. So that’s an interesting situation. So I think China certainly on some products is getting their act together and there’s more of a balance between supply and demand.

Rajul Aggarwal – Marathon Asset Management

Got it, thanks so much.

Operator

(Operator instructions). Your next question will come from the line of Eric [Privy] with [Canaccord].

Eric [Privy] – [Canaccord]

Great, thanks guys, just going back to the scrap side of the business. Can you make any comments, there is a lot of talk out there that scrap levels are you know getting more and more constrained. Your guys’ confidence that this years and previous years that when the snows melt there’s going to be an adequate supply of scrap out there?

Murray McClean

Well scrap you know in the US comes from three sources, the obsolete which is the biggest source, 50 odd percent, demolition about 13% and industrial scrap. So the obsolete we’ve seen grow in the last two or three years because of these higher prices. But there is a limit, you’re right, there is a limit to how much scrap can be collected and generated but certainly in the northern states of the US there will be a better flow once the snows melted and there’s still some snow storms up north we understand but from April onwards the flows ill improve, they’ll improve right through till October November period.

Bill Larson

And keep in mind the US, you have to look at it region by region, the US had record exports of ferrous scrap in calendar 2007. So it’s not, that’s not an issue for the domestic mills, the mills just, it’s only a question if they need more scrap, paying a higher price to get the scrap. It could be an issue perhaps in some parts of the world that are more dependent let’s say on Russian scrap, Ukrainian scrap which are decrease, year by year, they’re decreasing their exports and using it more in their home markets. But again Poland is a scrap exporter. So you have to look at in terms of the global situation, country by country, region by region.

Eric [Privy] – [Canaccord]

Great, thanks and then maybe just a quick comment, a lot of consolidation in the scrap industry, some of your competitors stepping up and integrating also, have you seen that impacting at all pricing availability et cetera, has that changed the dynamic out there at all in the scrap industry?

Murray McClean

No we don’t see any change. Maybe a little bit too early to say. But we don’t anticipate a major change there.

Eric [Privy] – [Canaccord]

Great, okay, thanks a lot.

Operator

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

Murray McClean

Well thanks very much everyone. As we mentioned the third quarter looks to be a good quarter based on these higher prices that are moving through and we certainly anticipate the third quarter to be strong. So thanks everyone for participating today and that’s it.

Operator

Ladies and gentlemen this does conclude the Commercial Metals Company’s second quarter 2008 earnings results conference call. You may now disconnect.

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