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Executives

Joseph Alvarado - Chief Executive Officer, President and Director

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

Analysts

Kuni M. Chen - CRT Capital Group LLC, Research Division

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

Brian Yu - Citigroup Inc, Research Division

Arun S. Viswanathan - Longbow Research LLC

Timna Tanners - BofA Merrill Lynch, Research Division

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

Aldo J. Mazzaferro - Macquarie Research

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

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

Nick Farwell - Aurora SFC Systems, Inc.

Commercial Metals (CMC) Q4 2012 Earnings Call October 24, 2012 11:00 AM ET

Operator

Hello, and welcome, everyone, to today's Commercial Metals Fourth Quarter and Full Year 2012 Earnings 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 risks and uncertainties that could cause actual results to differ materially from these expectations.

These statements reflect the company's beliefs based on current conditions but are subject to certain risks and uncertainties that are listed in the company's press release and described in the company's latest 10-K. Although CMC believes these statements are made based on the 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 and 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 fourth quarter and full year 2012 results. I'll begin with highlights for the fourth quarter and full year and an update on our strategic initiatives. Barbara will then provide further financial details relative to the quarter and fiscal year, and I will close out with comments on our outlook for the first quarter of fiscal 2013, after which we will open the call to questions.

In our results for the quarter and year end as detailed in our earnings release this morning, we reported net sales of $1.9 billion for our fiscal 2012 fourth quarter, a decrease of 16% from sales of $2.2 billion for the fourth quarter of 2011. We also reported net earnings of $30.2 million or $0.26 per diluted share in the fiscal quarter ended August 31, 2012.

This marks 4 consecutive quarters of positive earnings. And yesterday, our Board of Directors declared a quarterly dividend of $0.12 per share for shareholders of a record on November 7. The dividend will be paid on November 21.

Positive results from operations were driven in part by slightly improved demand combined with our continued focus on improving product mix, cost efficiency and service to our customers.

For the full fiscal year, we reported net earnings of $207.5 million or $1.78 per diluted share on slightly lower sales of $7.8 billion. Full year 2012 results mark the fifth best performance in the nearly 100-year history of Commercial Metals Company. In comparison to fiscal 2011, the 2012 results are a huge turnaround from a net loss of $129.6 million or $1.12 per diluted -- loss per diluted share on sales of $7.9 billion, a $337.1 million turnaround in net earnings.

During the year, we generated $364.2 million of adjusted EBITDA as compared to $237.3 million for the full year of 2011. The $127 million increase in adjusted EBITDA reflects a dramatic turnaround in operating performance, including changes in our organizational structure to improve operational focus, difficult but necessary restructuring actions in 2011 and improvement in overall product mix.

Yet another important highlight is -- in the second half performance is performance of the Americas Fabrication segment. We've been describing to you for some time the efforts underway to stem the ongoing losses generated by this segment. Those actions have now yielded 2 straight quarters of modest profitability.

Another important milestone achieved during the fourth quarter was the share sale of our Croatian subsidiary. This complex 3-part transaction was concluded on September 21, when the final group of assets was sold. We expect to receive a total of approximately $41 million in cash as a result of these transactions, and we will have no ongoing business obligations in Croatia.

The fourth quarter also marked the second consecutive quarter in which all of our operating segments achieved profitability. Our Americas Recycling segment remained profitable in the fourth quarter and for the fiscal year despite volatile market conditions and reduced demands in our nonferrous business.

The Americas Mills segment recorded substantial improvements for the fourth quarter and the full fiscal year during 2012 over the same period in the prior year. Operating rates remained above 75% utilization for the full year.

And as already noted, we are quite encouraged with the improvement in our Americas Fabrication segment, which reported improved adjusted operating results of $113.4 million as compared to the prior year.

Stable material pricing with improving transaction and backlog prices coupled with our disciplined market approach are driving the improved results. From an end market perspective, many of the same concerns we've expressed recently remain mostly unchanged and continue to slow any meaningful market momentum. Availability of credit, lower state and federal funding and unemployment levels have contributed to flat construction and manufacturing activity.

End markets showing the best demand continue to be public works, energy, health care, heat treating and institutional buildings. Our fabrication backlogs have remained steady at elevated levels when compared to fiscal 2011, and the average price and margin in our backlogs continue to improve.

The International Mills segment results continue to be negatively impacted by significant margin and compression, driven by the economic recession in Europe, along with import pressures in Poland. Our International Marketing and Distribution segment was hit hard in the fourth quarter due to a global slowing of key end markets in regions where we have a presence. We recorded a decline and adjusted operating profit in our International Mills segment, which is attributable to the continued economic uncertainty in the U.S., Europe and China.

With that as background, I summarize our progress on the broad set of strategic initiatives as follows: At this time last year, we committed to a plan to improve the financial performance of CMC and to position our company to capitalize on the eventual construction cycle recovery. Furthermore, we committed to exiting unprofitable businesses that were not part of our core strategic operations. Lastly, we committed to improving our cost structure and our ability to generate cash.

As we reflect on our accomplishments during the fiscal year, we believe we have accomplished what we have committed to do. Compared to our peers, CMC has unique advantages with our global reach and vertical integration. We operate in highly cyclical business, with many factors influencing our results. Slowing demand in certain markets we serve, volatile pricing and global liquidity constraints underscore the current business environment. Continued low levels of construction spending in the U.S. and competitive pressures in Europe are ongoing obstacles for CMC.

Though challenges remain, we believe we have taken substantial measures to strengthen our competitive position to serve our customers in a more effective manner and to improve shareholder return.

I'll 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 fourth quarter 2012, we reported net earnings of $30.2 million or $0.26 per diluted share. Compared to last year's fourth quarter, net earnings improved over the net loss of $120.3 million or $1.04 per share. Included in the results for the fourth quarter last year were pretax restructuring charges, including impairment of approximately $144 million related to our decision to exit the Sisak mill in Croatia and to close 14 other unprofitable locations.

This year's fourth quarter results include an after-tax LIFO income of $18.3 million or $0.16 per diluted share compared with an expense of $6.3 million or $0.05 per share during last year's fourth quarter. Additional after-tax items included in continuing operations were a loss of $2.5 million related to the sale of a rebar fabrication shop in Rosslau, Germany; expenses of $2.5 million related to the full valuation of state tax losses; and expenses of $2.4 million related to our proxy contest and hostile tender offer.

Net earnings for the year ended August 31, 2012, were $207.5 million or $1.78 per diluted share on net sales of $7.8 billion as compared to the full year 2011 when we reported a net loss of $129.6 million or $1.12 per diluted share on net sales of $7.9 billion.

For the year ended August 31, 2012, after-tax LIFO income was $29.6 million or $0.25 per diluted share compared with after-tax LIFO expense of $50 million or $0.44 per diluted share for the same period last year.

Additional after-tax items included in continuing operations were tax benefits of $113.6 million or $0.97 per diluted share related to ordinary worthless stock and bad debt deductions from the prior investment in our Croatian subsidiary and for research and development expenditures. Furthermore, we incurred after-tax expenses of $9.7 million related to our proxy contest and hostile tender offer.

Turning to our results by segment. Our Americas Recycling segment experienced a solid quarter at $8.3 million of adjusted operating profit in face of highly volatile ferrous and nonferrous market pricing. Average ferrous scrap sold for $309 per short ton during the fourth quarter, which represented a 14% decrease over the $361 per ton reported in the fourth quarter of 2011. Average sales pricing on nonferrous scrap was $2,655 per short ton, which was down 22% quarter-over-quarter.

We shipped a total of 520,000 tons of ferrous scrap, which was down 19% over the last year's fourth quarter. We shipped 62,000 tons of nonferrous scrap, which was a 15% decrease over last year's fourth quarter.

The Americas Recycling segment recorded an adjusted operating profit of $39.4 million for fiscal 2012 when compared to $43.1 million for the prior year. The slightly lower results compared to the prior year were mostly due to reduced nonferrous volumes and pricing, down 9% and 14%, respectively, compared to fiscal 2011.

Nonferrous activity is closely tied to demands in Asia and uncertainty in those markets negatively influenced our business levels.

Within our Americas Mills segment, our domestic steel mills generated an adjusted operating profit of $63 million for the quarter compared to $45.6 million during the same period last year, an improvement of 38% on 6% lower sales volume; net sales of $494.2 million for the fiscal fourth quarter compared to last year's fourth quarter net sales of $526 million.

We recorded a pretax LIFO income of $19.5 million compared to an expense of $5.1 million for the fourth quarter of 2011.

Metal margins expanded during the fourth quarter of 2012 to $332 per ton, up from $314 per ton during the prior year quarter.

For the year, net sales of $2 billion were up 8% from $1.8 billion for the full year 2011. Adjusted operating profits for the full year of $235.9 million was $86.7 million higher than a year ago, primarily due to stronger shipments and margins.

Within the Americas Mills segment, our copper tube mill endured a challenging fiscal 2012 with a backdrop of volatile copper pricing.

During the fourth quarter, the adjusted operating loss was $0.7 million with pretax LIFO income of $2.1 million compared to a breakeven performance in the fourth quarter of last year, with a pretax LIFO expense of $0.7 million.

For the year, the copper tube mill reported an adjusted operating loss of $2 million, including a pretax LIFO income of $3.8 million. This compares to adjusted operating earnings of $12.5 million, including a pretax LIFO expense of $5.6 million for fiscal 2011.

Our Americas Fabrication segment recorded an adjusted operating profit of $1.5 million for the quarter. This performance marks the second consecutive quarter of positive results for this segment after breaking a stretch of 10 consecutive quarters of loss. The average selling price for the Americas Fabrication segment increased $54 per ton over last year's fourth quarter average selling price of $866 per ton.

Pretax LIFO income of $3.7 million was included in the fourth quarter result as compared to a pretax LIFO expense of $1.7 million for the comparable quarter a year ago.

For the full year 2012, our Americas Fabrication segment improved $113.4 million on an adjusted operating profit basis. The average selling price of the segment improved 11% or $89 per ton while shipments increased 55,000 tons compared to fiscal 2011. The backlogs in this segment remain healthy in terms of both volume and total value.

CMC Zawiercie, our Polish steelmaking operation, reported an adjusted operating income of $5.4 million for the fourth quarter compared to an adjusted operating profit of $14.6 million for the same period last year. While volumes were better than a year-ago quarter, much of the increase hinged on spot billet sales. This segment continues to be negatively affected by the unsettled Eurozone crisis, import pressures from neighboring geographies and the weakened Polish zloty.

Operationally, other than shipment, the International Mills segment results were lower than in the prior year quarter. CMCZ shipped 420,000 tons in the fourth quarter of 2012, of which 65,000 tons were billets, as compared to 399,000 tons shipped in the fourth quarter of 2011, of which 37,000 tons were billets.

The unit melted 404,000 tons as compared to 434,000 tons for the same period in 2011 and rose 343,000 tons during this year's fourth quarter compared to 386,000 tons during the fourth quarter of 2011.

The average selling price was $570 per ton compared to $679 per ton for the same period last year, a decrease of 16%.

For the full fiscal period, our International Mills segment shipped 90,000 more tons when compared to the prior year while the average selling price declined $37 per ton. As a result, the adjusted operating profit for this segment declined 52% year-over-year.

Moving on to the marketing and distribution segment. CMC's International Marketing and Distribution segment delivered an adjusted operating profit of $1.5 million for the fourth quarter of 2012 compared to $22.7 million during the fourth quarter of 2011. The decline in performance from the year-ago quarter is mostly due to weakness in our European trading and warehousing operations, as well as our raw materials division. Unstable economic conditions in the Eurozone, together with ongoing uncertainty in China, adversely affected the operating performance of these divisions.

Our domestic steel import business also experienced a slowing trend but remained profitable for the quarter. For the full year 2012, this segment generated $47.3 million adjusted operating profit on 3% higher sales -- net sales.

For the fourth quarter of 2012, net earnings from discontinued operations of $13.2 million was mostly due to the $13.8 million pretax gains on the previously announced sale of the shares of our Croatian subsidiary. Included in this gain is $7.5 million related to foreign currency translation.

As Joe mentioned, these actions were a significant contributor to our company's turnaround efforts. In addition, we approximate $41 million in cash will further our strategic initiative to build our cash balances.

During previous earnings calls, we indicated that we would incur unusual expenses related to the proxy contest and tender offer defense. We incurred approximately $3.7 million in expense related to these matters in the fourth quarter of 2012 and approximately $15 million during fiscal 2012. We expect to incur an additional $3.7 million of these expenses in the first quarter of fiscal 2013.

Capital expenditures were approximately $31 million for the fourth quarter and approximately $114 million for the full year. We are estimating our 2013 capital budget to be approximately $160 million.

Overall, our balance sheet remains strong. Cash and short-term investments totaled $262 million as of August 31, 2012. Our $300 million revolver remains undrawn, and we continue to maintain significant unused credit lines that give us significant flexibility to adapt to changing markets. Furthermore, our financial ratios, such as total debt to total capitalization and interest coverage ratio, continue to improve compared to fiscal 2011.

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 fourth consecutive quarter of earnings, and we netted one of the best years in the history of our company during fiscal 2012.

As evidence to the progress we're making, the company received several noteworthy recognitions this past year. We're very proud to be named Steel Producer of the Year by American Metal Market, as the pioneers of the integrated Electric Arc Furnace steelmaking business model. Furthermore, Alcoa recognized our Recycling division as one of their top 10 North American raw material suppliers. We've also been recognized by the Steel Manufacturers Association for our safety performance and community involvement. I give thanks to our employees for their efforts and for earning these honors.

Reviewing again our key highlights for the quarter and the year, our actions to adjust our cost structure have helped to improve the financial performance of the company. We reported $30.2 million in net income for the quarter and $207.5 million for the full year. We generated $109.2 million of adjusted EBITDA in the quarter and $364.2 million of adjusted EBITDA for the full year, and we generated $196 million in cash from operations for the year.

Our liquidity has improved by $169 million and stands at $914 million. We declared our regular dividend of $0.12 per share each quarter during fiscal 2012, and all of our operating segments have reported profits for 2 consecutive quarters.

We reduced SG&A by $30.2 million over the prior year, and our Americas Fabrication segment continued to produce positive results for the second consecutive quarter.

And in June, we completed the stock sale of our Croatian subsidiary and the majority of the assets of our Croatian pipe mill. In September, we completed the sale of the remaining assets, and the aggregate proceeds from these transactions will provide us approximately $41 million in cash.

With respect to our 2013 outlook, we currently anticipate that business activity will most likely mirror the economic activity we saw in 2012. However, we've demonstrated that we can be profitable even at current business levels despite the lack of meaningful recovery in our largest end market.

We continue to believe that the United States, in particular, would benefit from greater spending on infrastructure. We believe that such spending would jump-start economic growth and help reduce unemployment in a period of general economic malaise. We, therefore, are supportive of programs that are aimed at investments to expand and renew infrastructure across the United States.

As a reminder, our first quarter is typically a seasonally low -- slower period as weather begins to affect construction activity in North America, as well as Poland and Northern Europe. Overall, we are pleased with our performance during fiscal 2012 and recognize we face continued economic hurdles as we enter fiscal 2013. With that, we look forward to continued success and progress in the future.

Thank you for your attention. At this time, we will now open the call up to questions. Amy?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kuni Chen at CRT Capital.

Kuni M. Chen - CRT Capital Group LLC, Research Division

I guess just first off, can you give us a little bit more color on what happened in marketing and distribution during the quarter? And I think that's pretty obvious. That's mostly commodity price declines. But if you could help by saying it for us, is it all iron ore or are there other contributing factors?

Joseph Alvarado

Yes. Kuni, the marketing distribution activity for the quarter this year as compared to a year ago is really broader-based. Its raw materials. It's energy-related. Our steel trading activities are included in that. So while there's been good activity and movement, not at the same levels nor at the same margins as we would have experienced a year ago. Using the energy business as an example, we deal in tubular products and SBQ products, and those have all been impacted both in volume and in margin. And those are examples of some of the disappointment, I guess, on a year-to-year basis in our quarterly performance in International Marketing and Distribution.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Okay. Just as a follow-up. Obviously, you guys continue to focus on things that you can control and focus on your cost structure and what not. Are there any metrics that you can share with us to help us get our hands around the level of cost improvement that you've made over the last couple of quarters or better working capital discipline and what not?

Barbara R. Smith

Well, I think the most obvious is what you're seeing show up on the SG&A line, and you can see that steady progress throughout the year. And we'll continue to look for additional areas of opportunity in the SG&A category, although I will tell you that we've taken the largest steps. In each of our operating locations, in particular, our steelmaking operations, they have ongoing cost reduction initiatives that, again, are very broad-based, from looking at power consumption initiatives to reduce the amount of energy that we use to produce steel, to savings in maintenance supplies, every category that you can imagine. There are ongoing inflationary pressures, so many of those activities are really just trying to keep pace with those inflationary pressures. But this -- those are just a few examples.

Operator

Our next question comes from Luke Folta at Jefferies.

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

My first question. In our survey work in the steel space, where we now have the distributors that we talk to that deal with long products have said that they've seen some pushouts in projects they thought would go forward in the fourth quarter or in the second half but didn't because of some of the uncertainty around the election and the fiscal cliff and all those things. I was curious to know if you're seeing that in your business and if you -- if that could be -- if there's some pent-up demand or if that could be a potential source of upside for you in steel in the first calendar quarter?

Joseph Alvarado

Yes. When you say pushouts, Luke, you're referring to construction activity, specifically?

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

Yes, yes.

Joseph Alvarado

Yes. This morning, there was, I guess, what I'd call some good news with the ABI Index being above 50 again. It continues to bounce and I -- we like to look at the activity level -- or the bidding activity level, which has remained well above 50 for a much longer period of time, indicating that there's plenty of project work and pent-up demand. But a lot of the decisions that do get delayed or deferred as a result of waiting for decisions that are imminent or forthcoming. It's more on the talk side, I'd say. There's no doubt that some projects have been pushed. It's more part of the common conversation than it is something that we can point to exactly because there's always bidding activity and projects like for a variety of reasons. But we've seen steady construction activity. It just doesn't get better, I guess, is the best way to describe it. And that just to me reflects an overall lack of confidence in the market. So projects that are moving forward because they're well-funded and there's a meaningful reason for them, I guess, it's great there's no speculative sorts of activity. But there's no doubt that fiscal cliffs and the like have some impact on thinking and confidence and -- but it's hard to measure on the bottom line bidding activity because that hasn't changed as significantly. Does that help you, Luke?

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

Okay. That does, that does. And the second one, I guess, in the fabrication business, it was profitable again this quarter. As we look forward to the next quarter, to the extent that we get a scrap-price-driven rebound in rebar prices, do you think -- I mean, does that business stay profitable if scrap prices [indiscernible] rebar prices start to move up here over the next couple of months?

Joseph Alvarado

One of the reasons that we've been able to improve our performance in the fab business is because of steady raw material cost. I guess that's the best way to describe it. So any volatility can have some negative impact or potential impact and, I guess, continued volatility is the worst sort of environment to be in. Some adjustments, either up or down, we can weather. The market can weather and withstand. But when I get concerned is when we see a dramatic jump and our expectation is that while scrap costs have declined and then recovered and declined again, we're expecting a recovery of scrap prices in the winter months as is traditional and are very common. It's difficult to perceive that we'll regain all of the lost revenue associated with the recent decline, but we'll see an improvement nonetheless. So for fabrication, I'd say that it's going to impact us if we see continued jumping around of plus and minus, because that starts affecting bidding activity and behavior overall. So -- and by behavior, I mean, the bidding of and quotation of projects. So for the time being, we're focused on an improved order book, maintaining a better discipline that we -- than we have maybe in the past to ensure that there's some margin and business that we take on even in consideration of volatile raw material pricing. But there is no guarantee that we can preserve that.

Operator

Our next question comes from Brian Yu at Citi.

Brian Yu - Citigroup Inc, Research Division

The first question is just with the Americas Mills segment. I noticed that metal margins have improved, volumes have picked up, but we haven't seen the same degree of profit increase. And it seems like conversion costs might have gone up a little, but I was wondering if there was anything notable in the quarter that stood out at you or is it just quarter-to-quarter variances?

Barbara R. Smith

Yes. I think it's quarter-to-quarter variances. We had a couple of mills in South Carolina and Arizona, where the costs were actually down slightly. South Carolina was related to the fact they were running pretty hard in preparation for a 42-day outage, which they are currently undergoing a furnace rebuild as we speak, so they built us some inventory ahead of that furnace outage. So their costs were pretty good. But we did see slightly higher costs in Alabama and in Texas. Texas, specifically, we had an unplanned outage related to some NOx burner work they did earlier in the year where they had to go back in and do some additional work. So that added a little bit of cost and certainly affected their output and their absorption. But nothing out of the ordinary. As I mentioned earlier, we are starting to see higher energy prices and some pressure on some input materials, but we're trying to keep pace with that through other cost reduction initiatives.

Brian Yu - Citigroup Inc, Research Division

Okay. Do you have any planned outages to schedule for the November quarter? Just for us to model out the comparisons.

Joseph Alvarado

Yes, we...

Barbara R. Smith

We do have the significant outage I mentioned in South Carolina where the [ph] 42 days scheduled to come back up the following -- this coming week. We also have another outage in South Carolina in November, a 15-day outage to upgrade some PLCs. And we have an outage in Poland in November, where they're going into do furnace work and some rolling mill work. These are normal schedule outages. But we would expect higher costs related to all of that activity.

Joseph Alvarado

And typically, we'd want to do that kind of work towards the end of this quarter and into the second quarter, our fiscal quarter, Brian. So this is normally scheduled stuff.

Operator

Our next question comes from Arun Viswanathan, Longbow Research.

Arun S. Viswanathan - Longbow Research LLC

My question is on the public works side. I mean, I guess, you said that the backlogs were healthy and it was one their better markets. Can you just describe a little bit more what you're seeing and, I guess, in relation to some other parts of nonres things?

Joseph Alvarado

Yes. Arun, I'll take that question. One of the things that continues to be a part of -- an important part of our order book and our backlog is highway work and in particular, in Texas, there are still a number of projects that are on the drawing boards that are close to moving forward. A big part of our backlog is fulfillment of highway work that was booked a couple of years ago. We've also seen, interestingly enough, a little bit more active highway work on the West Coast. So our Arizona mill is benefiting from a little bit stronger market in California, more driven by public work than by anything else. Unfortunately, the desert states continue to suffer under the weight of the recession there. On the East Coast, it's more a mix of public and private work as opposed to being highway work. It's a mix of activity more oriented towards the private work than public. So we don't benefit from highway work in the East as we might in the Central region and, oddly enough, have in the Western region.

Operator

Our next question comes from Timna Tanners at Bank of America.

Timna Tanners - BofA Merrill Lynch, Research Division

So with my 2 questions, I wanted to ask, first of all, the CapEx for next year would be a sizeable increase. Can you give us an idea kind of what you have planned for the next year, please?

Joseph Alvarado

Sure. I'll cover that. And Timna, one of the reasons that we're -- you'll see that increase is, we've been telling you and the Street that we would -- we expected to spend about $140 million this year. We haven't gotten there. We ended up with $104 million in actual expenditures. So some of it is -- I don't want to call it catch-up work because it was already planned for. It just hasn't been implemented, and that's the function of resources and timing and everything else. But the major initiatives that we have moving forward is this outage that Barbara has already talked about in both the melt shop and the rolling mill in South Carolina. We also have approved some capital projects for downstream recovery of metallics in our Recycling business. This is a compliment to our investments in shredder capability last year in both Corpus Christi and Tulsa. What we also have the early stages of -- and we'll begin a project to upgrade our furnace in Poland. This is a major upgrade, much like what we're doing in South Carolina, going down to the foundation and doing significant restoration. And I'll call it a -- it's like a [indiscernible] startup, we're going back down to the foundation and putting in a new furnace, as well as ancillary equipment. So those are some of the major activities that lie ahead, plus catching up on some of the already approved projects is how we get to the $160 million in expenditures. That also is always a lever, as you know, depending on economic activity. But we're confident that those repairs will serve us well as the economy improves, both here as well as in Europe.

Timna Tanners - BofA Merrill Lynch, Research Division

So a combination of growth, CapEx and some maintenance, it sounds like?

Joseph Alvarado

Yes. And I'd say a more significant portion of growth CapEx, particularly on the Recycling side, whereas the maintenance outage related to repairing furnaces does have some growth element to it as well.

Timna Tanners - BofA Merrill Lynch, Research Division

Okay. And if I could get my second question was really to ask about the trading arm, the distribution business, internationally. Is there something -- I think I asked this before but I'm still confused if there's something that structurally changed there. It used to be a little more stable, and you used to be able to, if you look at your fiscal 2011, it didn't fluctuate as much as it has this year. So I mean, is there something that's changed? How do we think about modeling this going forward? Is there something in your downgrade of your credit rating or in the nature of the industry itself that we should be factoring in for modeling purposes?

Barbara R. Smith

Timna, I'll take a stab at it, and Joe can follow on if he has any additional points. I think we have -- that, that M&D can have lumpy quarters. But if you look at it year in and year out, the total contribution from the M&D segment is fairly consistent and stable. However in volatile markets, that can create an opportunity for them to really capture a lot of material movement and margin. It can also represent a headwind. And in this past quarter, that's the situation. I think you all understand the slowing in China and the economic crisis in Europe. Both of those are having a big impact on both volume and margins of material flow. I think you heard from our peers significant slowdown in SBQ and other energy-related products. And that is certainly having a significant impact on us as well in this current quarter as it relates to the results in M&D because we move a fair amount of those products through that segment. And several of those products have been highly profitable products for us. Now in 2012, we had the unfortunate market-to-market back in the first quarter, which is something that we haven't seen since the crisis. So I think last year, first quarter was unusual, but the group did a terrific job to make that up throughout the year. And overall, their results on a total year basis are on par with other really good years in the marketing and distribution segment.

Operator

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

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

Just on Poland, your volumes were up in the quarter, though obviously your commentary is pretty cautious there. Have you seen some pressures or signs yet of a reversal and for that positive volume trend you experienced in Q4?

Joseph Alvarado

Yes. The greatest impact of -- in Poland was, I think we shared with you in the second quarter, we saw a sudden, I'll call it a deluge of imports into Poland, which really complicated matters and volumes, and prices declined really dramatically. Third quarter, those prices began to recover and some of the volume as well. And the fourth quarter is just a kind of a continuation of that. We also did take a write-down of a fab business of about $3 million, which also impacted the quarterly results, making it look a little bit worse than it was. But we've seen some improvement, both in volume as well as in pricing. We expect the Polish market to remain difficult, however. We're going into the winter time when things are less -- are more volatile and there's less activity. And margins do get squeezed, so that's typical. And we're working on our mix of merchants versus rebars and still a lot of upside on shipping more merchant. But the same phenomena that we have in the United States of what I'll call a premium for merchants isn't quite as large as it is in -- it's much larger in North America than it is in Europe. And I think that owes to the fact that there's not the same level of consolidation and more aggressive pricing on merchants, vis-à-vis rebar in Europe, particularly under the current economic conditions. So we've been squeezed on that end as well.

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

Okay. And then just secondly, the volume decline in structural and other just within the Americas Mills business, you've been seeing growth there for the last several quarters. Anything in particular that affected that this quarter?

Joseph Alvarado

I can't think of anything in particular other than seasonal. One of the interesting things that we're seeing is that our shipments, despite the price volatility, have remained fairly steady, Brent. And I think that owes to the fact that inventories are pretty low throughout the distribution chain. And that may be more a function of timing than from missed opportunities. I don't recall anything significant in the way of change in our shipments. Do you have the figures, Barbara?

Barbara R. Smith

Down a little from 2011, but I don't have any particular items...

Joseph Alvarado

So nothing in particular, Brent. In fact, we're encouraged that shipments remain as strong as they might be when we see the volatility in pricing. Because normally, there's a lead lag effect there with price increase announcements and shipments, and we haven't seen that. Volumes have been good.

Operator

Our next question comes from Aldo Mazzaferro at Macquarie.

Aldo J. Mazzaferro - Macquarie Research

I just had a couple of quick ones, actually. Barbara, I heard you mention a lot about numbers and charges, and I was wondering if I missed your comment on the tax rate on the continuing operations, why it was so high.

Barbara R. Smith

Yes, the major item there was we had to put up a valuation allowance on some of our tax NOLs in the quarter. And I think that was detailed out in the press release, about $2.5 million. So that was really the major item. We're in a taxpaying position. Obviously, the rate in the U.S. is higher than the rate in Poland. So to the extent that you have lower earnings in Poland, that's going to cause the overall rates to be higher. But we did have to put up a valuation allowance this quarter, which drove the ETR up. We would probably tell you to model in about a 33% ETR going forward.

Aldo J. Mazzaferro - Macquarie Research

So other than that $2.5 million of the deferred tax allowance, the high rate was because of Poland was, what, contributing less than what was expected or...

Barbara R. Smith

Poland has a lower tax rate, and their contribution was modest relative to the earnings in the U.S.

Aldo J. Mazzaferro - Macquarie Research

Okay. And Joe, here's kind of a strategic question. I understand the diversity of Commercial Metals is one of the things that you focus on, and I can see how the mills and the scrap company and the fabrication go together and balance each other out at time-to-time. But the marketing distribution sector is almost like a wildcard within this -- within the company that doesn't really balance the other divisions. It just actually adds to more volatility as it has this quarter. I'm wondering if you agree with that view or maybe would consider this as a possibility of a divestment?

Joseph Alvarado

If you look at the -- this goes back to the comment Barbara made earlier, Aldo, that if you look at the marketing and distribution business as a segment over time, it's been a pretty stable and steady business for us. That doesn't mean that there isn't some inter-global volatility because of certain regions, whether it's Australia or Europe or China don't move in sync with one another. And probably the biggest issue we have overall was threefold. One, the Australian economy still really hasn't recovered and they're suffering with the burden of a higher dollar, and you can see what that's done to some of our competitors that are not only in distribution but in steel production. The Chinese economy continues to grow its below levels that are capable of supporting the total steel production there. So that leads to maybe more trading activity at lower margins but certainly puts a lot of price pressure in the region. And then lastly, the Eurozone, where, for a long time, we have talked about the Eurozone being a stable market for us and Poland, we haven't been impacted and it finally did impact us. I expect that there'll be some continued pressure on margins and volume levels in Europe but that will recover with time. So the volatility that we're seeing, as Barbara pointed out, the iron ore deal in the first quarter had a significant impact. Falloff in business is really what's happened in the fourth quarter. Generally speaking, it's a fairly steady business for us. But there's no way to counteract all of the things that are going on at global basis, the changes and the shifts in global activity, which, ironically, has made North America a much stronger market. We've heard some of our competitors talk about North America being a good market to participate in, not only because of free trade but because of the fact that while it's depressed relatively speaking to where we were a few years ago, it's been a fairly steady market. And we've seen that even in our construction activity. While, we'd like to be operating at more than 75% rate of our -- of production utilization. That's what the market allows, and we've adjusted our cost structure. And that's what helped us improve our performance on the domestic front. So I won't answer the last part of that question, Aldo. It's a good business for us, and we're going continue to build upon it and take advantage of it as we can.

Operator

[Operator Instructions] And our next question comes from Phil Gibbs at KeyBanc.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Just curious what you're seeing as far as public works spending momentum, particularly at the state level, and, obviously, much written about in the press about states having fiscal difficulties. Wondering what you're seeing there?

Joseph Alvarado

I got at this a little bit earlier when I talked about some of the highway programs and activity that continues. A lot of that is -- isn't purely state money anymore. Some of the tollways that are being built in Texas are partially privately funded, so it's a joint effort of public and private. There's no doubt that there are a lot of states that are suffering from a budgetary perspective. But even here in Texas, there are some projections that -- not as a result of stimulus, but just better fiscal policy, that there's a potential for surplus. We don't think that, that's a reason to be excited, that something's going to change dramatically because we do business in more than Texas. And certainly, public funding under the current circumstances for projects is going to require some sort of broader stimulus at the federal level in order to kickstart the economy. And we recognize that, and that's why we're supportive of any initiative to address the infrastructure rebuild that's required in the United States. I think we all recognize it needs to be done. It's a question of where does the revenue come from and what are the offsets? And that's the tough part of the job that politicians have to try to sort through how we kickstart the economy. And I'm confident that after we get through this election phase, cooler heads will prevail, and we'll start working on building the U.S. economy instead of focusing on elections 4 years out.

Barbara R. Smith

So I think to follow on what Joe is saying, no doubt, there is some momentum on the residential side. Residential construction activity was up quarter-over-quarter, and it's up about 16% year-over-year. And that, as you know, is a good leading indicator to nonresidential construction, no doubt. So the public construction activity is -- it was about flat quarter-over-quarter, but it is down slightly from the prior year. But at the same time, private spending is up about 12% year-over-year. So you have to dig for the positives inside the data, and there's definitely some good signs emerging here.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay. And then I really appreciate all that color. Anything that we should be thinking about as far as changes in LIFO going forward, whether you expect any benefits to continue modestly or it's too challenging to tell into the first half next of year?

Barbara R. Smith

Thanks, Phil. We expect to have a LIFO benefit in the first quarter. But then, it just really is going to depend upon where pricing goes. The first quarter is a little tough to call right now. There's been downward price movements thus far, but we could see price movement back up in November. But our best view right now is that we would see a LIFO benefit in the first quarter.

Operator

Your next call comes from Mark Parr at KeyBanc.

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

Phil and I are just in different spots, but we're on the same page.

Barbara R. Smith

I just thought that was the way to get 4 questions.

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

One thing, Joe, I was wondering if you could just give us an update on the micromill, how that mill is performing relative to the other operations and if you have any updated thoughts on how you might want to deploy that technology in other locations?

Joseph Alvarado

The micromill -- and thanks for that question. It's a good question. We didn't touch upon it too much other than when I talked about the West Coast construction activity in California. We have -- we're really pleased with the mill and with the technology. We feel like we've taken full advantage of everything that was designed into it and then some to the point where we've gone back to local authorities for permitting to increase production capability. We've done that. And even this month, we think we're pretty close to hitting nameplate -- the adjusted nameplate capacity on that facility according to the permit. So the mill has been really, really successful for us, and we're pleased with the technology. And yes, we would like to deploy it elsewhere. But in a global economy that's oversupplied, it's difficult to envision where we might do that. But we feel that we have a competitive advantage in having operated that facility for a few years now, all the way back to the beginning in design and construction. That was a shared project with Danieli. And John Elmore, who joined us on the international front made comments. He visited the facility last week for the first time and said, "That would be a great sort of facility for us to put someplace where regional market production capability would serve us well, and we could take advantage of the technology that we developed jointly with Danieli." It's just difficult to envision where that is in today's global oversupply situation. So we reserve the right to take advantage of it, the opportunity presents itself and we'd like to. It's really worked very well for us. It's very efficient, low energy cost in terms of conversion costs. We do pay higher rates in Arizona than we might otherwise. But that aside, we're pleased with the technology and the facility.

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

Okay. I appreciate that. I just had one other follow-up. Barbara, I'm not sure if you mentioned what you're seeing as far as the scrap outlook for November. I know you commented that you had expected scrap prices to move higher over the winter. But I mean, do you think there's a reasonable potential for some upside in scrap here as we move into next month?

Barbara R. Smith

Mark, I think we both have a crystal ball and it's hard to say, and there's a lot of whisper talk going on and whether or not that will materialize in November. I think it's a little too early to tell. But I think most people believe that there's not going to be further fall in scrap prices. And certainly, we generally see them move up as we move into the winter months and the January timeframe. But...

Joseph Alvarado

Yes. Flows have been compromised, Mark, and that has significant impact on availability. So that's why -- partly why we're expecting a turnaround.

Operator

Our next question comes from Nick Farwell at Arbor Group.

Nick Farwell - Aurora SFC Systems, Inc.

I'm curious if you would please update us on the board's priorities with respect to the redeployment of your excess cash flow over the next, say, period of time?

Joseph Alvarado

I'll take that question, Nick. And we just had a board meeting yesterday. It was noted we -- they approved the dividend for the quarter, and the board is fully supportive of our initiatives to improve our balance sheet and improve our cash position. We have some bonds coming due next year, about a year from now, $200 million. And so strengthening the balance sheet is important for us to have the flexibility to move whichever direction we might want to move, including further growth of the business through investment or additional M&A activity or just investing in the business, like with our capital plan. There's some organic growth potential that we still have within the company that we could fund. And what we want to do is have as much flexibility as possible and, hence, the priority to improve our balance sheet and leverage cash. So the board is fully in alignment with that as a near-term strategic initiative. And long-term strategic initiatives, we really don't talk about out in public.

Nick Farwell - Aurora SFC Systems, Inc.

In terms of deploying capital into building, for example, the Recycling side of your business, to what degree does the board feel that's an appropriate use of capital given the nature of the certain -- uncertain economic environment and the, perhaps, leverage and scale you may get out of that operation with incremental...

Joseph Alvarado

So Nick, let's talk about our business model because there are 2 components to our Recycling business. Clearly, it's all affected by the market dynamics, but there is a certain part of our Recycling business in Poland and North America which is aimed at securing raw material for our mills. And if we don't have access to those raw materials, we could pay dearly and drive our costs up dramatically. And so raw materials is an important part of our Recycling business. So too is our retail business not only for ferrous, but for nonferrous as well, where we've done quite well in the past. So some of the investments that were made last year in shredding capability were designed to help us garner some of what we had already invested in the way of the yards and collection and controlled the processing, which is good for our bottom line and good for our steelmaking business, as well as our retail business. And the downstream investments that we'll be making this year in recovering metallics help us to reduce our costs by minimizing the amount of metallics that are going to a landfill and allowing us to capture the benefit of those metallics and resell in our retail business. So on both fronts, those investments are important for us, both the raw materials, as well as retail. And in all cases, what we do with our prioritization of capital is measure the returns of those projects before we approve them and prioritize those projects based on strategic need, as well as economic return. And our Recycling business is both strategic and economically -- those investments are both strategically and economically justified.

Operator

This concludes today's question-and-answer session. Mr. Alvarado, I'll turn the call back over to you.

Joseph Alvarado

Okay. Thank you, Amy, and thank you, everyone, for joining us on today's conference call. We look forward to meeting with many of you in our investor meeting in the coming weeks, and we thank you for your attention.

Operator

This concludes today's Commercial Metals Company Conference Call. You may now disconnect.

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