Commercial Metals Company CEO Discusses Q1 2011 Results - Earnings Call Transcript

Commercial Metals Company CEO Discusses Q1 2011 Results - Earnings Call Transcript
By Seeking Alpha ,

Commercial Metals Company (CMC)

Q1 2011 Earnings Call

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

Executives

Murray McClean - Chairman, President and Chief Executive Officer

Joe Alvarado - Chief Operating Officer

Bill Larson - Chief Financial Officer

Analysts

Timna Tanners - UBS

Brian Yu - Citi

Luke Folta - Longbow Research

Mark Linemov - Morgan Stanley

Chris Olin - Cleveland Research

Sal Tharani - Goldman Sachs

David Woodyatt - Keeley Asset Management

Brent Thielman - D.A. Davidson

Sanil Deptardar - Sentinel Investments

Charles Bradford - Affiliated Research Group

Barry Vogel - Barry Vogel & Associates

Michelle Applebaum - SMI

Presentation

Operator

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

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

Murray McClean

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

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

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

Joe Alvarado

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

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

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

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

Murray McClean

Okay. Thanks Joe. Bill.

Bill Larson

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

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

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

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

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

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

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