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CMC Reports 2nd Quarter Results
03/26/2008 - Commercial Metals reports net earnings of $39.8 million on net sales of $2.3 billion for the quarter, and net earnings of $108.9 million on net sales of $4.4 billion for the six months ended February 29, 2008.
Commercial Metals Co. reported net earnings of $39.8 million on net sales of $2.3 billion for the quarter, and net earnings of $108.9 million on net sales of $4.4 billion for the six months ended February 29, 2008.
Second Quarter Results—Net earnings of $39.8 million ($0.34 per diluted share) compares with net earnings of $65.9 million ($0.54 per diluted share) for the year-ago second quarter. Net sales of $2.3 billion compare to net sales of $1.9 billion for the second quarter last year.
This year's results included after-tax LIFO expense of $38.3 million ($0.32 per diluted share), which compares with expense of $12.3 million ($0.10 per share) in last year's second quarter. Selling, general and administrative expenses included $14.7 million of pre-tax costs associated with investment in the global deployment of SAP software, and other costs of $9.2 million were capitalized during the quarter.
The company also repurchased 3.7 million of its own shares during the quarter at an average price per share of $27.36, which represented 3.1% of the shares outstanding at the beginning of the quarter.
Six-Month Results—Net earnings of $108.9 million ($0.91 per diluted share) compare to net earnings of $151 million ($1.25 per diluted share) for the first six months last year. Net sales of $4.4 billion compare to net sales of $3.8 billion for the same period last year.
This year’s results include an after-tax LIFO expense of $35.5 million ($0.30 per share), which compares with last year’s after-tax LIFO expense of $18.9 million ($0.16 per share).
Selling, general and administrative expenses in the first six months included $25.0 million of pre-tax costs associated with the investment in the global deployment of SAP software. To date, the company has expensed $60 million and capitalized $59.4 million for the project.
The company also repurchased 5,412,238 shares during the first six months at an average price of $28.00 per share.
Safety First—Steel Manufacturer's Association named CMC Steel Arkansas as the safest steel mill in North America for 2007. CMC’s other mills ranked second, third, and fifth; combined, all CMC mills were ranked first in safety. This is the sixth year in a row one of CMC's mills has won the award; each mill has won the award at least once.
Management Comments—“Market conditions improved steadily throughout the quarter,” said CMC President and CEO Murray R. McClean. “December ended excess inventory hangovers and the quarter saw an unanticipated $97-per-short-ton spike in ferrous scrap pricing followed by an $85-per-ton increase in rebar and merchants by quarter end. Management's outlook had not anticipated a LIFO effect for the quarter; however, the dramatic increase in pricing inevitably led to a huge LIFO expense of $0.32 a share, a record quarterly charge.
“Our Americas Recycling segment, propelled by ferrous scrap pricing, had a strong second quarter,” continued McClean. “Our Americas Mills segment, on the strength of higher production and shipment levels, overcame a temporary metal margin squeeze. The Americas Fabrication and Distribution operations felt the margin squeeze and the effect of a massive LIFO charge, although underlying operations remain solid.
“The International Mills were at extremes,” said McClean. “CMCZ (Poland) shook off lethargic pricing early in the quarter to achieve excellent results in the second half of the period. CMCS (Croatia) remained in turnaround mode. International Fabrication and Distribution showed continued strength in raw materials, inter-Asian trade, and European markets."
McClean said that spiking ferrous scrap prices and the significantly higher pre-tax LIFO expense ($18.2 million compared to $7.7 million in the prior year) for the segment kept the Americas Mills segment's adjusted operating profit at $55.3 million, comparable to last year's second quarter, despite a 33% increase in net sales.
“Our average selling price was up $76 per ton to $617 per ton while the average selling price for finished goods was up $101 per ton to $657 per ton,” continued McClean. “Margins were also affected by a 100% increase in alloys, a 21% increase in electrodes, and a 17% increase in energy costs. Combined, these three costs accounted for some $11.5 million in increased costs this quarter.
“Sales volumes increased 12% to 630 thousand tons,” said McClean. “Rebar shipments rose 6% and merchant tonnage rose 17%. Included in the sales volumes was 113 thousand tons of billets, of which 40 thousand tons were exported. The price premium of merchant bar over reinforcing bar was $105 per ton, up $18 per ton from last year. Sales volumes in the second quarter of last year were down due to scheduled maintenance for the melt shop and the rolling mill, and billet sales were lower.
“Service centers continue to match their buying to their sales commitments with no surge in purchasing though inventories are at 10-year lows. On a quarter-to-quarter basis, tonnage melted for the second quarter was up 9% to 578 thousand tons while tonnage rolled was 504 thousand tons, a decrease of 2%. We have invested $39.6 million of the expected $155 million total cost of our micro mill project in Arizona.”
Also included within CMC’s Americas Mills segment is a copper tube mill, which McClean said had recorded an adjusted operating profit of $4.4 million, “a 100% increase over last year on a 38% increase in sales and after absorbing a $4.6 million swing quarter to quarter in LIFO expense.” said McClean.
McClean said that the company’s Americas Fabrication and Distribution segment was negatively impacted by escalating steel prices and a pre-tax LIFO expense of $35.2 million (compared to $14.1 million pre-tax LIFO expense in last year's second quarter). The segment reported an adjusted operating loss of $7.6 million compared to an adjusted operating profit of $11.7 million last year.
Regarding the company’s International Mills segment, McClean said, "This segment had two opposite, though expected, results to report this quarter. Combined adjusted operating profit was $9.7 million compared to last year's $26.0 million. CMCZ (Poland) saw an improved pricing environment from mid-quarter on and achieved an adjusted operating profit of $16.1 million. CMCS (Croatia) continued to be saddled with start-up costs and investments in customer acceptance. A mild winter, low inventory levels at the end of 2007, the reduction of Turkish and Chinese imports in the region, and a strong Middle East construction market all led to higher shipments. Merchant bar tonnages again showed an improvement in sales this quarter compared to last year's second quarter.
“For the second quarter, tons melted were 385 thousand, 2% above last year's 378 thousand; rolled tons equaled 308 thousand against 292 thousand last year; and shipments totaled 403 thousand tons (a new all-time quarterly record) including 81 thousand tons of billets versus 369 thousand tons last year,” said McClean. “Average selling prices decreased 5% to PLN 1,414 (including 20% billets) from PLN 1,486 per ton (including 11% billets). The cost of purchased scrap entering production increased 5%. The average metal margin decreased to PLN 589 from PLN 660. Our mega-shredder processed 108 thousand tons of scrap during the quarter.
"Our turnaround at CMCS (Croatia) continues,” said McClean. “Our marketing efforts are aimed at winning back customer acceptance that was lost in the many years that the mill was operated poorly and at low capacities. Our sales are often in trial lots as we develop the customer base. Our adjusted operating loss was $6.4 million. We rolled 12,100 tons and sold 9,200 tons during the quarter."
McClean added, "International Fabrication and Distribution had a strong second quarter recording an adjusted operating profit of $21.7 million, a 26% increase compared to the prior year of $17.3 million.”
Outlook—Regarding CMC’s outlook, McClean said, "Our third fiscal quarter should be excellent. Global infrastructure growth will continue to create a strong demand for rebar and other steel long products in emerging countries. In the U.S., nonresidential construction growth should be flat. Supply of rebar is likely to be impacted by the reduced level of rebar imports. Supply of steel products in global markets is likely to be significantly impacted by the Chinese cut back in steel exports. The recently announced contract iron ore prices for 2008 (up 65% plus) should support higher pig iron and ferrous scrap prices in global markets."
Summarizing, McClean added, "Higher prices globally and in the U.S. for raw materials, ferrous scrap and steel long products should be positive for four of our five segments. The fifth segment, Americas Fabrication and Distribution, is likely to be impacted by a margin squeeze due to higher steel prices. We anticipate a significant LIFO expense for the third quarter."
