CMC Reports Second-Best Quarterly Results
10/31/2007 - Commercial Metals reports net earnings of $104.7 million on net sales of $2.3 billion for the fourth quarter, and net earnings of $355.4 million on net sales of $8.3 billion for the year ended August 31, 2007.
Commercial Metals Co. reported net earnings of $104.7 million on net sales of $2.3 billion for the fourth quarter, and net earnings of $355.4 million on net sales of $8.3 billion for the year ended August 31, 2007. The company's net earnings return on beginning equity was 29.1%.
Fourth Quarter Results—Net earnings of $104.7 million ($0.86 per diluted share) compares with net earnings of $128.7 million ($1.04 per diluted share) in the fourth quarter a year ago. Net sales, $2.3 billion, compares with net sales of $2.2 billion in the year-ago fourth quarter.
Results included pre-tax LIFO income of $8.8 million ($0.05 per diluted share) compared with pre-tax LIFO expense of $16.2 million ($0.09 per diluted share) in the prior-year quarter. Selling, general and administrative expenses included $9.4 million of costs associated with the investment in the global deployment of SAP software. The effective tax rate was 26.6% compared with last year's 30.2% due to a shift in earnings.
Full-Year Results—Net earnings of $355.4 million ($2.92 per diluted share) compares with net earnings of $356.3 million ($2.89 per diluted share) last year. Net sales of $8.3 billion compares with net sales of $7.2 billion last year.
Results included pre-tax LIFO income of $51.2 million pre-tax expense ($0.27 per diluted share) compared with $77.9 million pre-tax expense ($0.41 per diluted share) in the previous year. LIFO inventory valuation reserves were $240.5 million at year end.
Selling, general and administrative expenses included $33.8 million as compared to $1.2 million last year. Other costs of $33.5 million have been capitalized since inception of the project, of which $22.3 million has been capitalized in the current year. The effective tax rate was 31.9% compared with fiscal 2006 at 33.9% due to a shift in earnings (higher profits in Poland).
Management Comments—"Backed by record fourth quarters from our Domestic Fabrication and Marketing & Distribution segments, we achieved our second-best quarter ever, eclipsed only by last year's all-time-record fourth quarter,” said Murray R. McClean, President & CEO. “Though not at record levels, our Recycling segment had its best quarter of the fiscal year, and CMCZ finished its best year ever.
“Operating profit for our Domestic Mills segment was lower,” continued McClean, “primarily on account of lower production and shipments. The service centers continued destocking reduced shipments, most notably merchant bar.
“The housing slump had some impact on rebar shipments, particularly in the southeast,” said McClean, “although nonresidential construction in the U.S. continued at strong levels. In addition, record rainfall in Texas slowed rebar shipments to construction sites. Steel imports have been a factor, but these declined significantly by quarter end.
“Internationally,” he continued, “most markets remained strong although slower due to the summer holiday period. The overhang of rebar inventories, mainly steel imports, caused by very robust market conditions in the first two quarters of calendar 2007 impacted many European markets including Poland.”
Domestic Mills Segment—Regarding the company’s Domestic Mills Segment, which included the steel minimills and copper tube mill, McClean said, "Our Domestic Mills segment's adjusted operating profit at $67.1 million was 30% below last year's fourth quarter, an all-time segment record. LIFO expense was negligible this quarter compared with $3.7 million pre-tax expense last year. Net sales were flat."
"Within the segment, adjusted operating profit for our steel minimills declined 28% compared to last year's fourth quarter on slightly lower sales,” McClean continued. “Metal margins were at record levels having increased $34 a ton fourth quarter to fourth quarter. Our average selling price was up $43 per ton to $591 per ton, while the average selling price for finished goods was up $76 per ton to $639 per ton. However, sales volumes dropped 12% at 548 thousand tons with decreases in both rebar and merchant bar volumes. Rebar was negatively affected by the wet summer in Texas and the ripple effect in the residential housing downturn; merchants by declining inventory levels at service centers.
“Faced with softening demand,” said McClean, “our mills undertook both maintenance and capital expenditure programs in the fourth quarter as well as inventory management. Between our four minimills and three meltshops, we were down 137 days this quarter compared to 20 in last year's fourth quarter. On a year-to-year basis, tonnage melted for the fourth quarter was down 25% to 462 thousand tons, while tonnage rolled was 377 thousand tons, 34% lower than last year's fourth quarter.
“The price premium of merchant bar over reinforcing bar was $70, down $13 from last year. The average scrap purchase cost rose $9 per ton from a year ago to $209,” continued McClean.
“Total utility costs decreased by $5.1 million compared with the fourth quarter last year with natural gas and electricity both declining. Costs for ferroalloys, graphite electrodes, and other supplies decreased $284 thousand year over year. We have invested $26 million of the expected $155 million total cost of our micro mill project in Arizona."
According to McClean, "The copper tube mill (CMC Howell Metal) recorded an adjusted operating profit of $11.1 million on 6% lower sales, historically a solid performance, but trailing the phenomenal result of $18.3 million in the prior year fourth quarter. The continued slump in residential housing overhung the market; however, we continued to shift the product mix to higher-value items.
“Pre-tax LIFO expense was $636 thousand this fourth quarter compared to $6.3 million expense last year,” said McClean. “The average selling price dropped 45 cents to $4.65 per pound, and metal spreads declined $1.01 to $1.55 per pound as scrap prices increased 11 cents to $3.36 per pound. Copper tube production increased 9% to 15.0 million pounds while shipments rose 3% to 13.9 million pounds compared to last year's fourth quarter."
CMCZ—Regarding the company’s Polish steel operation, McClean said that CMCZ, "closed out a record year with fourth quarter adjusted operating profit of $20.8 million, solid results, but 45% below last year's fourth quarter record. The vibrant Polish construction market and a strong currency attracted imports, driving down metal margins and shipments.
For the fourth quarter, he said that tons melted were “330,000, 2% below last year's 338,000,” while “rolled tons equaled 240,000 against 323,000 last year; and shipments totaled 309,000 tons (including billets) versus 378,000 last year. Average selling prices increased 4% to PLN 1,620 per ton (including 18% billets) from PLN 1,552 per ton (including 7% billets). The increase in pricing was not sufficient to offset the increase in the cost of purchased scrap entering production. The average metal margin declined in local currency to PLN 727 per ton from PLN 777 per ton. Our mega-shredder processed 502 thousand tons of scrap for the year, representing 34% of the mill's scrap requirements."
Domestic Fabrication—"The margin squeeze occasioned by rising mill prices significantly abated in the fourth quarter as the rise in average selling prices worked its way through shipments,” commented McClean. “Adjusted operating profit rose to a fourth quarter record of $32.5 million, an increase of 49% over last year's $21.8 million profit. LIFO income was $2.7 million pre-tax in the fourth quarter this year compared to an expense of $1.1 million last year.
“Total shipments from our fab plants fell 11% to 429,000 tons from 483,000 tons last year. Most of the decrease was in rebar shipments, particularly in Texas where record summer rainfall postponed construction.
In contrast, shipments in joist and deck were up substantially as a result of our April 2007 acquisition of Bouras; all acquired locations were profitable. The composite average fab selling price (excluding stock and buyouts) rose 21% to $1,073 per ton."
Recycling—According to McClean, "Our Recycling segment had its best quarter of the year with adjusted operating profit of $26.6 million, though off some 41% from last year's all-time record quarterly earnings of $45.1 million. Ferrous scrap pricing showed some stability in comparison to the volatile swings exhibited earlier in the year. Nonferrous markets were notable by extreme price and demand volatility. Nickel dropped almost in half, and with low terminal inventories, copper reacted to any news influencing supply or demand. LIFO income was $10.3 million in the fourth quarter driven by significantly lower inventory quantities; days outstanding of inventory stood at seven days at year end. Comparative LIFO income in the prior year was $2.1 million.
“The average ferrous scrap sales price for the quarter increased by $2 to $216 per short ton, while shipments of ferrous scrap decreased 4% to 587 thousand short tons,” continued McClean. “The proliferation of shredders, especially in the south, has pressured margins. The average nonferrous scrap sales price for the quarter dropped 1% compared with last year while nonferrous shipments also declined 8% to 90,000 tons. Chinese nonferrous buyers appeared only towards the end of the quarter after being adversely affected by customs investigations and the resulting port congestion. The total volume of scrap processed, including all our domestic processing plants, equaled 969,000 tons versus 1,020,000 tons last year."
Marketing and Distribution—"On the heels of its best quarterly operating profit ever, achieved in the third quarter, the Marketing and Distribution segment had its best fourth quarter and second best quarter ever," McClean said.
"Adjusted operating profit of $28.8 million was double the prior year of $13.9 million. LIFO expense of $3.3 million pre-tax versus $13.5 million last year was a key factor. Each of our major divisions was profitable during the quarter. U.S. steel import volumes were strong, but declined significantly by quarter end. Our raw materials product division was steady and achieved its second best year ever. Our aluminum, copper, and stainless steel semis business saw an upturn during the quarter. International markets were profitable, but uneven; inter-Asian markets were solid, but Australia showed signs of weakening. Great Britain and Germany were good markets for niche products."
Outlook—McClean continued, "The prospects are very good for another strong year for CMC in 2008. We believe the year will be typical with a good first quarter followed by a slower second quarter (winter months) and then a strong finish in the third and fourth quarters. The housing market slump and the more recent sub prime mortgage crisis/credit squeeze have slowed the U.S. economy. The global economies remain relatively solid, although in Europe there are some signs of slowing growth. Nonresidential construction remains strong in the U.S. and in most global markets. This is the key driver for our business.
"The strong 2007 results should carry forward into a good first quarter for 2008. Our domestic mills should have a solid first quarter, particularly if shipments to service centers and rebar fabricators improve. Our U.S. Recycling segment should have a good quarter based on relatively high ferrous scrap prices, good shipping volumes and a healthy nonferrous global scrap market. Margins on shredder ferrous scrap should continue to be squeezed due to the overcapacity of shredders in the U.S. Our U.S. fabrication business should have a solid quarter based on a very good backlog at good prices. Our steel import distribution business in the U.S. is likely to be negatively impacted by the rapid decline in steel imports. Our copper tube mill should continue to perform well with shipping volumes and margins relatively stable."
McClean added, "Internationally, our Polish mill (CMCZ) should have a profitable quarter, although lower than the fourth quarter of fiscal 2007. Our newly acquired mill in Croatia (CMC Sisak) is a turnaround situation, but may have a slight negative impact on first quarter results. The international fabrication and distribution operations should have a solid quarter, although down from fourth quarter fiscal 2007 results.
"Steel imports into the U.S. will continue to fall significantly. As well, consolidation of steel producers in the U.S. has resulted in more supply discipline. Service centers' inventory levels for most steel products are the lowest in two years. The combination of lower steel imports, producer supply discipline and lower inventory levels should result in stable, if not slowly increasing, shipping levels, stable margins and prices with an upward bias. Globally, China has reduced steel exports through removal of VAT tax rebates and new export taxes. The impact should be higher international steel prices. As well, 2008 contract iron ore prices are likely to increase significantly which will result in higher steel prices. Ferrous scrap prices, while remaining volatile, should also trend upwards. Ocean freight rates should remain at high levels due to the demand for iron ore, coal and other key raw materials."
McClean concluded, "We anticipate investments for fiscal 2008 will be $494 million including routine capex ($206 million), ERP ($76 million), the Arizona micro mill and flexible rolling mill in Poland ($116 million) and other acquisitions / investments ($96 million)."
Commercial Metals and subsidiaries manufacture, recycle and market steel and metal products, related materials and services through a network including steel minimills, steel fabrication and processing plants, construction-related product warehouses, a copper tube mill, metal recycling facilities, and marketing and distribution offices in the U.S. and in strategic international markets.
