Commercial Metals Company Reports Third Quarter Loss
06/24/2009 - Commercial Metals Co. reported a net loss of $13.1 million on net sales of $1.3 billion for the quarter and net earnings of $13.6 million on net sales of $5.3 billion for the nine months ended May 31, 2009.
Commercial Metals Co. reported a net loss of $13.1 million on net sales of $1.3 billion for the quarter and net earnings of $13.6 million on net sales of $5.3 billion for the nine months ended May 31, 2009.
Third Quarter Results—The $13.1 million net loss ($0.12 per share) compares with net earnings of $59.5 million ($0.51 per diluted share) for the year-ago third quarter. Net sales of $1.3 billion compare to net sales of $2.9 billion for last year’s third quarter.
Results included $29 million after-tax LIFO income ($0.26 per share), which compares with $83 million ($0.71 per diluted share) of expense in last year's third quarter. At quarter end, the company’s LIFO reserve totaled $279 million.
Nine Month Results—The $13.6 million net earnings ($0.12 per diluted share) compares to net earnings of $168.4 million ($1.43 per diluted share) for the same nine-month last year. Net sales of $5.3 billion compare to net sales of $7.3 billion for the same period last year. Results included after-tax LIFO income of $184 million ($1.62 per diluted share), which compares to an expense of $118 million ($1.00 per diluted share) last year.
The company recorded $10.8 million of pre-tax costs (under Selling, general and administrative expenses) in the third quarter related to global deployment of SAP, part of $126.8 million the company has expensed to date for the project. Other SAP costs of $105.8 million have been capitalized since inception of the project, of which $5.6 was capitalized in the current quarter. The company estimates that 58% of the company’s earnings power will be on SAP by August 31, 2009. At that time, the company will fold deployment of SAP into its continuing IT operations, and will stop tracking it as a separate project.
Management Comments—"Global metal markets may have tested the bottom during the quarter and though some recovery has occurred, the markets, overall, remain fragile,” commented CMC Chairman, President and CEO Murray R. McClean. “Any volume improvement in the quarter was seasonal and not reflective of any stimulus effect. Destocking appears to be in its last stages; however, end-use demand remains weak.
“Internationally, Poland remains one of the few countries with a positive GDP; its weak currency discourages imports; however, the lack of demand in traditional export markets minimizes any opportunities to leverage the euro or the U.S. dollar through exports. There are some encouraging developments in China where pricing and consumption are on the rise,” continued McClean. “Lower prices and lower inventory quantities again triggered LIFO income during the quarter. Our largest commercial exposures remain unwarranted customer contractual noncompliance leading to market claims, price renegotiations, and unexpected inventory positions."
McClean noted that the company’s Americas Mills segment experienced mixed trends in the third quarter. "Metal margins, though still at historically strong levels, eroded from the second quarter,” said McClean. “Tons shipped increased from the second quarter, but this is more likely seasonal rather than sustainable demand. Most benchmarks compared to the third quarter of last year are down. Rebar continues to exhibit resilience, while merchant products wither. Import competition is limited.
McClean said the company’s customers were continuing to destock, although he added that this trend was slowing. “We have rolled approximately 15% less than we shipped in every quarter this year as we reduce inventories to meet lagging demand.”
The company’s Americas Mills segment earned adjusted operating profit of $42.1 million in the third quarter, which compares to adjusted operating profit of $34.0 million in the year-ago quarter. The segment also reported $16.4 million of pre-tax LIFO income, primarily due to the continuing decline in prices and volumes, which compares to $55.3 million of pre-tax LIFO expense last year.
"Our steel mills ran at 58% of capacity this quarter, up from 55% capacity in the second quarter,” continued McClean. “The steel mills’ adjusted operating profit of $39.2 million was up 18% compared to the prior year third quarter; pre-tax LIFO income was $17.3 million compared to the prior year third quarter pre-tax LIFO expense of $44.5 million. Our metal margin at $365 per ton was 14% above the third quarter of last year, but down some 19% from the second quarter. The price of ferrous scrap consumed at the mills during the quarter fell 50% compared to last year's third quarter.”
McClean said the segment’s average selling price of $564 was down $154 per ton, while the average selling price for finished goods was down $166 to $583 per ton. Sales volumes declined 37% in the third quarter to 427,000 tons.
Rebar accounted for 58% of the segment’s tonnage shipped, which McClean noted was consistent with the percentage throughout the rest of the year. “The price premium of merchant bar over reinforcing bar averaged $154 per ton, down $103 per ton from the second quarter,” added McClean.
“On a quarter-to-quarter basis, tonnage melted for the third quarter was down 38% to 396,000 tons, while tonnage rolled declined 35% to 365,000 tons,” added McClean. “Lower production rates as well as price decreases in some alloys and natural gas resulted in an overall decrease of $22.7 million in electrode, alloys, and energy costs.”
Regarding the company’s International Mills, McClean said, "Weak international steel markets, metal margin compression, mill start-up costs and lower of cost or market inventory adjustments caused by rapidly falling sales prices resulted in an adjusted operating loss of $17.7 million for this segment compared to a $30.7 million profit in the third quarter of last year. On a more positive sequential note, the loss was less than the $24.3 million incurred in the second quarter of 2009, this in spite of local currencies (zloty and kuna) strengthening against both the U.S. dollar and euro during the third quarter.
“CMC Poland had an adjusted operating loss of $9.2 million in the main attributable to compressed metal margins as the volumes were fairly constant with last year,” continued McClean. “Encouragingly, the losses were reducing each month of the quarter as shipments increased; absent billets, export markets were not viable. Shipments totaled 328,000 tons (69,000 tons of billets) compared to 339,000 tons (82,000 tons of billets) in the prior-year third quarter. Tons melted were 324,000 tons compared to 428,000 tons last year, and tons rolled were 253,000 tons compared to 284,000 tons in the prior-year third quarter. Average selling prices decreased 31% to PLN 1,172 per ton compared to PLN 1,708. The cost of scrap entering production decreased 33%. The average metal margin decreased 192 PLN, from 669 PLN to 477 PLN, a level insufficient for profitability.”
“We successfully rolled 14,000 tons of material on our newly commissioned wire rod block,” added McClean; “during the fourth quarter, we will continue to trial different sizes and grades incurring additional start-up costs.”
"Our adjusted operating loss in Croatia for the third quarter was $8.5 million, lower than the second quarter, and including inventory lower of cost or market adjustments," said McClean.
"Though not yet evident in the results, the mill has some positive developments,” continued McClean. “It set a new record for tons shipped this quarter. Our yields have steadily improved during the year; we have successfully completed castings of all major sizes of billets from phase one of our updated meltshop. The installation of the renovated furnace is underway and should be completed late in calendar 2009. During the quarter, we melted 13,000 tons, rolled 21,000 tons, and shipped 22,000 tons."
Fourth Quarter Outlook—"We believe for the balance of calendar 2009, market conditions in the U.S. will remain difficult,” commented McClean. “There is very little evidence of stimulus dollars impacting demand. It is likely in 2010 that the stimulus package will impact infrastructure spending and, thus, demand for steel long products such as rebar.
“We are seeing some small signs of a pick up in demand,” continued McClean. “However, this is more a function of seasonality and restocking of certain steel products than a general recovery in demand. We believe destocking of rebar and merchant products is almost over. It is likely that steel prices will stabilize and recover modestly in coming months. Rebar imports are likely to remain modest as U.S. domestic prices remain lower than international prices.”
"In Europe, we anticipate market conditions to be even more difficult than in the U.S.,” said McClean. “The only bright spot is Poland, where we anticipate better demand for rebar, merchant products and billets. This is partly due to increased infrastructure spending utilizing mainly EU funds.
“We are more optimistic about Asia, in general, led by China. China, after a slow start, is on target to achieve 7 to 8% GDP in 2009,” continued McClean. “The various stimulus packages and other initiatives introduced by the Chinese government to stimulate demand through domestic consumption and infrastructure spending have taken hold. Both long and flat steel products prices in China are likely to firm further. Other markets in Asia, in particular Southeast Asia, are likely to continue to improve.”
McClean added, "At CMC, our people, whether in the U.S. or in international markets, continue to perform superbly under difficult market conditions. We believe CMC will weather the crisis better than most due to our strong balance sheet, vertical integration, geographic dispersion and long products focus. We believe prices will stabilize at or near current levels, negating the need for further significant inventory valuation adjustments.
“We estimate that our domestic mills may operate around 65% of capacity in the fourth quarter,” continued McClean. “Ferrous scrap prices and volumes should increase based on improving export markets and a small pick up in domestic demand. Our fabrication backlogs are likely, in the short term, to reduce further with additional margin pressure due to fewer jobs being awarded. Our industrial products business should remain profitable. Internationally, we are likely to see modest improvements in Poland, as well as in our operations in Asia and Australia.
“Overall,” concluded McLean, “we anticipate fourth quarter results to be similar to the third quarter."
Commercial Metals Co. 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 United States and in strategic international markets.
