Commercial Metals Sees Improved Outlook
03/23/2011 - Commercial Metals Co. reported a net loss of $46.2 million for the second quarter and a net loss of $45.5 million for the six months ended February 28, 2011.
Commercial Metals Co. reported a net loss of $46.2 million for the second quarter and a net loss of $45.5 million for the six months ended February 28, 2011.
Second Quarter Results — The $46.2 million ($0.40 per diluted share) net loss compares with a net loss of $173.3 million ($1.53 per diluted share), including a loss of $135.3 million ($1.19 per diluted share) from continuing operations, for the year-ago second quarter.
The company’s consolidated pre-tax loss was $58.7 million, which included $55.7 million of pre-tax LIFO expense, which compares to $7.4 million of pre-tax LIFO expense in last year's second quarter. At quarter end, the LIFO reserve totaled $291.7 million. Last year's second quarter included $38.1 million of after-tax costs associated with the company’s decision to exit the joist and deck business.
Six Month Results — The $45.5 million ($0.40 per diluted share) net loss for the first six months compares to a net loss of $204.5 million ($1.81 per diluted share) for the comparable year-ago period, which included a loss from continuing operations of $163.9 million ($1.45 per diluted share). Pre-tax LIFO expense was $61.4 million, which compares to pre-tax LIFO income of $9.8 million last year.
Management Comments — "Consistent with the outlook we provided last quarter, absent LIFO considerations, we incurred a small loss for the second quarter,” said CMC Chairman, President and CEO Murray R. McClean. “The accelerating price environment led to significant LIFO expense, which is masking underlying improvements in operations.
"Ferrous scrap prices increased sharply in December and January before reducing slightly in February,” continued McClean. “Finished steel product prices, while lagging, increased significantly during the quarter. The acceleration in ferrous scrap and steel prices led to significant LIFO expense.
"Our Americas Recycling and Americas Mills segments exceeded our projections due to the favorable price environment. Our Americas Fabrication segment was faced with higher steel input costs, which resulted in losses. Our International Marketing and Distribution segment remained profitable in all major geographic areas, but at seasonally lower levels.
“Improving demand in Poland led to an unexpected profit for our mill in what is typically our weakest period,” added McClean. “Losses in Croatia, while reducing, remain unacceptable. Management is focused on improving performance in that operation. It remains one of our top priorities.”
Americas Mills — Mill finished goods pricing moved with ferrous scrap increases, but with the time lag resulted in modest mill margin declines from the first quarter. Some pull forward shipments early in the quarter were attributable to customer buying in anticipation of price increases, but this worked its way through by the end of the period. The company noted that commercial construction remains weak and needs a rebound in residential construction to jumpstart, while the better nonresidential construction markets remain in infrastructure, health care, and education. The mills ran at 73% of rolling capacity during the quarter, up from 58% in the second quarter of last fiscal year. CMC Steel Arizona set monthly production records during the quarter and achieved its first monthly net profit in February.
Domestic steel mills had an adjusted operating profit of $6.9 million compared to an adjusted operating loss of $18.5 million in the same quarter last year. The quarter had an elevated pre-tax LIFO expense of $38.5 million as price increases hit, which compares to pre-tax LIFO expense of $9.3 million in the comparable year-ago period.
The metal margin for the quarter was $289 per ton, well ahead of the prior year's metal margin of $249 per ton. The price of ferrous scrap consumed at the mills increased $95 per ton during the quarter compared to last year. Sales volumes were 606,000 tons, of which 98,000 tons were billets, compared with 521,000 tons in the second quarter of last year, including 101,000 tons of billets. Comparing second quarter to second quarter between years, tonnage melted was up 23% to 598,000 tons, and tonnage rolled increased 29% to 514,000 tons.
International Mills — The Polish economy remained vibrant with calendar-year fourth quarter growth of 4.4%. Infrastructure, engineering applications, and consumer goods were strong; exports were made to Germany. Although CMC Zawiercie's (CMCZ) succession of profitable months since last April ended in December, a solid end to the second quarter resulted in net quarterly profit for the Polish mill, making this operation the largest swing factor for CMC's earnings.
CMCZ achieved almost three million man hours without a recordable injury, and reported adjusted operating income of $4.0 million compared to a $38.4 million loss in the year-ago second quarter, a period suffering from the lowest metal margins since the acquisition of the mill.
Shipments totaled 314,000 tons (45,000 tons of billets) compared to 282,000 tons (59,000 tons of billets) in the prior year's second quarter. Tons melted were 359,000 tons compared to 293,000 tons, and tons rolled were 285,000 tons compared to 236,000 tons last year. Average selling prices increased 49% from PLN 1,186 in the prior year to PLN 1,768 this year, an indication of the depths of recessionary pricing and an improved product mix from the facility’s new rolling mills. The cost of scrap entering production increased 45%, and the average metal margin per ton was PLN 637 compared to PLN 408, a historic low.
In Croatia, with the assistance of the technical teams sent this quarter, the company reports that CMC Sisak (CMCS) has begun to make progress in several essential operating areas. While the loss incurred this quarter is disappointing, it included a significant scheduled downtime for maintenance and write-downs on inventory and equipment that the new operating plan considers secondary. Also encouraging, safety results are ahead of last year and ahead of plan.
According to the company, CMCS's initial progress is being achieved in quality of personnel and training, efficiency in processes, and opening of markets to the sale of blooms, which is expected to be reflected in future financial results. Its adjusted operating loss was $11.3 million compared to $14.1 million in the previous quarter and $16.0 million in last year's second quarter. During the quarter, the mill melted 34,000 tons, rolled 18,000 tons, and shipped 19,000 tons.
Outlook — In closing, McClean said, "Looking ahead there appears to be more optimism in world metal markets. As the spring construction season begins, pricing should see a shift from cost push to demand driven. Effective sales prices should rise as previously-implemented increases take effect; with scrap pricing stabilizing, metal margins should improve.
“In this environment, our Recycling segment should continue to do well and our Americas Mills should significantly improve,” continued McClean. “While our fabrication operations should get some relief, it may not be enough to achieve profitability. Sustainable growth in Northern and Central Europe, particularly Germany, will benefit our CMCZ (Polish) operations, driving higher earnings. CMCS (Croatia) losses should reduce as margins improve and cost reduction efforts take effect. Our raw materials, Asian, European and U.S. divisions should maintain overall profitability for International Marketing and Distribution. Absent LIFO considerations, we would anticipate earnings per share between $0.15 and $0.25 for our third quarter."
Commercial Metals Company 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.
