Commercial Metals Sees Drop in Q1 Earnings

Results were partially attributed to a drop in profit from CMC’s Americas Recycling segment which saw lower demand that affected ferrous and nonferrous pricing and volumes. Average selling price for ferrous scrap was $322 per short ton, down 8 percent from a year ago at $351 per ton. Shipping of ferrous scrap dropped 7 percent from last year’s first quarter, to 503,000 tons.

The Americas Mills also saw a drop in operating profit as increased conversion costs offset improvements in shipping volumes and metal margins. An extended outage at the electric arc furnace in the South Carolina melt shop resulted in $5.5 million of expenses.

The Americas Fabrication segment showed significant improvement over the prior year’s first quarter but CMC’s International Mill segment slid from an adjusted operating profit of $9.8 million in the prior first year quarter, to $0.9 million, due to Europe’s eroding market conditions.

CMC’s International Marketing and Distribution recorded an operating profit of $40.2 million compared to an operating loss in last year’s first quarter of $4.1 million. Part of the results were due to sale of an 11 percent interest in Trinecke Investment for an after-tax gain of $17 million and $29 million in cash proceeds. The raw materials business in this segment experienced some improvement over the prior year but overall lacked momentum in terms of volume and margins.

Joe Alvarado, Chairman of the Board, President, and CEO, gave the following outlook for CMC:

“Our second fiscal quarter is normally our weakest period of the year due to holiday slowdowns and winter weather conditions curtailing construction activity. However, there is growing evidence of an emerging recovery in domestic construction end markets, which is encouraging for future quarters. Our customers remain cautious, and stocking levels are low.

Within our segments, we expect our Americas Recycling segment to benefit from scrap price improvements, which historically occur during our second fiscal quarter. We believe the scrap price improvements will likely result in near term downstream margin compression in our Americas Mills and Fabrication segments.

We believe our International Mill segment will remain challenged by deteriorating conditions in the Euro zone. Further, we expect the International Marketing and Distribution segment to exhibit continued softness until there is more clarity around the economic direction in both domestic and international markets.”

During the CMC conference call Alvarado was asked to comment on the construction market. “We have a good enough feel for our construction projects that are on the ground that are more related to commercial. There’s still some public infrastructure,” said Alvarado. “But I guess I’d say that the non-res recovery is still some time off. It really will depend more on strengthening unemployment levels and some fiscal policy that could support infrastructure spending. But in California and Florida both, as well as in Texas, we see good construction activity, certainly better in California and Florida than we’ve seen in the recent past. And Texas has just remained consistently strong throughout the economic downturn.”

Alvarado commented that orders for CMC are about 70 percent non-residential and 30 percent government work and noted that ratio has been inverted for the last three years.

He said, “We don’t see any growing demand for what I’d call government work until funding issues are resolved. But, it would certainly be nice to have the choice between public projects funded by the federal and state governments or non-residential, commercial activity funded more by private investors. And we’d like to have that problem and hope that we will in the foreseeable future.”

When asked to comment on the outlook for market demand now that the fiscal cliff has been averted, Alvarado said the following:

“We’ve had this sense of, what I’ll call, nascent demand for the last couple of quarters. And if it wasn’t the fiscal cliff, it was the election; if it wasn’t the election, it was the stock market. So there is always some bugaboo that investors are concerned about. But generally speaking, the money is available, there are construction activities and some pent-up demand, so we remain optimistic. I don’t know that we’ve heard the last of what’s going to come of Washington. There are always other obstacles that get thrown in the way and so a lot of matters to be resolved. But we’re cautiously optimistic.”