Joseph Alvarado - Chairman, President and CEO Barbara Smith - SVP & Chief Financial Officer.

Luke Folta - Jefferies & Company Brian Yu - Citigroup Timna Tanners - Bank of America Merrill Lynch Evan Kurtz - Morgan Stanley Michael Gambardella - JPMorgan Brent Thielman - D.A.

Davidson Phil Gibbs - KeyBanc Capital Markets Andrew Lane - Morningstar John Tumazos - John Tumazos Very Independent Research Nathan Littlewood - Credit Suisse Charles Bradford - Bradford Research Sal Tharani - Goldman Sachs.

Hello, and welcome everyone to today's Commercial Metals Company Second Quarter Fiscal 2015 Earnings Call. Today's call is being recorded. After the company’s remarks, we’ll have a question-and-answer session and we’ll have a few instructions at that time.

I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information, and will include expectations regarding economic conditions, future legislations, the company’s future operations, the company’s future results of operations, and capital spending.

These statements are considered forward looking and may involve speculation, and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations.

These statements reflect the company's beliefs based on current conditions, but are subject to certain risks and uncertainties, including those that are described in the risk factors section of the company's latest 10-K.

Although these statements are based on management's current expectations and assumptions, CMC offers no assurance that events or facts will happen as expected. All statements are made only as of this date, except as required by law.

CMC does not assume any obligation to update these statements in connection with future events, new information or otherwise. Some numbers presented will be non-GAAP financial measures, and reconciliations can be found in the company's earnings release or on the company's website.

And now for opening remarks and introductions, I will turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Mr. Joe Alvarado. Mr. Alvarado, please go ahead. .

Good morning, everyone. Thank you for joining us to review CMC’s results for the second quarter of fiscal 2015. I'll begin with highlights from the second quarter.

Barbara will then provide further financial details, and I'll conclude our prepared remarks with comments on our outlook for the third quarter of fiscal 2015, after which we’ll open the call for questions.

As described in our earnings release this morning, we reported net sales of $1.4 billion for the second quarter of fiscal 2015 compared to $1.6 billion for the second quarter of fiscal 2014.

Earnings from continuing operations for our second quarter of fiscal 2015 were $61.7 million or $0.52 per diluted share, an increase of $0.41 per diluted share when compared to the same quarter in the prior fiscal year.

Also noted in our earnings release this morning, the Board of Directors declared a dividend of $0.12 per share for stock holders of record on April 9, 2015. The dividend will be paid on April 23, 2015. I’ll now review current trends and conditions in the markets in which we operate.

Historically, our fiscal second quarter is slower as holidays and winter weather limit construction activity in the United States, Poland and Northern Europe.

As indicated in our last earnings call, we took advantage of the seasonal slowdown to conduct routine maintenance and equipment enhancements during our fiscal second quarter in preparation for stronger market activity in our fiscal second half.

We remain optimistic as the US economy continued its steady growth cycle through our fiscal second quarter as job growth extended its upward trend with an increase of approximately 860,000 jobs during our fiscal second quarter. In addition, many of the key economic indicators important to our business continued to show improvement over the year.

Construction starts were up year over year, which was led by non-building construction starts improving approximately 96% year over year. Further more, nonresidential construction starts improved by approximately 58% year over year.

For our fiscal second quarter, average monthly ferrous scrap prices as reported by the AMM declined approximately 25% compared to the same period in fiscal 2014.

However, finished steel pricing did not experience the same declines, which resulted in expanded average metal margins for our Americas Mills segment for our fiscal second quarter when compared to the same period of our prior fiscal year. The strong US dollar makes the US market an attractive outlet for foreign produced steel.

Imports of reinforcing bar from Turkey increased approximately 77% during our fiscal second-quarter compared to the same period of the prior year. These imports are particularly acute in the Gulf states and at the Port of Houston.

The backlog for our Americas Fabrication segment remained strong at February 28, 2015 with a modest increase of approximately 23,000 tons year over year, which is consistent with improving nonresidential construction spending.

For an update on the Highway Transportation Bill, we are optimistic that lawyers will pass a long-term bill to fund the Highway Trust Fund. Temporary funding measures are set to expire in May 2015.

A long-term bill will positively affect steel consumption as well as improve the ageing and deteriorating transportation infrastructure in the United States. Continuing with comments regarding our International Markets, overall the Polish economy continued to strengthen during our fiscal 2015 second quarter.

In particular, the manufacturing sector saw strong growth in February. The backlog for our Polish operations is healthy as of the end of February with improvement of approximately 16,000 tons over the prior year in the February period.

Similar to the US, the strong Polish economy has attracted imports from neighboring countries which negatively impacted margins for our International Mill operations. Currently energy markets have been adjusting to depressed oil prices by dramatically lowering rig counts.

We expect this to have some effect on our International and Marketing Distribution segment which trades a variety of products used for energy applications. We anticipate lower volumes for these products as well as margin pressure. As previously reported, our Australian Steel Distribution business is currently held for sale.

During our fiscal second quarter, we continue to seek a buyer for this business, and we hope to provide a more fulsome update in the second half of fiscal 2015. With that overview, I'll now turn the discussion over to Barbara Smith, Senior Vice President and Chief financial Officer.

Barbara?.

Thank you, Joe, and good morning everyone. As Joe mentioned, for the second quarter of fiscal 2015 we reported earnings from continuing operations of $61.7 million or $0.52 per diluted share which compares to earnings from continuing operations of $13.3 million or $0.11 per diluted share for the second quarter of the prior year.

Results from continuing operations for this year's second quarter included after-tax LIFO income of $47.1 million or $0.40 per diluted share. The increased LIFO income is largely due to the dramatic decline in scrap pricing.

This compares with after-tax LIFO expense from continuing operations of $12.3 million or $0.10 per diluted share for last year's second quarter.

Turning to our results by segment, our Americas Recycling segment recorded adjusted operating loss of $172,000 for the second quarter of fiscal 2015 compared to adjusted operating loss of $863,000 for the second quarter of fiscal 2014.

During the second quarter of fiscal 2015, average ferrous selling prices declined by $90 per short ton while average non-ferrous selling prices declined by $458 per short ton. These reductions compressed average ferrous and non-ferrous metal margins by 20% and 2% respectively compared to the same period in the prior fiscal year.

Partially offsetting the margin compression were a $1.7 million gain on sale of assets, and a $7.7 million favorable change in pre-tax LIFO during the second quarter of fiscal 2015 when compared to the same period in fiscal 2014.

Our Americas Mills segment recorded adjusted operating profit of $98.5 million for the second quarter of fiscal 2015 compared to adjusted operating profit of $44.1 million for the same period in the prior fiscal year.

As Joe previously discussed, scrap pricing fell at a greater rate than transactional pricing out of our mills which led to a 17% increase in average metal margins compared to the same period in the prior fiscal year.

Furthermore in the second quarter of fiscal 2015, this segment benefited from a 3% shift in product mix from lower-margin billets to higher-margin finished products, including rebar and merchants compared to the second quarter of the prior fiscal year.

A $50.7 million favorable change in pre-tax LIFO also contributed to the improvement in adjusted operating profit compared to the second quarter of fiscal 2014.

Our Americas Fabrication segment recorded adjusted operating profit of $11.8 million for the second quarter of fiscal 2015 compared to adjusted operating loss of $5.3 million for the second quarter of fiscal 2014.

The favorable results were primarily due to expanded average rebar metal margins of 5% as our average rebar selling prices grew at a faster rate than input pricing for this segment compared to the same period in the prior fiscal year.

Additionally for the second quarter of fiscal 2015, this segment recorded a favorable change in pre-tax LIFO of $22.1 million compared to the same period in fiscal 2014.

Our International Mill segment recorded adjusted operating profit of $819,000 for the second quarter of fiscal 2015 compared to adjusted operating profit of $8.3 million for the same period in the prior fiscal year.

The decrease in adjusted operating profit for the second quarter of fiscal 2015 was due to a 19% decrease in average metal margins on flat volumes compared to the same period in the prior fiscal year.

The metal margin compression for the three months ended February 28, 2015 was the result of continued pressure on the top line as a result of elevated imports into Poland.

The average selling price for the segment declined a $147 per short ton, while the average cost for ferrous scrap consumed fell only $99 per short ton compared to the same period of fiscal 2014.

Our International Marketing and Distribution segment recorded adjusted operating profit of $15.7 million for the second quarter of fiscal 2015 compared to adjusted operating profit of$ 4.5 million for the same period in the prior fiscal year.

The improvement in adjusted operating profit for the second quarter of fiscal 2015 was attributed to an increase in volumes which more than offset average margin compression. In addition, the segment reported a favorable change in pre-tax LIFO of $11.1 million compared to the same period in fiscal 2014. Turning to our balance sheet and liquidity.

As of February 28, 2015 cash and short-term investments totaled $313 million and total liquidity remained at nearly $1 billion. We continue to maintain sufficient unused credit lines.

During the second quarter of fiscal 2015, we actively participated in our share repurchase program that was approved in October 2014 by purchasing approximately 2.2 million shares of our common stock for $30.2 million. To date, total purchases are approximately $39.6 million.

Capital expenditures were $27 million for the second quarter of fiscal 2015 compared to $22.1 million in the prior-year second quarter. We estimate that our capital spending for fiscal 2015 will be in the range of a $150 million. Thank you very much. I'll now turn it back over to Joe for the outlook. .

Thank you, Barbara. Our third fiscal quarter is the start of the spring construction season, and we're carrying healthy backlogs entering the second half of our fiscal year. With adjustments in scrap and steel pricing, we expect margins to improve for Americas Fabrication segment during the second half of our fiscal 2014.

We believe that elevated levels of imports in the US supported by a strong dollar and excess global supply will remain our top challenges. In addition, depressed energy markets have resulted in lower demand for certain raw materials and steel-related products in our International Marketing and Distribution segment.

In Poland, demand and volumes remained quite good but competitive pressures, mainly imports will continue to constrain margins in the near term. Thank you for your attention. At this time, we will now open the call to questions. .

Question-and:.

Thank you, we'll now begin the question-and-answer session. We request that you ask one initial question, and one follow-up question. If you have additional questions, please re-enter the question queue. Follow-up questions will be addressed if time permits. [Operator Instructions]. We'll pause momentarily to assemble our roster.

And our first question comes from Luke Folta of Jefferies. Please go ahead. .

My first question, when you look at pretty much every business or most of the businesses this quarter, you know it seemed to be characterized by just given the big fall-off in pricing that we’ve seen by you know margin pressure on a FIFO basis, largely I think associated with just the flow-through of pricing and inventory effects offset in part by, or more than offset by a big amount of LIFO income associated with those moves.

As we move into the May quarter, should we be thinking about this as you know perhaps meaningfully improved FIFO margin performance or perhaps lesser LIFO income? Is that how you generally expect the shape of Recycling, Americas Mills and Fabrication to sort of act?.

Well certainly Luke, I think the Recycling segment should improve because they are going to cycle through the higher-cost inventory. And you know the Mills; it's tough to say at this point because you know the pricing action for April and beyond has not taken place yet.

But if margins hold in the range that they are at right now given we are moving into the stronger part of the year, we should see improvement there. And then Fab should benefit from raw material pricing that's been coming down for you know the last period of time.

So between the seasonal improvements, you know we do expect to see better results across most of the segments with exception to M&D. And LIFO is going to continue if scrap prices stay at the level that we are at today, and all indications are that you know scrap is going to stay in this range. .

And then I guess more structurally, you know since we’ve had this big sort of reset in pricing on both scrap and steel, I am curious to understand how that impacts the businesses going forward.

I mean in Fab, the situation has been you know the pricing that some of your competitors were buying on an import basis was less than what your internal transfer pricing would be, which had given them a bit of an advantage and had sort of constrained margins in your Fab business.

I would think now with prices having come down quite a bit, we're not quite at parity with import but that spread has come down quite a bit.

So I would think that from a competitive perspective, and from a profitability perspective fabrication should be much better positioned sort of structurally going forward?.

Yeah, that's right Luke. If you think about it in the context of the timing of when contracts are set versus when shipments are realized, and the raw material supply for the fabrication in a declining rebar environment with fixed prices on the Fab, but there should be better margins.

There is the offset of future business that is somewhat determined by the pricing that goes on in this quarter, and reflects some of the pressure that's being realized in the Fab business by imported rebar from Turkey in particular. .

Okay, but those prices are a bit better now than they had been I would think, right? So there is some amount of pressure [indiscernible]?.

The [indiscernible] spreads or the Fab spreads?.

I mean, I would think that domestic pricing was a bit lower relative to imports and it have been say over the last couple of quarters?.

Yeah, that's fair. .

Okay and then just the same question on Recycling, you know scrap prices have moved lower. And if we assume the same, it's a structural move and things sort of persist at this level.

You know I'm not expecting anything you know magnificent out of recycling, but do you think that -- I mean have feedstock prices fallen to a similar amount to where you think you can at least sort of hover around the breakeven point for the foreseeable future in Recycling?.

You know, projecting what's going to happen in Recycling business is always iffy, Luke. As Barbara said, we kind of expect things to be where they are. We are working on the cost side of it because activity levels there are less.

Flows have been impacted positively and negatively depending on what day in the week you talk to people in the Recycling business. I think there is an adjustment to whatever the new normal might be.

And after its precipitous decline, you know there is some resistance on both the supply side as well as some trepidation on holding inventory and taking position. So you know our posture is to turn the inventory and not to speculate, to go with the market. But you know when the market falls as quickly as it has, there is always some residual impact.

And so with some stabilization, as well as some improvement in our costs I would expect that you know we’ll continue to work towards breakeven or positive results which you know that's always our objective is to be in the black. .

Our next question comes from Brian Yu of Citi. Please go ahead. .

Yeah, in the first half I was looking at your inventories, and it looked like it had grown a bit even though your shipments are down.

And I was wondering if this might somehow be related just to the drop in volumes and sharp downturn in scrap? And you know maybe some of your mills or yards were caught holding a bit more inventory than what they wanted? And should we expect that to get worked down as the year progresses?.

Yeah Brian, so the inventory build was you know it spreads across the various businesses, and we always build a little bit on the Mill and Fab side in preparation for the busy construction season. There were some shipments impacted this past quarter by weather.

We had even some pretty difficult weather in the Dallas area, and we were hit hard out in the East. And so some Fab shipments were delayed due to weather, and those will clear through in the next quarter. So that resulted in a little bit higher inventory.

And then the balance related to what Joe talked about in terms of the adjustment in the energy sector where rigs are coming down, and shipments are just slowing as the supply chain adjusts.

So we do expect you know to move through a good portion of that inventory, but I would say on the M&D side it's just scheduling our further than we would have originally anticipated. .

Okay, a second question on Poland. You guys mentioned import pressures.

I was wondering, would you characterize this import pressure as being you know it’s related to the weak demand and you know how low global utilization rates are? Or is there something else behind it? It seems like, you know the last time you had import pressures it was related to some of that circumvention by some of your competitors? So was this essentially is kind of a clean if you will import pressure? Or is there something else going on?.

Well, whenever we talk about import pressure, calling it clean is difficult. .

Oxymoron. .

Yeah, because we’re always a little bit suspicious of what's going on when imports increase dramatically, particularly in what’s already a very competitive market.

So some of what we’re seeing Brian is dislocation, partly as a result of the economy, partly as a result of what’s going on in Ukraine, and partly the result of some new capacity coming on in Belarus.

So all of those factors contribute to operating rates that are higher than they may be should be in some of the neighboring countries, and countries that focus almost exclusively on exports. The BMZ Mill or the Belarus Mill is targeting 75% of its product to be exported. And that's pretty substantial in what's already a very competitive market. .

Our next question comes from Timna Tanners of Bank of America Merrill Lynch. Please go ahead. .

So wow, it's been a wild ride if you think about the February quarter. You know you guys had scrap prices fall sharply in February. You know it went up a little bit before then. And if you look at the licensing data imports of rebar look like they are set to rise a little bit, I guess into the future.

So I was just wondering in light of those phenomenon, but also the clear seasonal recovery that you highlighted, how sustainable is the results that you just gave in terms of margins? And I know that Luke asked this, but I wasn't clear on your answer for LIFO versus FIFO margins.

How do we think about the sequential move? I mean do scrap prices now kind of catch up to where steel -- I mean did the scrap drop and steel drop now mimic each other? Or how should we think about that going forward?.

So from the perspective of what we see as being sustainable, clearly there is more volume expected in what’s seasonally our strongest period of time in the second half of the year. And comparably speaking, our backlog today looks a little bit better than it did a year ago.

So we're not seeing some of the expected decline in demand in construction markets that's been reported widely as a result of decline in energy prices. Despite being a sunbelt-oriented company, there’s other activities in the Texas market in particular that are helping to sustain construction demand.

So having said that, we are fairly confident that the volumes will be there, and are sustainable through the second half. That's not a guarantee, but we feel really good about that. In terms of margin, you know the margin will reflect whatever pricing is, and the second half pricing of rebar vis-à-vis the cost of scrap.

And you know our scrap has fallen, and we anticipate should stabilize some. I said that we’re adjusting to a reality, and so there can be some further adjustments in scrap pricing which would impact margins.

And ultimately you know the selling price is set by the market, and there are import pressures, and we respond to those import pressures where we need to. But where it’s unacceptable or geographically undesirable or projects that we can't add more value than just price value, then we don't match those prices. We don't look to match them.

We think we offer much greater service to our customers and something as basis-only only price. So back to the FIFO-LIFO margins, maybe you could rephrase that? I am just trying to understand, and make sure we’re answering the questions properly. .

Sure and as you know there is a difference and it can be confusing. But I mean what I'm trying to understand is you said that you have a sharp drop in scrap in the quarter, and the finished selling prices didn’t move as quickly.

Is that phenomenon sustainable into the second quarter where scrap stays low and selling prices stay high?.

Yeah so in general Timna, we would expect FIFO margins, and FIFO income to improve quarter over quarter. I think as you know it's a little early. Price action hasn't been taken for, certainly for April, and we didn't see margin compression. Margins were able to expand because scrap fell more than finished goods prices.

But that as Joe explained carefully that we’ve to respond to the market. And at this point, we would certainly encourage holding on to those metal margins. But they may adjust a little bit further. It's hard to say, but they are still at very healthy levels.

And with increased volume throughout the second half of the year, that certainly would support hanging on to the existing metal margins. .

Our next question comes from Evan Kurtz of Morgan Stanley. Please go ahead. .

Maybe just a follow-up on that one a little bit more. I mean, I’ve actually been pretty surprised that rebar prices have held in so well after the February scrap move.

How much rebar in this market has scrap surcharges tied into it? I thought like there is a decent percentage where you know scrap went down one month, the next month you know the surcharge was lower unless you did some sort of a base price offset? So that didn't seem to happen in March, so I was kind of curious what's going on there?.

Yeah, Evan I'm not sure what you're asking about surcharges?.

Is there rebar that has surcharges pricing or is that mostly just reserved for beams and that sort of thing?.

I think the surcharge mechanism you know has largely fallen away as it relates to rebar pricing. And you know the prices are adjusted based on changes in raw material pricing. But it's not necessarily through a surcharge mechanism like you would have seen in the past. .

Okay great, and then maybe just one more on the OCTG business since you deal with that in your M&D segment.

You know, what do you see in there as far as how much inventory you hold on the OCTG side? And just maybe some commentary on just the inventory, and the supply chain at this point? I mean obviously demand is down by about 50%, but I'm sure everybody is probably trying to destock material.

Where do you see -- how far into that destock are we? And when do you think that apparent demand and the underlying demand in OCTG could begin to line up again?.

Yeah, OCTG is one of the many products that we import, and a value-add product. And you know lead times on product that's imported are naturally long. So when we order material for our second quarter, it is as early as our first quarter just given normal delivery. We didn’t anticipate in the first quarter the dramatic decline in the rig count.

You know the rig count has fallen exceptionally since this January. It started in December. Some of the early figures is there was a decline of over 30% in about a four-week period from January to February. So whenever the rig count drops, everyone gets stuck within inventory.

And domestic producers have been cutting back turns and shutting down operations. And there is almost a ton-per-ton decline in consumption correlated with each of these rigs. So everyone’s got inventory that's going to take a little bit longer to consume.

But I would tell you that, you know you noted that the rig count while it's declined, production levels has remained high. And that's because of some of the more efficient units are the rigs that are running today.

I would expect that if we had a normal cycle of three months or I'll call it 90-120 days on an inventory stock target, that's probably doubled right now. Because the rigs are running at about half of what we anticipated, so you know we won’t get into the specific numbers of inventory.

But you know thinking we’ve no terms is probably the same way that's everyone is seeing it. It's hard for the consumption not to halve when the consumer is halved in the terms of production rates. .

Our next question comes from Michael Gambardella of JPMorgan. Please go ahead. .

Two questions.

First one, could you give us a status report on the Arizona Micro Mill where you are in terms of production profitability? And how does that profitability you know on a per ton or margin basis compare to some of your other rebar mills?.

The Arizona mill is, and we’ve talked about this in the past, Mike. We’re really pleased with the progress that we’ve made in that mill, and getting it up and running and increasing the productive capability really through the resources of Commercial Metals Company, the people that make it happen everyday. So we’re really proud of that.

We are well above the nameplate capacity and had to go back for increased permits. We view it as efficient a mill as we have in our system, if not more efficient because of the lack of reheat. Probably the biggest challenge is we don't necessarily have the cheapest energy prices in Arizona.

But from our perspective, we view that project has been a huge success. We are pleased with the progress that we made in increasing the productive capability of it, and view ourselves to be a very competitive supplier to our own Fab business in the West Coast where construction markets remain strong and where backlogs are also very good. .

And Mike, we don’t tell the specifics mill to mill. But suffice it to say consistent with Joe’s remarks that you know we’ve seen consistent improved profitability out of the Arizona Mill through time since we started up that mill. .

And any plans for a second Micro Mill?.

You know Mike, we look at the market all the time. And constructing a mill and adding capacity is always a difficult decision. There are markets that are underserved. For example on the East Coast the construction activity has picked up dramatically.

We can't shift to the East Coast very effectively, certainly as a fabricator because there’s plenty of capacity up there. But that's a market that's picked up noticeably from a construction perspective. The Gulf area and Florida also very strong, but we see really significant imports there.

So there is a bit of a supply imbalance in what's coming into the Gulf Coast region because of imports, but certainly construction activity is really strong. So any decision on expanding capability has to be concurrent with the market demand for it, and the ability to be competitive even against imports. .

Our next question comes from Brent Thielman of D.A. Davidson. Please go ahead. .

Joe, is there anything we can look toward or forward in Poland that might help alleviate some of the competitive pressures you are seeing?.

Well, it’s a really good question. We also have the added disadvantage of Polish złoty having depreciated in relationship to the US dollar. So as we look at the Polish market, there any number of influences, and we work hard with federal authorities on all aspects of our costs.

And so some of our issues relate to foreign exchange, some of that relate to competitive pressures, some of it relates to higher energy costs in Poland, and we try to attack all of those. One of the things that we’ve embarked upon over the last year is to improve our cost competitiveness. We built a new furnace.

That furnace is operating as expected, and we’re a one furnace operation in Poland where we used to be two. And so the manpower as well as huge energy savings associated with that. We’ve approved a new caster for Poland, and are in the early stages of finishing the configuration design associated with the equipment.

That caster won’t go until next year in our fiscal third quarter. So it's a long way off, but you know those are the things that we do to combat. Its attention to detail and working on continuously reducing costs.

We can't impact the market in terms of supply, but we are very active in Poland as we are in the United States in combating imported products that are either dumped or subsidized. And we suspect that some of that happens from time to time as was the case with the VAT fraud a year ago.

And at the same time you know the Polish situation is also influenced by supply. And we’ve competitors in the Polish market that are a little bit more aggressive because of you know evolving financial issues, and some stabilization of their financial condition will probably helped improve some of the market discipline. .

And then the composition of kind of fabrication backlog, are there any regions where you are seeing significant increases or decreases or is it pretty much steady improvement throughout?.

From a Fab perspective, you know we’ve seen steady markets in Texas for a long time. And our backlog reflects that and still good strength, and that's not to say that that there is a lot of speculative stuff going on. It’s really designed and build sorts of project, so that hasn't changed.

California is another area where I mentioned that we’ve had a strong market for a long period of time. So too with South Florida, the beltway has been good, and its regions in between.

I guess more recently where we’ve seen an uptick in demand and activity, and why I mentioned the Northeast is, New York in particular, there is just a lot of construction activity. Not only for a non-res, but also for infrastructure and you know that's a more difficult market for us to compete in because of freight costs.

But we do ship some products there, but I think others are enjoying more of the benefit of increased demand in the New York market. .

Our next question comes from Phil Gibbs of KeyBanc Capital Markets. Please go ahead. .

I had a question on the line down in the Australian distribution assets and just kind of twofold, you know whether those inventories are still on the balance sheet? And you know to the extent that it can't be sold, is there any potential for even a modest writedown on those assets? I am just trying to understand the status of where that exists right now?.

Yeah and thanks, Phil. You know the sale process is progressing well. Things slowed down in the December-January timeframe as you could well appreciate because of holidays. And then that's the summer season in Australia, so a lot of holidays. But you know the process is moving forward, there is interest level.

I can't get into specifics at this point in time, but we’re still anticipating selling as a going concern. At the same time, we’ve to you know continuously evaluate the carrying value, and you know just evaluate if we need to make adjustments there. But for now you know we're optimistic we can recover the book value. .

And then just broadly speaking on capital allocation priorities maybe over the next year or two or three you have some things in mind from a hierarchy standpoint as to what you want to do? I think you are in good shape from a debt perspective, so no real pressing need to delever.

I am just trying to understand, you know in that hierarchy what you're thinking about?.

Okay, clearly we’ve been focused on high-return, quick-payback organic growth opportunities. You know Mike asked a question about the Micro Mill. It's a great platform. It’s something that you know we’ve been looking at for a period of time, and we will continue to look at things like that.

But we have, you know I'll call it an interesting and significant list of really good organic growth type projects. And then you know we’ve been very active on the share buyback program. We still have you know nice room to continue to execute on that buyback program. We’ve consistently held our dividends, and you know I think that remains.

Our capital spending which is also linked to organic growth has been going up the last couple of years. And so we do think that we’ve good ability to support higher levels of CapEx, so those would be the priorities. You know we always look for interesting acquisitions, but they are less plentiful.

And you know be sure that we’ll be quite disciplined when it comes to looking at any type of M&A. .

Our next question comes from Andrew Lane of Morningstar. Please go ahead. .

I appreciate your commentary about overarching construction-related steel demand.

But would you be able to provide some additional texture as to the types of major construction projects that you are seeing in the sunbelt, commercial, institutional or residential et cetera?.

Yeah, I can't give you the exact figures on that, but it's really a broad base. And we use the example of North Texas in many instances to illustrate the point that there is office construction. There is mix-use construction. Even just outside my window, I can see four to five cranes.

There is also office complexes, for example the cowboys are building a huge office complex. Toyota, State Farm, none of which have anything to do with energy, and so that makes the construction market in North Texas really pretty vibrant.

And while Houston still is very, very energy-dependant, there is a very high usage rate of office space in Houston. And much of what we’re seeing in the way of demand and in our backlog reflects the need for expansion of some office space because of those high utilization rates.

What’s changed more than anything else is there is less expectations of any speculative build. And there were some of that, that have started up over the last year and a half in Houston. But wherever there is construction like that, that which I described in North Texas, you know the example of Toyota, 4000 families are coming in.

And schools expand, the hospitals expand, infrastructure expands whether it's water treatment plants or other infrastructure. So it's really a very broad base. Obviously none of it starts until unemployment figures go down, and that's been happening over time on a broader base in the country.

Secondly, as once those unemployment rates go down, you know there is more money that's flowing in the economy. And certainly the energy prices which have declined are also creating some velocity of money movement that ultimately will benefit the economy.

And lastly, you know this is all without any significant improvement in infrastructure build, and both sides of the aisle agree that there’s need for infrastructure. They are unanimous and resounding that we’re going to do something, but neither side has answered yet how it's going to be funded.

And the good news is that there is an end date for that, it’s May. So whatever deals have to be made will have to be made in order to extend beyond that. And I think we’d all be disappointed if there wasn't some measure taken to address the infrastructure.

Because those of us who travel and use bridges and are concerned about the safety of those bridges and highways all recognize that they continue to fall into disrepair. And some of the airports as examples in the New York area as compared to foreign airports pale in comparison and almost look like Third World airports. .

And on a related note quickly, have you seen a noticeable downtick in construction projects in major oil and gas producing regions?.

That would be Houston and that's why I commented specifically on Houston. Certainly the E&P side of the house has taken dramatic and swift action. And so for example with rigs being idle, not only is OCTG impacted but I'm sure some structural and plate impact.

The good news is that as prices adjust and go up as they did today I guess about 6% per barrel, a lot of that rigs are going to be put into action pretty swiftly. And the crews that are needed to man them are available, whereas in the 2004 time period it took a long time to crew up, and to train people.

Because so much of the work force had moved to other industries and/or moved out of the business. So while there is always a potential that Houston could get even sicker I guess than what’s projected by the E&P.

So far the signs are positive and there continues to be you know significant growth of the population into Texas because of the friendly working environment and a favorable tax environment. And I think the figure is over a 1000 people a week are moving into Texas still, and that doesn’t count the births in Texas.

So that portends well for growth and demand in the future above and beyond just the energy sector. .

Our next question comes from John Tumazos of John Tumazos Independent Research. Please go ahead. .

Could you give us an update on the scrap market, particularly in the US versus Japan, China, the Black Sea basin? Are US scrap prices now adjusted to match world levels? Are they higher or lower? And secondly, is there so much distress in the US scrap business that there’s attractive acquisition opportunities? It's a long far cry from when the OmniSource and David Joseph and Metal Management and all those companies went for billions and billions?.

Yeah, so let me address the global scrap pricing phenomenon, I guess first. You know we see the markets as being pretty efficient on a global basis, and sometimes can move somewhat separately or with different timing, John as you know very well.

And there is also a strong correlation with iron ore pricing overtime that probably still hasn't been fully realized. But given efficient markets between the availability of iron ore and alternative methods of manufacturing versus scrap, certainly what’s happened is exports have slowed significantly. That's partly due to demand.

That's partly due to iron ore, and that's partly due to a strong US dollar. So we see efficiency and I think that's why there was such a dramatic decline in scrap prices last month.

So we see the markets as being very efficient, and I can't say without any absolute certainty that the adjustments have concluded but we see some stabilization in the near term. With regards of the availability of assets, you know our strategy has been, and I should have said we don't export.

Or we export very little is maybe a better way to say of ferrous. So some of the more significant portion of our nonferrous gets exported. But we don’t have the same exposure to exports that many of our competitors have, but certainly there’s a readjustment that's going on.

And you know when Barbara talked about M&A, we would always prudently look at M&A opportunities. And our strategy in our scrap collection is not to be a retailer but to reinforce our scrap supply and secure that scrap supply.

We made a decision last year to acquire assets in the San Antonio area where we felt we were vulnerable, and that was the Newell acquisition. And it helped solidify our position in the scrap collection capability. So anywhere that there is a weakness, we certainly would be interested in that.

We would be not interested in assets that are far afield from many of our manufacturing capability, and would put us only into the retail business. .

Our next question comes from Nathan Littlewood of Credit Suisse. Please go ahead. .

Listen, I just had a question about sort of scrap mix. I guess given the products that you sell in your steel manufacturing business, most of the scrap that you intake is going to be autos.

But I'm wondering whether, either you know the recent fall in absolute scrap prices and/or perhaps you know all the activity that we are seeing in auto sales at the moment.

Are either of those factors having much of an impact on the intake volumes into your Recycling business? And if so, are there any read-throughs or implications to the product mix of your Mills business?.

Well let me take that, Nathan. And I thought you're going to ask me if we’re going to use DRI or something. But you didn't ask me that, because we really don't need it. From a qualitative perspective, we have plenty of supply of scrap of what we need and what we are looking for.

And that's why I emphasize our desire to be aligned in our scrap collection with our processing capabilities. Because for us scrap is very much about a very, very important and basic cost of our manufacturing, and having the right supply and the right mix of scrap is really important to us. We’ve not seen anything dramatic in the way of intake.

In fact I would suggest that in this kind of environment where prices are down and there is an adjustment going on, flows are more likely to slow rather than accelerate. And as the market settles wherever it settles, whether it's up or down from where we’re today some normalcy will improve the flow.

So the increased production in automotive manufacturing could have residual impact down the road in more cars being scrapped, but we haven't seen any significant shift. .

Listen, the other question I guess is slightly higher level. Just thinking about the relationship between sort of ferrous scrap prices and iron ore prices globally, I guess when you look at the supply side of iron ore you’ve got some big suppliers there who are targeting an oligopoly.

You’ve got a third and fourth quartile that's proving to be very, very price inelastic. So it doesn't really look like there is any relief for the iron ore price on the horizon? Meanwhile on scrap, I guess you’ve got a much more price elastic supply base.

And I guess there is an argument to be made that we could be in for a sort of prolonged decoupling of the relationship between scrap prices and iron ore prices. And I guess if you believe that's true, then you might also believe that there is a motivation for sort of world steel production to switch a little bit more towards blast furnaces.

I am just wondering, if you had any thoughts on that subject, if you have any insights? Are you perhaps seeing enquiries from more blast furnace customers than what you normally would on the sort of global scale?.

Well let me rephrase it, I want to be precise. In Europe with our Polish mill, there is a propensity for the blast furnace based producers to become a little bit more active in some long products where they have capability.

We certainly have a competitor in the Czech Republic, not too far away from the Silesian region in Poland where we operate, that operates blast furnace and makes long products. But you know margins in the product are not so great that freight can be easily absorbed. So there are offsets to everything here.

In North America, you know the more common production of all long products in North America. And I am trying to be careful to make sure I don't misstate, but all long products for the most part in North America if we exclude pipe from products is electric furnace based without an option to go into blast furnace.

So I can't think of any integrated producers with blast furnace capability that are in long products. So there’s some -- and I am not going to use inelasticity, but there’s an inability to switch if you will from one to the other at least in North America.

And then if one thinks about transportation costs on a global basis is making iron ore based products, and moving that product on a global scale. You know then freight becomes a big factor. The whole concept of mini and micro mills are intended to serve close-in regional markets using scrap from within that range.

And the further afield we go, the more problematic that becomes, and somewhat true to the same degree for any blast furnace based producer. I hope I answered your question, and I'm not trying to mix the response here, but it depends by geography.

Certainly in Southeast Asia, there is a lot of switch between -- there could be a lot of switch between blast furnace and electric furnace. But in China for sure, the predominant manufacturing methodology is blast furnace, and so it’s blast furnace to blast furnace. .

Our next question comes from Charles Bradford of Bradford Research. Please go ahead. .

A question for you from the marketing side, because your marketing or international marketing has always been very valuable as a source of information about what's happening around the world.

What are they seeing as far as early signs of a recovery, for example in Europe, maybe Southeast Asia, and some of these other places that tend to get important on the margin once the business starts to improve?.

Well Chuck, I wish I could tell you that we’re seeing things developing that indicate a strong recovery somewhere in the world. What our intelligence tells us is that the US market is still the best market in the world for a host of different reasons, from logistics to financing, supply and availability, and the willingness to take on risks.

So we don't see in our International Trading business particularly in the raw material side, any dramatic shift towards what I would call a significant global recovery. It's a market that's oversupplied in China. The European situation is still oversupplied and some uncertainty.

I guess the strength of the US dollar will allow some of the European competitors to be more aggressive as they have been. But in terms of a significant indicator of improved global demand as reflected in our order book on raw materials, we really don't see that. .

And I was just hoping for early signs.

And it’s going to be a long time before we see recovery back to where we were a few years ago?.

I would love to be able to tell you that happy days are on their way again. But you know we focus on the markets where we can be competitive from a manufacturing perspective. And our operations in Poland and North America are as competitive as we believe as any mills.

And we want to build on that strength for the long-term and not relying on macroeconomic issues that we can't control. .

Our next question comes from Sal Tharani of Goldman Sachs. Please go ahead. .

I haven’t -- I'm sorry I came in late. So I just want to make sure that hopefully you haven’t -- these questions haven't been asked. But one thing we’re seeing with the stronger dollar is there has been an import of scrap in the US increase.

I was just wondering where you are in Texas? Does it make sense? Have you participated in that, [A]? Or the scrap that you use, does it really matter? And second, has your trading business participated in any of that?.

You know there have been reports of imported scrap, particularly in the East Coast. They are not so much in the Gulf, there is certainly an abundance of availability in North America scrap. So it's going to have to be aggressively-priced scrap, and certainly with the strength of the dollar that maybe the case.

We’ve not participated in the import of any product either directly into the mills or by our trading group of scrap into North America. .

But then the prices are not still, even with this dollar good enough to actually import scrap where you are?.

Not so far, I guess. .

Okay the next thing is, you had in the past talked about a little bit of acquisition appetite.

And I was just wondering what are you seeing in that front? Is there something in which geography or which product you think that it’s helpful? Or you just think that where you are, you're satisfied with your present business?.

Yeah Sal, we did get a question on capital allocation earlier. And as I described it, we’re actively looking at interesting and high-return organic growth opportunities. And that would certainly be you know number one priority. You are aware of our share repurchase, and we’ve plenty of room to continue to execute on that program.

We’ve also remained committed to our dividend. We do monitor and look at all the assets that are available for acquisition. As you know, that's been a little bit light as of late. And you know our approach is to just be very patient and disciplined as it relates to acquisitions.

But certainly you know we study and look at that and if there was something that made good strategic sense and had all the other elements associated with it, we would look at that. But for now you know we are working on things that are within our control, and we do have a good pipeline of organic options.

You know we’ve done the Newell acquisition which was very targeted and small, and it was protecting our supply to the Seguin mill. And we’ll continue to look at things like that, but there’s nothing significant on the horizon in that arena. .

And at this time, there appears to be no further questions. Mr. Alvarado, I'll now turn the call back over to you. .

Okay, well thank you everyone for joining us on today's conference call. We appreciate your interest and your questions. And we look forward to speaking and meeting with many of you during our investor visits in the coming week. So thank you very much, and look forward to talking to you again soon. Thanks. Bye-bye. .

And this concludes today's Commercial Metals Company conference call. You may now disconnect..