Following is the transcript of the Commercial Metals Company (NYSE:CMC) first quarter fiscal 2015 earnings call made on Tuesday, January 6, 2015, 11 AM ET. The company announced the financial results for the first quarter ended November 30, 2014.
Commercial Metals Company (NYSE:CMC)is a Fortune 500 steel and metal manufacturer based in the United States, but has strategic international market presence. It was founded in 1915 with a single recycling operation. Today, it has grown to be a global entity operating four primary business segments throughout 200 locations in more than 20 countries, recycling, mills, fabrication, and distribution.
Company Representatives:
Joseph Alvarado – Chairman of the Board, President, and Chief Executive Officer (CEO), Commercial Metals Company
Barbara Smith – Chief Financial Officer and Senior Vice President (SVP), Commercial Metals Company
Analysts:
Luke Folta – Jefferies Group LLC
Evan Kurtz – Morgan Stanley
Sal Tharani – Goldman Sachs
Nathan Littlewood – Credit Suisse Group
Brian Yu – Citigroup
Philip Gibbs – KeyBanc Capital Markets, Inc.
Aldo Mazzaferro –Macquarie Securities Group
Andrew Lane – Morningstar
Charles Bradford – Bradford Research, Inc.
Operator
Hello, and welcome everyone to today’s Commercial Metals Company First Quarter Fiscal 2015 Earnings Call. Today’s call is being recorded. After the company’s remarks, you will have a question-and-answer session and we will 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 the company’s future operations and capital spending. These statements are considered forward looking and may involve speculation, and are subject to risk and uncertainties that could cause the actual results to differ materially from these expectations.
These statements reflect the company’s beliefs based on current conditions, but are subject to certain risk and uncertainties, including those that are described in 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 them 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 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.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Thank you. Good morning, everyone and Happy New Year. Thank you for joining us to review CMC’s results for the first quarter of fiscal 2015. I willfirst cover highlights from the first quarter. Barbara will then provide further financial details, and I will conclude our prepared remarks with comments on our outlook for the second quarter of fiscal 2015. After which, we will open the call to questions.
As described in our earnings release this morning, we reported net sales of $1.7 billion for the first quarter of fiscal 2015, which was 4% higher than our net sales for the first quarter of fiscal 2014 of $1.6 billion. Earnings from continuing operations for our first quarter of fiscal 2015 was $38.3 million or $0.32 per diluted share, an increase of $0.03 per diluted share when compared to the same quarter in the prior fiscal year. Also noted in our earnings release this morning is that the Board of Directors declared a dividend of $0.12 per share for stockholders record on January 20, 2015. The dividend will be paid on February 3, 2015.
I will now highlight current trends and conditions in the markets in which we operate as well as provide an update on a few strategic matters. First, we are encouraged by the steady growth of the U.S. economy. As new jobs are created, average hourly wages increased and the unemployment rate remained below 6% during our fiscal 2015 first quarter. Furthermore, the demand pattern for U.S. steel products remains solid as the nonresidential construction market continued its upward climb with nonresidential construction spending up approximately 6% over the first quarter of our prior fiscal year. The continued improvement in nonresidential construction spending led to higher shipments in our Americas Mills and Americas Fabrication segments. Although volumes have strengthened over the same period of the prior fiscal year, we continue to see pricing pressure as a result of elevated import activity. Rebar imports have increased approximately 40% year-over-year primarily from Turkey. Iron ore prices remain low driving the cost of scrap down. Inversely, metal margins for the Americas Mills expanded in the quarter as a result of improved finished good selling prices and stable scrap prices.
Our focus remains on evaluating a number of strategic growth initiatives, capitalizing on our vertically integrated operating model and strong customer and market position in the U.S. Continuing with comments regarding our international markets, the Polish economy continue to strengthen during our fiscal 2015 first quarter, specifically the manufacturing sector. On the other hand, margins for our Polish operations remained under pressure due to broader economic concerns in the Euro zones. Our International Marketing and Distribution segment reported outstanding results for the first quarter of fiscal 2015, as our steel trading division in the U.S. benefited from strong shipments, in particular, of tubular products. However, in light of the recent decline in oil and gas prices, we are closely monitoring the demand for products exposed to the energy sector.
As part of our share repurchase program that was approved in late October, 2014, we purchased 560,493 shares of our common stock for approximately $9.3 million during the first quarter of fiscal 2015. To date, total purchases are approximately $13.3 million.
With that overview, I will now turn the discussion over to Barbara Smith, Senior Vice President and Chief Financial Officer. Barbara?
Barbara Smith, SVP and Chief Financial Officer,Commercial Metals Company
Thank you, Joe. Happy New Year and good morning, everyone. As Joe mentioned, for the first quarter of fiscal 2015, we reported earnings from continuing operations of $38.3 million or $0.32 per diluted share, which compares to earnings from continuing operations of $33.7 million or $0.29 per diluted share for the first quarter of the prior year. Results from continuing operations for this year’s first quarter included after-tax LIFO income of $4 million or $0.03 per diluted share compared with after-tax LIFO expense from continuing operations of $2.8 million or $0.02 per diluted share for last year’s first quarter.
Turning to our results by segment, our Americas Recycling segment recorded adjusted operating loss of $1.1 million in the first quarter of fiscal 2015 compared to adjusted operating profit of $839,000 in the first quarter of fiscal 2014. Ferrous shipments declined 2% and average ferrous metal margins declined $1 per short ton compared to the same period in the prior fiscal year. Non-ferrous shipments increased 5%; however, average non-ferrous metal margins continued to be pressured compared to the first quarter of fiscal 2014. Furthermore, in the first quarter of fiscal 2014, this segment benefited from a pre-tax gain on real estate and facility relocation benefits of $3.7 million. In contrast, a favorable change in pre-tax LIFO of $3.2 million was recorded for the first quarter of fiscal 2015 compared to the first quarter of the prior fiscal year.
Our Americas Mills segment recorded adjusted operating profit of $75.4 million for this year’s first quarter making the highest adjusted operating profit recorded for this segment in any fiscal quarter since the onset of the global financial crisis. Our Americas Mills segment recorded adjusted operating profit of $65.8 million during the same period last year. This segment’s strong result for the first quarter of fiscal 2015 were primarily due to a 7% increase in total shipments and a 4% per ton increase in average selling prices on stable average scrap costs compared to the first quarter of fiscal 2014. Overall shipments of our higher priced finished products, including rebar and merchants, increased approximately 34,000 short tons while billet shipments increased approximately 15,000 short tons.
Our Americas Fabrication segment recorded adjusted operating loss of $3 million for this year’s first quarter compared to adjusted operating profit of $2.2 million in the prior year’s first quarter. Adjusted operating profit was impacted by an average metal margin compression of $14 per short ton for fabricated rebar in the first quarter of fiscal 2015 compared to the same period in the prior fiscal year. Additionally, conversion costs for our rebar fab increased $8 per short ton. Partially offsetting these items was a favorable change in pre-tax LIFO of $2.9 million for the first quarter of fiscal 2015 compared to the first quarter of the prior fiscal year. We booked approximately 30,000 more fabricated rebar tons during this year’s first quarter compared to the same period in the prior year, and the backlog is up approximately 22,000 tons over November 30, 2013.
Our International Mill segment recorded adjusted operating profit for the first quarter of fiscal 2015 of $4.2 million compared to adjusted operating profit of $15.3 million for the same period last year. Adjusted operating profit in the first quarter of fiscal 2015 was negatively impacted by a decline in shipments of 55,000 tons coupled with an average metal margin compression of 7% compared to the first quarter of fiscal 2014. Shipments declined during the first three months of fiscal 2015 due to sluggish demand in central Europe and a three-week planned maintenance outage at our Polish minimill.
Our International Marketing and Distribution segment recorded an adjusted operating profit of $18.3 million for the first quarter of fiscal 2015 compared to adjusted operating profit of $2 million during the first quarter of fiscal 2014. The improvement in adjusted operating profit was primarily attributed to an increase in margins and a $3.6 million favorable change in pre-tax LIFO for our trading divisions headquartered in the U.S. In addition, our Western European and Asian operations reported a strong increase in shipments for the first quarter of fiscal 2015 compared with the same period in fiscal 2014.
Turning to our balance sheet and liquidity. As of November 30, 2014, cash and short-term investments totaled $326.1 million. Total liquidity was approximately $1 billion as of November 30, 2014. We have continued to maintain sufficient unused credit lines.
Capital expenditures were $22.5 million for the first quarter of fiscal 2015 compared to $14.1 million in the prior year’s first quarter. We estimate that our capital spending for fiscal 2015 will be in the range of $140 million to $180 million.
Thank you very much. I will now turn it back over to Joe for the outlook.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Thank you, Barbara. We are encouraged by the continued improvement in the U.S. economy with job growth and rising wages. U.S. manufacturing activity expanded for the 18th consecutive month in November 2014, and U.S. nonresidential construction spending increased during the first three months of our fiscal 2015. In November, theArchitecture Billings Index, a leading indicator of construction activities, reported the seventh consecutive month of greater than 50 at 50.9.
Our second fiscal quarter has historically been slower as a result of a seasonal downturn in construction activity due to the holidays and the onset of winter weather. Consistent with prior years, we have planned outages for routine maintenance and equipment enhancements during the slower business activity over the winter months. These activities allow us to prepare for stronger anticipated demand in our fiscal second half.
That completes our commentary on the first quarter results. Thank you for your attention. We will now open the call to questions.
Question and Answer Session:
Operator
(Operator Instructions)Our first question comes from Luke Folta at Jefferies.
Luke Folta, Jefferies Group LLC
Good morning, Joe, Barbara.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Good morning, Luke.
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Luke.
Luke Folta, Jefferies Group LLC
I guess the first question I had was on the fabrication business. This is another quarter of very solid volume growth, but with the business still generating losses, and clearly there are margin issues there. You have talked about improving mix towards more private work as of late as the backlog has grown. Can you just maybe give us some more detail on what is going on with the margins on that business? You touched on imports being a factor in the remarks, but I would think that with this sort of volume increase that we should start to see some positive pricing momentum at some point here. Just any thoughts on that would be very helpful.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Well, Luke, it is not just a factor. It is the most significant factor that we face on the fab side of the business with imported product being brought in at significantly below market prices causes us to have to be competitive and quoting on our fab business. So we have seen an overall strength in metal margins in the steel mill side of the business and the deterioration on the fab side mostly owing to the imported product, so it is not a small factor. It is the most significant factor that we are seeing really across the board.
Luke Folta, Jefferies Group LLC
I am surprised you see that more so on the fabrication side of the business than the mill side of the business. Is that because you have got competing fabricators who are buying imported products at a much lower price so they can charge a lot less? Why is not that showing up on that rebar price from the mill segment?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Our fab businesses are dependent on sourcing material competitively and we compete against independents who also have access to imported product. With the significant pricing differential that we are seeing in rebar pricing and anticipated pricing of those products causes the independents to be more aggressive in their pricing to secure business at less than attractive margins or the kinds of margins that we would like to look at, so the battle there is really in the independent fab business or against independent fabricators as opposed to into the mill segment itself.
Luke Folta, Jefferies Group LLC
Got it. Okay. Then just as a followup on M&D, another very strong quarter there, it continues to be a bit of a black box from an outsider’s perspective looking in. Can you give us some sense of what the moving parts were? We have definitely seen what looks like an inflection over the last couple of quarters and profitability in that business. I know Australia being out of it is a factor, but anything that you can help us think about in terms of what we should be monitoring or how should we think about the profitability and particularly margins in that business over the looking-forward year.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Well, I would attribute it to a couple of things. One, it is not only steel trading but our raw materials trading business that has improved on a year-on-year basis and has steadily improved from the summer into the first quarter. There is no doubt that taking Australian business and putting it in disc ops is also a factor, but more it is about better trading activities particularly in North America, but also in Europe and our UK operations. The steady flow of volume in Southeast Asia out of our Singapore office, albeit at smaller margins.
Luke Folta, Jefferies Group LLC
Are you going to talk about what products, though, in the international trading businesses are your biggest? And what is improved, somewhat?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Well, yes, I mentioned tubular product is one example. We trade in a whole range of long and flat products. Long products including tubular products and we do that really everywhere. It will vary from market to market which products are most attractive for us to trade. In North America, it is a combination of flat and long products including tubular and some SBQ as well as other products, so it is not just one thing, Luke.
Luke Folta, Jefferies Group LLC
Okay. Then just one more if I could for Barbara. Inventories were pretty good use of cash this quarter, $100 million bucks or so turns a bit lower than what they had been historically. Is this something we should expect to reverse fairly soon?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Yes, you will see that start to unwind in the following three quarters. Typically, we see it unwind towards the end of our fiscal year. I think it is reflective of overall higher level business activity levels on the M&D side as well as on the mill side. Some is a little bit of inventory build ahead of some of these outages to support these outages. Typically, this is our highest level of working capital between first and second fiscal quarter.
Luke Folta, Jefferies Group LLC
Okay, thank you very much.
Operator
Our next question comes from Evan Kurtz at Morgan Stanley.
Evan Kurtz, Morgan Stanley
Happy New Year, Joe and Barbara.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Happy New Year, Evan.
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Happy New Year.
Evan Kurtz, Morgan Stanley
Question on energy exposure. I was hoping you guys could just kind of walk us through each of the segments and kind of talk about where you might have some exposure to weaker energy prices and any kind of quantification you can give us would be really helpful. Thanks.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Yes, so let me take a stab at that first. We have been getting lots of questions about energy in the same way we got a lot of questions about iron ore. I guess what I would say, Evan, is it is an evolving situation. It will settle itself out. What the decline in oil prices is doing is freeing up a lot of disposable income for people and stimulate spending a lot of different ways that ultimately could lead to nonresidential construction across the board. Remember that we are a nationally based, a broad-based company with a footprint throughout the Southeast.
Well, the Texas market is really important to us. I think there is a tendency for there to be an association that lower oil prices may lower construction spending. That may be the case that some projects will be pulled. Generally speaking, we are still seeing positive growth and strong demand in construction markets. It is hard to correlate an exact dollar value, and I think this will continue to settle itself out. There will be an adjustment in drilling activity.
I would say that the most significant impact, this is now I’m talking from my own experience, will generally come on tubular products and other products that support the energy industry like SBQ products. That is where we would see it in our order book more than anything else as well as a decline in demand for construction spending. Having said that, we still see a strong order book, a strong backlog. I think a more measured approach by some of those that are dependent on energy money for construction spending going forward, but it really has not sorted itself out in a negative way other than from an apprehension or anticipation, but the order book remains strong.
Evan Kurtz, Morgan Stanley
Do you have any visibility in your order book, which projects are energy related and what sort of percentage that might be of the total book?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Yes, we will take that as a follow up. We would include part of that in wind farms, which taking above construction spending and energy prices even with oil coming down,there is still a desire in part of the government to stimulate spending on alternative forms of energy and that so far is continued. That is one example where we have a very direct impact as a result of energy pricing where so far there has been almost no reaction whatsoever.
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
I would add and like to point out, Evan, that lower energy prices could provides some positive momentum around the renewal of the transportation bill and I think that discussion is only beginning but it might create an opportunity where they can find the funding mechanism and that could be a real positive that is right now not factored in anybody’s outlook.
Evan Kurtz, Morgan Stanley
That is an interesting point. Thanks. I will turn it over.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Thanks,Evan.
Operator
Our next question comes from Sal Tharani at Goldman Sachs.
Sal Tharani, Goldman Sachs
Good morning, guys.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Good morning, Sal.
Sal Tharani, Goldman Sachs
I want to ask a couple of questions. You mentioned conversion costs in fabrication were up. Any particular reason? Is this a recurring stuff or was this some one-time item?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Well, due to the stronger order book in fab, we did incur some additional freight just to meet some of the commitments and we have done some staffing up in preparation of the busier time in the year. That will equal itself out as time goes forward.
Sal Tharani, Goldman Sachs
Okay. This next one on European demand. You mentioned obviously you had some down time but you also mentioned some weak demand. I am just wondering what are you seeing as we exit the winter. I know winter is going to be slow at Poland. Beyond that, what is your outlook over there?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Yes, growth in Poland is substantially stronger this year as compared to last year. You might recall that last year in the first quarter was when the Latvian situation got resolved. We saw a really, really strong order book in the first quarter. The European economy – well, the economy in Poland particularly – continues to grow and we expect strong demand. The pressure that we are seeing is really a function of imports. Not only weakness in the Euro zone but some carryover from what is going on in Eastern Europe.
We have seen some imports coming from neighboring countries that we have not seen before which is putting pressure on prices and margins, but we expect strong demand to continue. The Polish economy continues to do better than most of the rest of the European economies orother countries in the Euro zone. We do not see any reason for that to tail off. What we would like to see is less influence from imports and stronger margins.
Sal Tharani, Goldman Sachs
Okay. Barbara, you touched upon the working capital. I was just wondering, if I look at since the downturn, 2009, you generated quite a bit of cash from the working capital. You have spent almost $0.5 billion, oh, sorry, almost $600 million in terms of working capital as you are growing the business. I am just wondering how should we look at because that does not… your free cash flow has impacted despite your earnings are improving. How should we look at this quarter? I noticed that your revenue quarter-over-quarter was down $220 million, year-over-year was almost flattish, but your working capital was a massive use of funds. How should we look at it over the next couple of years in terms of having some of that reverse back?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Yes, well, another factor affecting the first quarter was AP. If you look at the balance sheet, our payables are much lower, reflective of moving into the slower period. Inventory, we did some building as I said to support higher business activity levels. I mean, as we indicated, M&Ds had one of the strongest quarters since the global financial crisisand a lot of the working capital is going to support the growth in M&D and that will liquidate fairly quickly.
The other factor this specific quarter which is lower accounts payable and we have a number of scheduled payments in the first quarter that affected that. We are still projecting that at some point, we will have a net working capital to support the market growth and then you are going to start to see that cash turn and we are still forecasting positive free cash flow going forward.
Sal Tharani, Goldman Sachs
Okay. Great. Thanks very much.
Operator
Our next question comes from Nathan Littlewood at Credit Suisse.
Nathan Littlewood, Credit Suisse Group
Good morning, guys. Thanks for the opportunity. I just had a couple of questions.
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Good morning, Nathan.
Nathan Littlewood, Credit Suisse Group
Good morning. I just had a couple of questions for you. The first on your ferrous scrap purchase price for the Americas Mills. It was down I think $7 or $8 bucks a ton quarter-on-quarter. If we look at the domestic assessments from CIU and the like, they were down sort of $20, $25 a ton for your quarter. I’m just wondering,I am asking this as an engineer here, not an accountant. Could you help me bridge the gap there? Was there something strange going on with scrap procurement costs?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Yes, I will take a quick shot at that, Nathan. When you think about the numbers that you are comparing, there is some regional numbers as well. That might be more reflective in comparative and start looking at gross averages of scrap and then the mix within each of the regions. I think you will get some significant divergence. You would have to be able to compare that to what scrap purchase prices were before. You might have been purchasing more competitively. On a quarter-to-quarter basis, I do not get real concerned about that because there are lot of averaging that is going on. We are measuring our cost and need to be competitive in the markets that we are buying and selling in and feel like we are in a good place in that market. You want to comment anything more? I am not sure that I answered that as an engineer or an accountant, probably latter.
Nathan Littlewood, Credit Suisse Group
No problems. That is good. Thanks, Joe. The other one was just on International Marketing and Distribution. You had indicated previously that your expectations for a quarterly run rate there were about $13 million. I guess I am just curious about the sort of going forward impact there from Australia. You have shown us that for the November quarter, that was worth about $2 million. Could we say that looking forward, your expectations for M&D would be $13 million plus the $2 million loss or $15 million total for that business? Does that math make sense?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Nathan, I think thatI would still, at the current moment. stay with the $13 million that we have guided. M&D has very lumpy quarters and we had a really good quarter this quarter. The nature of the business is to take advantage when the markets are available and hot, and we certainly saw that in the first fiscal quarter. Right now, I would not be comfortable given all the global uncertainty with raising that, maybe with time we would get more comfortable.
Nathan Littlewood, Credit Suisse Group
Okay, no problem. Thanks very much, Barbara. I will turn it over.
Operator
Our next question comes from Brian Yu at Citi.
Brian Yu, Citigroup
Thanks and Happy New Year, Joe, Barbara.
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Thanks, Brian.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Happy New Year and good morning.
Brian Yu, Citigroup
We did notquestion on rebar pricing. I know you touched on this earlier in the call and commented how rebar imports are coming in at a definitely healthy clip. Yet, we have seen prices be fairly resilient here, which is very different than what we are seeing in hot rolled coil. A couple questions along these lines. One, any insight you could share with us on what is driving this divergence? Then two, going back to a question earlier about the fab, is there some cross subsidy between the two businesses or are these sales between the mills and your fab business occurring at market prices?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Let me take a stab at both the questions. The first is on the rebar pricing and the strength that we see. We priced according to what market will accept. We also have a downstream fabrication business which is not subsidized by the mill operation. There isn’t a subsidy going either way. It is basically all at market prices. So when we see initiatives from Turkey, in particular, to move a lot of product. I think that is without regard to the market. That is more based on a cost plus pricing formula. That is my opinion. We do not understand why someone would come into the market, global market pricing other than they are moving to dump steel. We made our case and the case was reviewed and was found to be negligible or almost to minimus.
There is nothing we can do about that but we certainly don’t understand the economics of buying scrap from North America, taking it to Turkey and bringing it back and selling at well below market prices. It is what it is. Better to ask that question of them than us. We don’t know how they price their product. As far as that second component on subsidy, there is no subsidy. We see strong demand for construction products and consumption is up overall and the overhang is what I will call marginally priced rebar in the market that comes in flows, it ebbs and flows, but it is not a nuisance.
Brian Yu, Citigroup
Yes. I guess I’m still kind of confused why it’s not having the same type of impact on the U.S. market like what we are seeing in hot rolled coil because we are seeing volumes coming in, especially with where you guys are located towards the south. I would figure that imports would have a greater impact, but obviously, not the case. I’m not sure if you can shed any light on that.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
I don’t know if there is much more I can share than what I just shared with you.
Brian Yu, Citigroup
Okay. Then the other question I’ve got is just on the scrap market. It did seem like prices were weakening and now they’re starting to pick up a bit. Would you attribute that just to typical seasonality, given the constraint on flows and as we exit winter if you guys do any kind of trading on scrap backs towards the…Is the international market demand for U.S. material weak enough where we should see scrap prices begin to drop after the seasonal impact goes away?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Yes. As you know, Brian, there is a lot of seasonality in scrap and scrap purchasing. We will see fluctuations just based on that. A bigger driver in scrap pricing, I think, these days is the influence of export product and I can only tell you what I have read is that there appears to be a little bit more demand for export in scrap product. We ourselves don’t heavily participate in that. We are impacted by it but we don’t see it directly, so it is hard to comment on how good that market may or may not be. We will see how the current month settles out, but it doesn’t feel a lot different than what we’ve been seeing in the last few months.
Brian Yu, Citigroup
Okay, thanks.
Operator
Next question comes from Phil Gibbs with KeyBanc Capital Markets, Inc..
Philip Gibbs, KeyBanc Capital Markets, Inc.
Good morning.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Good morning, Phil.
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Phil.
Philip Gibbs, KeyBanc Capital Markets, Inc.
I just had a general question on the backlog in the U.S. business, just how that may be looking relative to last year and maybe versus the August quarter?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Yes, let me take a look here, Phil. Both the fab backlog if you look at it compared to a year ago, it is up over 5% and it is up marginally over the fourth quarter, which is a really good sign going into the seasonally slower period of the year.
Philip Gibbs, KeyBanc Capital Markets, Inc.
What are you seeing from a regional perspective across the Sun Belt as far as Texas, California, etcetera? What is stronger? What is weaker? Sort of what does the picture look like to you guys, right now?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
I think if we were talking a year ago, we would have said Texas continues to be strong and California was picking up and the Southeast was the weaker market for us. I think we are seeing good demand broadly across all three regions. At this point in time, California continues to pick up momentum. We are now starting to see more activity in Southern California where it was previously being driven out as activity in Northern California. We are seeing very good activity levels in the Southeast.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
And continue to see stronger demand in the Texas market.
Philip Gibbs, KeyBanc Capital Markets, Inc.
Okay, I appreciate that. Just a housekeeping question, Barbara, as far as what the… I’m not going to ask you for LIFO by all the segments, just curious as to what it was in the Mills division, in particular, and if you have a view on what the tax rate should look like here?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Okay. The mills, Americas Mills, had a LIFO income of $2.7 million for the quarter. As far as the tax rates, it does depend somewhat on income in foreign jurisdictions where we enjoy a lower tax rate, but we are projecting a tax rate somewhere in the 30% to 32% for the year.
Philip Gibbs, KeyBanc Capital Markets, Inc.
Okay. I appreciate it. Thank you very much.
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Thank you so.
Operator
Our next question comes from Aldo Mazzaferro at Macquarie.
Aldo Mazzaferro, Macquarie Securities Group
Yes. Hi, good morning and Happy New Year.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Happy New Year, Aldo.
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Happy New Year, Aldo.
Aldo Mazzaferro, Macquarie Securities Group
Yes. I was wondering, just a couple of questions on the production rate that you may have seen in the quarter for your rebar plants, Joe. Could you give us a ballpark? Are you 80% or above or below that or somewhere? Could you give us a little hint as to where you’re operating at?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
That corollary is somewhat like Barbara just described in the fab side of the business where we’ve seen the softest demand in production rateshad in the East Coast and our South Carolina operation. For that matter in Birmingham as well. They are operating at better rates. There is always opportunity for us to expand our production capability although with a better mix and shorter cycle or longer cycles, we haven’t really gotten into that point. That potentially exists across the board. We are operating at 80% plus in each of our segments, best way to describe it. Alittle bit less so still in the eastern region.
Aldo Mazzaferro, Macquarie Securities Group
Right. Joe, could you comment on how you see inventories, both in rebardownstream of your mill and also with inventories that you see in the scrap market. Could you comment on how you see the levels there?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Well, on the rebar side of it, are you talking about rebar inventories in general or our own inventory levels?
Aldo Mazzaferro, Macquarie Securities Group
No, in general. It’s very hard to get specific inventory numbers and with all the imports in here and a pretty good decent operating rate domestically and prices holding together, maybe there isn’t a big inventory overhang. I am just wondering what you think in terms of is there more oversupply of rebar in the market or are we pretty balanced, you think, despite the high imports?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Yes, I think that it is fairly balanced. There are months, for example, when things will flex and get a little bit out of whack. I think product moves through the system pretty quickly in rebar. No one wants to be sitting and speculating when there’s volatility like there has been. I am not real concerned about downstream inventory and maybe I’m being Pollyannish about it, but we haven’t seen any real swings in inventory that concern us, other than when a couple of boats arrive at the same time. That seems to be getting its way into the system and working its way through fairly quickly. On the scrap side of it, if the question is whether or not there’s good movement of scrap material, if that’s what you’re looking for or availability, we’re not seeing huge flow problems but certainly lower prices ultimately will lead to some flow issues and it ultimately will drive prices back up. There hasn’t been a dearth of scrap or anything like that. Availability is good. The mills are not starving.
Aldo Mazzaferro, Macquarie Securities Group
The mills are not starving yet for scrap but the supplies have drifted down a little bit would you say in the last few months?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
I expect they have a little bit, but there might be those that have sat on inventory and speculated on inventory expecting it to go up, for example, after the first of the year, which is seasonally what happens. So if that doesn’t happen then maybe there will be some move to move inventory in the ensuing weeks or months. It’s an interesting thing to watch right now, Aldo, I will say.
Aldo Mazzaferro, Macquarie Securities Group
Okay. Yes. One final question, Joe. Can you categorize a little bit about how much of your overall backlog… I know it’s probably hard but with steel and fab and other operations, how much of it might be related to energy-related projects. I know your fabrication could be energy, could be a lot of other things. Can you say a little bit about that, about how you’re exposed to energy through fab and through steel bars and things?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Aldo, we took a look at that and our direct… if you took direct specific products, like tubular, SBQ, it’s 10% or less. I think the question that we all wrestle is, is there a follow-on effect to a prolonged downturn in energy prices that would then spill over into industrial and construction activity. As Joe pointed out earlier, we see there’s a positive side to this lower energy price and that’s increase in disposable income which could fuel the economy in other ways that could dilute the effect of what’s going on. Right now, we’re looking at it carefully and studying it,but as far as specific products, it’s not that creative.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Aldo, I don’t know that it’s fact or not. Just a report that I heard that a penny in gasoline price reduction is equivalent to $1 billion in savings. That’s a lot of money. Going back to normal patterns for what drives nonresidential construction demand, often times it is led by residential with more disposable income. That’s the kind of growth that ultimately spurs nonresidential as infrastructure needs to be built to support those kinds of operations. I wouldn’t lose sight of what Barbara said either about the ability to maybe negotiate something in the Congress. Let’s try to find a way to work together on the construction side of it and the highway programs. We’ll see what happens after the Congress convenes today, but at some point, what’s been freed up in the way of energy prices could be an opening to raise taxes on energy consumption in order to fund the infrastructure that we all know is so badly needed.
Aldo Mazzaferro, Macquarie Securities Group
Right. Well, thanks very much.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Okay, thank you, Aldo.
Operator
The next question comes from Andrew Lane at Morningstar.
Andrew Lane, Morningstar
Good morning and Happy New Year.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Good morning. Happy New Year.
Andrew Lane, Morningstar
Just one question here. You’ve discussed the impact of rising import volumes and I would be curious to hear any comments you have on how the October rebar trade case determinations has changed the texture of import volumes. It looks like import volumes from Turkey were down significantly in November,even though Turkey’s exporters were effectively given the green light. Are you seeing major upticks in rebar volumes from any other specific countries of note?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
No. The Turks are dominating. The import statistics as opposed to the market data that we have and what’s been negotiated, what’s on the water, what’s coming, it’s mostly Turkish. Now there have been some other sources that come into the market but it’s dominated by the Turks.
Andrew Lane, Morningstar
Along those lines, are your operations in California a little better insulated from those volumes than the rest of your geographic exposure in the U.S.?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
From Turkish, in a manner of speaking, but sometimes the pricing is so aggressive on the Turks it does have a carryover effect but there are other source that connect the West Coast so I wouldn’t call any of our markets completely insulated, but certainly for the Turks, it’s a longer reach to get to the West Coast market.
Andrew Lane, Morningstar
Okay. Great. Thank you.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Okay. Thank you, Andrew.
Operator
The next question comes from Charles Bradford of Bradford Research.
Charles Bradford, Bradford Research
Good morning.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Good morning, Chuck.
Charles Bradford, Bradford Research
Hi. A couple of questions. First of all, a year ago when we had that pretty bad winter weather, the price of electricity and natural gas just soared. Have you seen any signs of that yet or is it just back to normal?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Yes, no signs of that whatsoever. Last year we were impacted particularly in the East Coast by some heavy storms and ice storms. We were impacted here in Texas as well in December. The weather hasn’t been that terribly bad. In fact, it’s been pretty good. So far, no, but that doesn’t mean that we won’t see something before the quarter is out. I guess they’re getting snow in the Midwest today, but otherwise, it’s been a pretty tame winter.
Charles Bradford, Bradford Research
I’m more worried about franklythe price of electricity. We can track the gas pretty easily, but you use a lot of electricity.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Yes, Chuck, but for us the electricity is availability. Utilities need to the take care of the public sector. That means that we get squeezed. That’s what happened to us last year in South Carolina. We get curtailed and so that’s something that we’re subjected to which affects our electricity cost and availability. I wasn’t talking about gas as much as I was about electricity and availability.
Charles Bradford, Bradford Research
Understood. About a year and-a-half ago you gave a speech at apipe distributors’ conference with a pretty long list of new capacity coming online. Do you have any sense how much of that capacity has come online and whether U.S. Steel’s announcement today of a big cutback at Lorraine is more to do with the price of energy as they said or is it just new supply?
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
I was going to decline anything that said a year and half ago, but as far as tubular capacity, there are all kinds of reports about those projects still coming on stream and being strong, but as far as U.S. Steel’s decision to lay off, I think I read in March and May that’s a better question for Mario and the U.S. Steel people and what they are seeing in the market.
Charles Bradford, Bradford Research
Understood. Thank you very much.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Okay. Thanks, Chuck.
Operator
(Operator Instructions) Our next question comes from Phil Gibbs atKeyBanc Capital Markets, Inc..
Philip Gibbs, KeyBanc Capital Markets, Inc.
Barbara, I just had a question on the SG&A side as it related to the Australian distribution assets, if you could give us an idea about how much of the SG&A was tied up in that line last year?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Phil, I would probably have to take that offline and get back to you because there will be some portion of the SG&A that will remain to support our trading operations in Southeast Asia, but we can and we are still candidly working through that. How much goes and how much is required to support the remaining activity in the region. We haven’t put the pen down yet on that. I would be happy to look at it and give you some.
Philip Gibbs, KeyBanc Capital Markets, Inc.
Okay. I was not sure if you addressed this or not because I missed a portion of the call, but did you talk about whether or not you were winding down those assets or whether or not you intended to sell them or is that still a bit up in the air?
Barbara Smith, SVP and Chief Financial Officer, Commercial Metals Company
Well, in order to drop it down to discontinued operations, we need to meet certain criteria and we are holding them for sale. We had started a process. That process pretty much came to a slow pace.It was not shutdown as we approach the holidays and as you know in Australia they take extended holidays this time of year because it is their summer time. As soon as folks return to work, we expect to pick up the process in earnest and so far there is interest level for those assets and it would definitely be our intent to sell those assets rather than wind down.
Philip Gibbs, KeyBanc Capital Markets, Inc.
Okay. Thank you.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Thank you, Phil.
Operator
At this time, there appear to be no further questions. Mr. Alvarado, I will now turn the call back over to you.
Joseph Alvarado, Chairman of the Board, President, and CEO, Commercial Metals Company
Okay. Well, thank you everyone for joining us on today’s conference call. We certainly look forward to speaking with many of you during our investor visits in the coming weeks and I look forward to reporting our second quarter results only two months from March. I look forward to talking with you all soon. Thank you very much.
Operator
This concludes today’s Commercial Metals Company conference call. You may now disconnect.
