Radius Recycling Inc (RDUS) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience, and welcome to the Schnitzer Steel second-quarter 2006 earnings conference call. My name is Bill, and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded for replay purposes.

Before we begin our conference today, the Company has asked me to read the following statement. Today's presentation by management contain forward-looking statements subject to the Safe Harbor provisions of federal security law, including estimates of future company performance and views on future market trends. Actual results may differ materially from those projected in the forward-looking statements. Examples of factors that could cause actual results to differ materially from current expectations are described in detail under the heading "Factors That Could Affect Future Results" in the Management's Discussion and Analysis section of the Company's most recent quarterly report on Form 10-Q.

I would now like to turn the conference over to your host for today's presentation, Mr. John Carter, President and Chief Executive Officer. Please proceed, sir.

Thank you, and good morning. Welcome to the Schnitzer Steel Industries 2006 second-quarter earnings webcast and conference call. I am joined on the call by Greg Witherspoon, our CFO. And after a few introductory remarks, we will be available to answer your questions.

Let me start by saying that we remain focused on maximizing the long-term value of our businesses. We're making good progress with the integration of our recent acquisitions and toward completing our major capital improvement projects. Our second-quarter performance showed the value of our integrated business model.

Our steel manufacturing business reported its second consecutive quarter of record operating earnings. Our auto parts business is tracking our plan for the assets acquired in the GreenLeaf transaction, and posted solid financial results.

Results in the metals recycling business were consistent with current markets in a business that is, in the near term, a work in progress with respect to the significant capital improvement projects underway and the integration of recently acquired assets.

Let me start with the steel and manufacturing business. Cascade, our steel manufacturing business, continued to benefit from strong West Coast market conditions. As I said earlier, the operating earnings for the quarter set another record. Volumes in the second quarter have traditionally been lower due to seasonal impact of weather on the construction industry. Nonetheless, given the strong markets, we had anticipated that volumes would be somewhere in between the relatively low volumes shipped in last year's second quarter and the tonnage shipped in the first quarter of this year. In fact, volumes nearly equaled the first-quarter totals as the market for steel on the West Coast showed no sign of slowing down. As expected, selling prices in the quarter were slightly higher than the first quarter of this year.

On a year-over-year basis, the higher volumes in prices, lower scrap costs, and better productivity resulted in a tripling of operating profits. With the mill running at near capacity, the management team has been working to shift its sales focus away from lower-margin offerings in our product line by increasing the proportion of higher-margin rebar in response to strong customer demand in that segment of the market. This helps offset the increasing import penetration in those lower-margin products.

Our auto parts business continued its transition as we made good progress on our implementation plan to integrate the GreenLeaf full-service business and executed the planned closing of two full-service stores. Despite fewer stores, revenues in the full-service sector increased significantly. And made up more than 45% of the overall auto parts segment. Although increasing revenue is expected, GreenLeaf posted a modest loss for the quarter.

In the self-service business, normal seasonality resulted in lower retail sales. Even so, retail sales were higher than during the second quarter of last year. We're selling more parts per customer and getting more core sales out of the cars we purchase. That is reflected in higher parts sales per transaction and higher core sales per car on both a quarter-over-quarter and year-over-year basis.

Year-over-year margins on the sale of scrap cars were lower due to declining West Coast scrap prices. The prices we received for scrap declined, while increasing competition for auto bodies prevented the buying prices from declining at a similar rate.

Now let's turn to the metals recycling business. You may recall that volumes in the processing business were lower than normal in the first quarter due to operational issues on the East Coast and the timing of several export shipments on the West Coast that slid into the second quarter. We had expected much of the volume shortfall to be made up in the second quarter.

During the second quarter, sales volumes were higher than our expectations of 800 to 850,000 tons because our Northeastern operations were able to ramp up to speed more quickly than we expected, and the West Coast operations completed the sales that had been delayed from the first quarter. We shipped 912,000 tons.

In addition, at our Portland, Oregon facility, we're been undergoing a major dock renovation that previously limited our ability to load export shipments from that yard. However, our operating staff devised a procedure that allows us to load cargos during the renovation and take advantage of the inventory which had accumulated at the yard and further increase the volume shipped during the quarter.

Regarding the Northeastern processing facilities, our expectations have been that we would need to make significant improvements in infrastructure to capture the full value of these franchisees. At our Boston facility, our management team has been able to increase the output at the yard by increasing the uptime on very outdated and inefficient equipment. Our performance output for these facilities will improve once we complete the capital improvement projects currently underway.

Our operations in the Southeast had another strong quarter in line with our expectations, and we remain pleased with the results of that acquisition. We continued to benefit from the increased manufacturing activity in that region of the country.

Actual volumes for the global trading business were lower than expected for a variety of reasons, including an unusually harsh winter weather in Russia and strong Russian domestic demand.

During the second quarter, we had expected to decline in scrap acquisition cost would be greater than the decline in export sales prices and would result in an improvement in margins. On the West Coast, purchase prices did decline, although by a smaller amount than export sales prices, which remained soft early in the quarter. However, on the scrap purchasing side, when we acquire scrap for our processing yards, we are beginning to feel one side effect of the higher demand and the higher prices -- more competition, and we're seeing a need to pay more for material.

In addition to the nationwide pressure on material purchase prices, we see regional effects as well. In the Northeast and the Southeast, a strong domestic steel market has driven up demand for steel and steel prices. As a result, the price the domestic mills are willing to pay for scrap has increased.

Since the steel mills represent significant competition for unprocessed material, this has put additional regional pressures on the cost of buying recycled metal. In the Northeast, for example, we have been paying on average $10 to $20 a ton more for a material than on the West Coast.

Second-quarter net sales prices for our metals processing products were down slightly from the first quarter, and off significantly from the record prices in last year's second quarter.

Domestic sales prices continued to be higher than export sales prices, primarily as a result of the strong market conditions in the U.S. steel industry, as noted. During the recent quarter, average gross export sales prices out of the Northeast lagged the sales made out of our West Coast yards by $10 to $15 per ton. As a result, the spread between our buying and selling prices narrowed in the second quarter. And that contributed to a decrease in our margins in the metals recycling business.

Revenues in the global trading business fell as a result of the lower volumes mentioned and a focus on selling lower-grade materials. The lull in buying from the Asian export markets that started toward the end of the first quarter continued into the early part of the second quarter although demand in pricing did start to firm toward the end of the quarter.

During the quarter, China remained our largest export market, representing about 40% of our export sales. Consistent with our goal of expanding and diversifying our export base, we also made sales to Korea, Taiwan, Thailand, Turkey, Spain, and Mexico. As mentioned, earlier in the year, we made sales to India and Malaysia.

Now let me turn to our continuing efforts to maximize our long-term value through integration of our recent acquisitions and the upgrade of infrastructure and equipment at our facilities. First, we're continuing to integrate our operations and capture synergies from both the old and the new parts of our business. As we discussed before, we are working to leverage the economies of scale from our larger operation through a sound integration of these new businesses into our existing operations. During the quarter, we made progress in several key areas. As a step to centralize and standardize our business systems, we have begun to go from five separate ERP systems to one. We are expecting the initial phase of this project to be completed around the end of the current fiscal year.

In the Northeast, our Boston and Rhode Island operations have begun operating as a single entity. They are sharing best practices and combining forces in the procurement of raw materials. We also completed the purchase of the minority interest in the Rhode Island facility, which in the past caused the Northeastern entities to operate independently. In some cases, in the past, these operations actually competed against each other for material.

Historically, the Hugo Neu organization provided the infrastructure to handle sales out of the Northeastern operation. As part of the joint venture separation agreement, we signed a transition services agreement that continued the arrangement through March this year. In return, we agreed to continue the practice of paying Hugo Neu a commission of 1% of gross sales.

The termination of the services agreement has two immediate positive impacts. First, the commission payments cease, which should lead to an increase in operating margin on sales out of the Northeast. Second, we gain control over those sales, and begin to realize the benefits of having a coordinated worldwide market presence and being able to present a common face to all of our customers. In addition, we gain control over the quality of the sales.

Next, we have implemented a national purchasing program to better leverage our size. Starting with items like shredder parts, heavy-duty tires, and other items, we have already -- begin to put together companywide contract on the procurement side in the metals recycling business. By continuing to look within metals recycling for additional products to incorporate, and bringing in the auto parts and steel businesses, we think the opportunity exists to significantly expand the size of this purchasing program, and bring home meaningful cost savings companywide.

In our auto parts business, our focus has been on delivering value for the GreenLeaf acquisition. We are well into phase one of our plan to increase profitability by closing down our converting unprofitable or underperforming full-service sites. As of today, we have two former GreenLeaf sites in Fort Worth and the Phoenix area which have been reopened as self-service operations under the Pick-N-Pull banner. As planned, we have also permanently closed two sites which did not fit the demographics of our self-service model, and have temporarily closed two additional sites while they're being converted to Pick-N-Pull operations. These conversions are expected to be completed near the end of the third quarter.

When the conversion process is completed, we expect the GreenLeaf acquisition to have resulted in an additional 7 to 8 new self-service operations. Phase one of our plan also involves implementation of an improved purchasing model, increased inventory levels, centralization of administrative functions and improved parts distribution and logistics. These projects are all well underway, and expected to be completed by the end of the fiscal year.

As a result of the progress made to date, our focus has turned to phase two of our plan, which involves increasing revenues and leveraging the assets of the full-service operations. We've begun a number projects to improve our full-service core and scrap yields, incentivize our sales force to improve the quality of our sales, and rationalize our pricing structure. We expect to see significant progress in these areas by the end of the fiscal year.

Secondly, overall, we remain focused on managing the many capital improvement projects underway to improve productivity and efficiencies in our business. We believe improving our infrastructure and upgrading our equipment is the best way to leverage the positive long-term market fundamentals underpinning our businesses. By focusing on these key areas, integration, strong management, infrastructure investment, and productivity improvement, we will get the greatest long-term returns for our shareholders. As we have said before, we expect it may take some time to achieve our objectives, but we believe it is important to stay focused on these objectives even in the midst of short-term disruptions to our operations created by our capital improvement program.

Now let me turn the call over to Greg Witherspoon to go over a few financial details for the quarter.

Thanks, John. Let me start by providing more details on a number of the financial items included in this quarter's results. First, I would like to point out that, for the first time, we are breaking out the statistics and the high-level operating results for our global trading business separately from the processing part of the metals recycling business. These operations are both part of the metals recycling business, but by breaking out the results we hope to provide better visibility to understand the results of each portion of this operation.

Depreciation expense during the quarter was $8 million and capital expenditures were $21 million. We expect to spend approximately 50 million in CapEx for the remainder of the fiscal year, and we continue to explore other capital projects that will provide productivity improvements and add to shareholder value. I would also like to point out there remains open purchase accounting questions related to our multiple acquisitions completed in the first quarter, which will be resolved by year-end.

Finally, our debt balance was $44 million at the end of the quarter, which represents a decline of $5 million from the end of the first quarter. I will now turn the call back over to John.

Thanks, Greg. I'd like to take a minute to talk about our outlook for our business. Our focus is on making sure we prepare ourselves properly for what we believe is a positive future. In the steel manufacturing business, West Coast consumption of finished steel long products remains strong and customer inventories remained low. Third-quarter sales volumes are expected to be slightly higher than the volumes shipped in the third quarter of 2005. Based on current market conditions, the company expects average prices for steel products shipped in the third quarter to approximate the recently completed second quarter. We are seeing increased competition from imports, particularly in the wire rod products segment, which could put downward pressure on pricing.

In the auto parts business, as I said before, we are continuing to execute our plan to convert a number of full-service stores acquired in the GreenLeaf acquisition to our more profitable self-service model. While GreenLeaf is still expected to post a small loss during the full year, we believe it will record modest income during the third quarter as we turn our focus to increasing the top line. Longer term, the full-service operations is expected to provide meaningful revenues and profitability to the auto parts segment.

In the self-service auto parts business, the third quarter has historically been one of the strongest periods for retail demand. We expect customer admissions and retail parts sales to increase compared to the second quarter and to be slightly improved from the third quarter of 2005.

Wholesale revenues and sale of cores and scrapped auto bodies are also expected to increase from the second quarter based on higher expected scrap metal prices. Auto parts margins in the third quarter are expected to improve compared to the second quarter due to higher revenues from retail and core sales.

As scrap prices remain high, the Company continues to experience significant competition for the purchase of auto bodies, which results in higher cost to purchase inventory. Higher inventory costs for cars sold as scrap are expected to result in margins that will be lower than during the third quarter of 2005.

The self-service business will begin to see top-line revenue growth during the quarter from the stores which have been converted from the full-service model. However, due to advertising and other startup costs which are incurred before a store begins retail operations, the stores going through the conversion process will be a drag on operating earnings until such time as all stores are converted.

In the metals recycling business, third-quarter ferrous sales business at our processing facility should also be up slightly from the higher volumes of the second quarter. Volumes in our global trading business will nearly double from the second quarter as the impact of winter shipping conditions is reduced and higher market prices increase the flow of process material available for purchase from Russia and the Baltic Sea region.

Purchase prices for raw materials are expected to remain under pressure, but may rise at a lower rate than sales prices, providing an opportunity for improved margins. Based on sales booked to date and our current view of the market, we believe average net selling prices for our processing business will be up slightly from the second quarter. Due to an improvement in product mix in the global trading business, average net sales prices should be up significantly and approximate the prices received in our processing business.

Let me close by reiterating -- we are still going through a major transformation as a result of our recent acquisitions, which doubled our size and dramatically expanded our footprint. And we are integrating those operations while at the same time preparing for the future by investing capital in upgrading our equipment and improving our infrastructure companywide. We continue to be positive about that future, and we look forward to delivering the results of our transformation in the quarters to come.

I would now like to open up the call for questions. Thank you.

(OPERATOR INSTRUCTIONS). John Rogers, D.A. Davidson.

John, you made some comments about the auto parts business. And I'm not quite sure I got this right in terms of your outlook. You said that you thought the self-service business would have better margins than Q3 '05. And then said later that overall margins for auto parts business would be below '05. Were you talking about the auto parts versus the scrap sales? I just was confused about that.

In the self-service part of the business, John, we expect the demand -- historically, we have seen seasonal improvement in the third quarter. Overall in the business, of course, we still have the conversions that we're doing in the GreenLeaf side. And there is the investment and then the delay before you see the results of that investment on a conversion. So as a blended look in terms of overall margins, we expect to see them remain pretty flat.

The retail side of that auto parts business -- as we saw in the second quarter, we're getting more return, actually, on the parts sales side and core sales. But wholesale margins are a little bit lower.

But if GreenLeaf contributes anything even slightly, then you should have a better quarter than you had a year ago?

Well, because of this problem on the acquisition side on the wholesale pass-through with the scrap sale value of the car, those margins are lower than the scrap sale volume of the car a year ago, because this demand curve has washed through this whole business, and there is more competition for those auto bodies.

Okay, so your reference to it being better than a year ago was just on the auto parts sales themselves.

That's right (multiple speakers) on the retail side.

I'm sorry (multiple speakers) -- okay. And then the second question I had was just in terms of the scrap business -- how far out are you sold in the export market? And how does it compare with where you were, say, a year ago in terms of bookings or backlog or commitments for international sales?

Well, that's a good question, John. As you know, we are not very specific about our comments on that. But we are sold out reasonably forward into the next quarter. We have been seeing some firming up of those prices on the export side, particularly as the second quarter went along, and that's continuing into this quarter.

A year ago, the export prices were at record levels. So obviously, the incentive at that point, since those prices were unprecedented, was to sell everything that wasn't nailed down. Obviously, this year, we have -- this cycle has retained its historic highs. It is still cyclical; it's still going up and down. But as we predicted, the ups and downs are at a much higher level on the price curve.

Okay. And then lastly, in terms of your investigation, any updates there?

We really don't have anything to add to what we have already said on that. The process is moving to completion. We would like it to move a little faster, obviously. But that is not something we can really comment on. Nothing has changed our view of our exposure as we previously indicated.

Sal Tharani, Goldman Sachs.

On your auto parts conversion of stores, you mentioned that you won't see any benefit until all the stores have been converted. Is that -- by that, you mean those six or eight stores you are trying to convert, or does it mean for the [whole] 19 stores?

No, we actually -- what I meant by that is you don't see the benefit of the conversion until it's actually in operation for each of the stores that we are converting. So for example, the expenditures that go into the conversion and the advertising, the upfront costs, as you would expect, are incurred well in advance of the store opening. When the store opens, we see the benefit of that.

Because of the pace at which we are converting the stores this year, as we expend the front-end costs and each of the stores come on, they will be beneficial and additive to our earnings, but -- and it will continue the process of forward expenditures on the next conversion. So as we said, GreenLeaf looks like it's doing pretty much what we had planned. And we're hopeful that we'll see some modest income in the third quarter from GreenLeaf. So we are about on course.

And the business model for the stores which you will keep as full-service -- are you doing some improvement over there also?

Yes, we are. We actually have done a number of things. First, as you know, some of those stores were actually converting to a mixed full-service and self-service product line. The self-service stores were following our Pick-N-Pull model, but upgraded to our current view of what works best for the kind of retail sales that we look to. And then on the full-service side, we're adopting the techniques that worked well for us in self-service that have allowed us to extract more per customer on the retail side. We will do a higher volume, and actually are willing to sell parts at a lower price, because we sell more of the parts than had been historically the GreenLeaf model.

We are also applying in our information technology a number of things that will allow us to continue improving the way that we buy cars so that we're purchasing the cars for the retail side on the basis of the best-selling parts profile. We will also continue to purchase other cars that we move through the process into the scrap side.

Okay. And will you be looking at other opportunities in the auto business while you are integrating GreenLeaf, or you will wait until things settle over here?

No, we obviously are going to stay focused on the integration, because that is a commitment we made, and that's a significant investment. But we're looking all the time at other opportunities to expand in the auto parts business, both because we think it's good business to expand in, but also it does offer some opportunities on the metals recycling side. If we can establish a footprint on the auto parts side, it helps our metals recycling business.

Lastly, on your mini-mill, if I remember you are doing some modification to your reheat furnace. Is that going on? And I think you expect some increased production from there?

Well, the reheat furnace modification is in its planning stages. It won't actually occur until the end of the calendar year, when we have got an opportunity to do the installation with minimal disruption to our overall production. We're doing a number of things there that have improved our production. And in fact, we anticipate higher production during the course of this year, as we said.

We continue to look for ways to increase the throughput at the mill, and to do the things that will enable us to improve our profit line to meet the areas where we are getting the most margin on our products.

(OPERATOR INSTRUCTIONS) Wayne Atwell, Morgan Stanley.

Could you quantify the seasonality of your auto parts business between the second and third quarters?

Well, by quantifying the seasonality -- fundamentally, that depends on a lot of factors. In the second quarter, because we are on a fiscal year, our second quarter normally hits the wintertime. And as you know, that wintertime weather this year has been remarkably wet in California, which has had some effect on our retail sales in California. Overall, the way that cycle works is dependent on a number of different factors. So it's very difficult to put a specific differentiation on the seasonality. Greg, do you want to add to that?

Well, if you give us a call, Wayne, and we can give you the numbers that occurred last year between second and third quarter. Obviously, because of the growth and number of stores that -- it varies from quarter to quarter. Last year, third quarter exceeded the second quarter by 29% in revenues.

Okay. And basically, you said that the Chinese market for scrap was not as good in the second quarter. I assume that is pricing and maybe demand? And is that picking up?

That's really yes on both counts. The market in China -- as you know, the Chinese were undergoing some rethinking of how they wanted to operate their steel business in terms of consolidation and how the outlook was. They also were rather firm on their pricing ideas in the second quarter. And that, because of our commitment here to expand our customer base beyond our traditional Chinese customer base, meant that we sold, as I commented in my earlier remarks, to a much broader customer base than we have in the past.

The Chinese appear to be back in the market to a greater extent. And we will see how that works out. Whether or not they are an attractive customer for us or not will depend on where they think their prices are.

Is there any way to get a reading on the price of scrap in China? Is there an index or anything we can track?

No, there really isn't. There have been some efforts to put together some trading indices in Japan that related to scrap, but this is pretty much a [B spoke] market.

Okay. And you talked a lot about a lot of different things in your prepared remarks. And sorry if I got confused, but you talked about the price for scrap you were selling was a little lower, but the cost of accumulating it was a little higher. Do I have that right? And I would have thought if the cost of acquiring it was higher, that the price would be higher for what you would sell. (multiple speakers)

And you said the steel industry was willing to pay a little more for their scrap, which I understand; a lot of the mills buy some scrap themselves. If they were willing to pay more for the scrap they acquired, I would have thought the price for scrap would have been higher, so the scrap you sold would have been higher too. I'm sort of confused how that all fit together. I am sort of confused how that all fits together.

Good question. Let me comment a little bit more on that. The price of acquisition for scrap on the domestic side has been very strong, because the demand domestically has been high primarily driven by the strong steel picture domestically. Our normal sales process has been focused on export. We have moved to change that by the acquisition of regional, which of course, has performed well for us, and is selling into the domestic steel mill market. And we have other steel mill sales as well -- put in our own at Cascade, but also other places on the West Coast.

In the Northeast, however, those sales that were export sales out of the Northeast were affected by that because, as I mentioned, they had to pay significantly higher prices for scrap, but they're set up on the sales side for export. We have moved to change the direction of some of those sales, but we expect to see that situation with the inverse export domestic scrap pricing curve -- we expect to see that correct itself as we go forward.

We're already seeing some higher export prices and some firming, both later in the past quarter and this quarter and then going forward, but we're also seeing higher imports coming in to the domestic market. Imports are up somewhere in the 20 to 30% range, and that affects the demand and the pricing on the domestic side. Historically, that type of high domestic pricing has resulted in a correction on the domestic side, which has got us back into the long-term ratio, where the export price is higher than the domestic for our scrap products.

Let me repeat, I think, what you said, was you got hurt sort of on an arbitrage, and the cost of acquiring scrap went up because the mills were willing to pay more, and so you had to pay more, but you were set up primarily to export, and the export market was weak. So you sort of had the worst of both phenomena, where your costs were up and your pricing was weaker. And now you're trying to reorient yourself a little bit more toward selling domestically. And also, the foreign markets picked up.

I think that is a good summary. It's also true that historically, those export prices had been higher, and we expect to see them return to that. The other thing that we have seen in this quarter is that our processing costs have gone down. So the things that we can affect we're actually doing better on.

And I had thought one of the advantages of your Company was you could sell both domestically and foreign. You had the advantage of being very heavily exposed to the foreign market, but if the foreign market weren't as attractive as the domestic market, you could shift in and put product into the domestic market. Do I have that right?

That's correct. And we've, of course, done that, both with regional and on the West Coast with the sales that we have made to our mill and to [new core] on the West Coast. As I said, the part of the process that isn't as flexible as we would like right now is the Northeast. And that's part of the reason we're making the investments we are there.

So your margins -- and one last point. Your margins then are going to be the highest when scrap costs here are reasonable, and the export market is booming, and basically the price is a little higher to the export market. So your ideal environment would be if there's a very strong export price?

Well, that has been that has certainly been the historic situation with us. One of the things that we are doing that helps that is that as we put in these major shredders, we are able to extract more nonferrous. So as you can see in the numbers, we're taking advantage of the nonferrous side of the market, both domestically and, to a degree, on the export side as well.

So we recognize that that has been the situation, and we're working on different things to give us more flexibility to address the rather unusual situation that we are in at the moment.

(OPERATOR INSTRUCTIONS) Sal Tharani, Goldman Sachs.

The sales pricing in Asia -- how much impact are you seeing because of this SEC investigation? Were you able to get higher prices before this whole thing was revealed, and are you feeling more competition that others from other parts of the world will continue to do the same practice as the past -- of, you know, giving commissions to the buyers over there?

Well, good question. We have answered this in the past, and I'll be very clear about it again -- we see no effect whatsoever from that.

And now with regional, you have entered in a modest way in the domestic scrap market. Do you -- and you're working on some projects obviously in the Northeast to shore up your export business. But do you see further growth coming from -- in terms of acquisition or greenfield in the domestic scrap market, or would you still be concentrating on the exports?

Well, I think there's good opportunities in both areas. For example, with regional, we are working on a number of acquisition opportunities there. And we are in the process of looking for sites -- pursuing those sites for shredder operation in the southeastern part of the United States.

So we see infill opportunities with regional, and we'll continue to look for ways that we can find additional export facilities. As we have said before, export facilities are on pretty tight demand because of permitting and location issues -- specifically as to regional, because it sells so much of it product directly into the mills that are located in the Southeast. An export facility there in the current pricing environment -- it would not necessarily be a plus. Longer term, we expect it would be.

There are other places where we see the opportunities for export facilities, and we are pursuing those as well. Those are different geographic locations where we don't currently have an export facility.

Okay. And lastly, there was [a news I read] sometime ago that the containers which are arriving from China with durable goods or toys or whatever they're sending -- actually that the brokers are filling them up with scrap and sending them back, overriding the traditional scrap exporters. Have you seen something like that on the West Coast?

Another good observation. As you know, that backhaul -- those empty containers results in a very, very low price, because it's really an incremental benefit to put anything in those containers. So we have seen that. We're taking a number of steps to deal with that, which we really aren't in the [process] -- we would rather not discuss it at the moment. But to the extent that the backhaul situation continues, we feel that we have got a strategy to deal with it.

(OPERATOR INSTRUCTIONS) John Rogers, D.A. Davidson.

Just following up on your comments relative to capital spending. If I have this right, your total capital spending this year should be around 85, $86 million, with $50 million in the second half. Is that right?

Yes, that's right, John.

And then you have spent about $85 million or a similar amount on acquisitions?

It will exceed that. We have already spent over 100 million between regional and GreenLeaf.

Okay, that's what I was wondering, if it was --

And the CapEx will be closer to 90 million.

Okay. And at this point, I know it's very early, but in terms of a run rate then going into fiscal '07, presumably, it would drop down, unless you have got additional opportunities for upgrading shredders or something like that. Would that be right?

CapEx you are speaking of?

Yes.

Well, yes; I mean, there are two components to that. In the first place, what we're spending on acquisitions we'll spend on opportunities. And --

Sure, and that's what I'm trying to exclude from that.

Right. What we're doing in terms of upgrading the equipment by the installation of these mega-shredders and what occurs in the yards that we already have -- those major projects are identified and underway. And so the expenditure on those projects will of course drop off as they are completed. So for the next year, unless we identify either new acquisitions or new opportunities to put in infrastructure as I commented on the regional shredder potential, then we will have a much different look in terms of our capital expenditures. And you can expect them certainly to be lower on the projects as they go to completion. (multiple speakers) Greg, do you want to add to that?

Some of these projects run over several years. So you have to understand that all of the shredders will not be necessarily 100% in fiscal '06, although the majority will be. That's basically my comment.

Okay, but Greg, the maintenance-type level of capital spending would presumably drop back down -- I don't know, into the 20 or $30 million range, or is that --

Again, it depends on what John is saying about -- if we put a shredder in the Southeast, if we find -- you know, a lot of our acquisitions require capital improvements. So one of the things we did mention -- in GreenLeaf, we're putting additional inventory in to help them sell -- help them have better sales. It's not a CapEx improvement, but it is a use of our capital. So again, it varies depending on who we [firm]. On an as-is basis, yes; we anticipate the CapEx would go down in our existing businesses.

Yes, I think the other thing, John, to remember is what I said about the ERP system. A lot of the money that we're spending on our infrastructure on the information technology side will be in the course of this calendar year. We're also looking at some other opportunities where we see an investment that has a reasonably quick turnaround and payback we're willing to make -- for example, railcars and some things of that nature.

But what you should expect once these mega-shredders are in operation is their efficiencies are quite significant.

Okay. And then just following up on the comments relative to your operations in the Northeast and the Hugo Neu marketing arrangement -- is it possible that some of the sales out of the Northeast, this quarter, the last couple of quarters may not have been as attractive as what you would have done or what Hugo Neu would have done for their own account?

(laughter) That's a very good question, John. I don't think I really want to speculate on that.

(OPERATOR INSTRUCTIONS) At this time, we have no further questions. I'd like to turn the call back over to our management team for any closing remarks they may have.

Thanks very much for being with us today. We appreciate your interest in the Company, and look forward to talking to you in the future.

Thank you very much, sir. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation and you may now disconnect. Have a good day.