Radius Recycling Inc (RDUS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Schnitzer Steel Industries 2006 fourth-quarter earnings conference call. My name is Candice, and I will be your coordinator for today. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded.

Before we begin, the Company has asked me to read the following statement. We need to remind you that the Company's presentation and discussion today contain forward-looking statements subject to the Safe Harbor provisions of federal securities laws, including estimates of future 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 listed in our earnings press release issued this morning and are described in detail under the heading "Factors That Could Affect Future Results" in the management discussion and analyst section of the Company's most recent quarterly report on Form 10-Q.

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

Thank you and good morning. I would like to welcome you to Schnitzer Steel Industries 2006 fourth-quarter earnings webcast and conference call. I'm joined on the call today by Greg Witherspoon, our CFO. After a few introductory remarks, we will be available to answer your questions.

Schnitzer Steel just finished the second best year financially in the Company's 100-year history. Let me take a few minutes to go through what we have accomplished this year from a financial and operational perspective as well as what we have done to position ourselves for a future we believe is bright. After that, Greg will provide commentary on the recently-completed quarter. And then, I will share with you our outlook for fiscal 2007.

2006 was a transformational year for Schnitzer Steel. With our focus on growth, we completed four major acquisitions and signed an agreement for a fifth. Our employee base increased from 1800 to over 3200 people. We dramatically increased our scale and geographic presence through acquisitions in the metals recycling and auto parts businesses, and we increased our organic growth rate in the steel manufacturing business. The ferrous scrap tonnage under our direct control more than doubled, and our nonferrous volumes increased nearly 2.5 times.

Additionally, we established a new presence in the Northeast and Southeast regions of the country. Our auto parts revenues doubled as we went from 30 locations to 51 and entered into the full-service distribution market. We increased the sales volume at our steel mill by over 100,000 tons to take advantage of strong West Coast steel markets.

Our revenues increased by $1 billion to nearly $1.9 billion. And we delivered 2006 annual earnings per share of $4.65, including a record $1.62 in the fourth quarter. We produced EBITDA of over $265 million.

We focused this year on increasing our scale and adding to our business platforms in both the metals recycling and auto parts businesses and on improving our productivity in all three of our operations. We successfully integrated four acquisitions this year, achieving earnings accretion ahead of schedule. We increased the depth of our employee base through those acquisitions, and we bolstered our management team with key additions.

We believe that worldwide focus on recycling and sustainability has made our businesses and our business model increasingly irrelevant. We are committed to achieving further growth, both through additional acquisitions and organically through improved productivity and investments in technology.

In the metals recycling business, we set an objective of diversifying our customer base to be less reliant on export customers in one or two countries. We made sales in 2006 to customers in 18 different countries. Customers in China and South Korea made up just a little more than 20% of our total export volume as we sold to new customers in Asia, Europe and Mexico. This compares to fiscal 2005 when Chinese and Korean customers made up 86% of our ferrous export sales.

Through focused efforts by our management team, we lowered conversion costs by 17% from the first quarter when we took control of our newly-acquired metals recycling assets to the fourth quarter. And we also increased the frequency of our inventory turns.

In the auto parts business, we established a presence in the full-service market through the GreenLeaf acquisition. The full-service operation was profitable for the full year, well ahead of our own internal projections. We converted four full-service stores to the self-service model, and we're able to increase our same-store parts sales. We also increased the frequency of our inventory turns to provide a better selection of parts to our customers. More frequent turns also accelerates the capture of higher value core and scrap sales.

In the steel manufacturing business as a result of the capital improvements we've made and incentive contracts negotiated with our workers, we lowered our man hours per ton by 14%. We stepped up our focus on safety and dramatically lowered our lost-time accidents, reducing our workers' compensation expense, all while achieving a 19% increase in output.

We made a concerted effort to ensure that we captured the long-term benefits from our acquisitions through rapid integration. While we are not done with this process, we think the financial results for the year point to success on this front. We have made substantial progress on capital improvements to our facilities designed to utilize technology to improve our future competitiveness.

Let me talk about a few of these projects for a minute. In the metals recycling business, our focus has been on a significant improvement to many of our major facilities to provide better logistics, increased throughput, improve the quality of our shred product and increase the recovery of nonferrous materials.

The centerpiece of these projects has been the three new mega-shredders at our Oakland, Boston and Portland export facilities. The new Oakland and Boston equipment have just become operational recently, and the installation in Portland is scheduled for completion in February. These state-of-the-art mega-shredders are expected to result in an improvement in conversion costs by increasing throughput, reducing energy usage, labor and maintenance costs, and eliminating the need to employ higher cost processes for preparing the larger and denser scrap material. Our investment in the new shredders will create a higher-quality shred, which we believe will improve export sales values.

One of our primary goals as we improve our facilities has been to look to the future and stay ahead of the technology curve. As a result, we passed on a few technology alternatives, such as gamma-ray technology which we think has limited benefits, in favor of investments that will provide measurable improvements in the purity of our shredder product and have greater long-term returns.

We believe our new shredders and ferrous separation systems will create a higher-quality shred, which will increase the value to both our export customers and to our own mill. We can test our own product in our own mill and get immediate feedback regarding the success of our efforts.

Consistent with our technology objectives, we have installed in our Oakland, Tacoma and Boston facilities new nonferrous sorting systems, which are designed to improve the product that results from the shredding process. These improved nonferrous recovery systems combine new generation eddy current technology with high-tech sensors for more advanced sorting with demonstrated higher recovery rates of nonferrous materials.

The greater recovery of nonferrous metals also means that we produce more valuable nonferrous material for sale. Similar systems will be installed at our Portland and Hawaii facilities, and all are expected to have rapid paybacks.

In the steel manufacturing business, we made progress on two projects that are part of our first phase to increase capacity in the rolling mills. These projects, involving modifications to the reheat furnace in one of the rolling mills and a new billet yard craneway, are expected to have a payback of less than 15 months when completed in the 2007 calendar year.

We still have more work to do in improving the efficiency of our facilities through improved logistics and upgraded technology. We've taken a disciplined approach to selecting and prioritizing these investments. And we believe these projects will provide attractive future returns to our shareholders. We also installed in 2006 a new Oracle ERP platform to assist in integrating our present and future acquisitions and to provide us with a strong foundation for our companywide information technology.

Turning to non-operational matters, we settled the investigation by the SEC and Department of Justice regarding our past payment practices in Asia and have instituted several new programs and controls to ensure this type of thing doesn't happen again. During 2006, we also made a number of other positive changes in corporate governance, including the implementation of a Board of Directors composed of a majority of independent directors.

We believe 2006 was a successful year by all measures, and we look forward to 2007. Before I spend some time talking about our outlook for 2007, let me now turn the call over to Greg to go through the details of a very strong fourth quarter.

Thank you. As John said, we just completed a fourth quarter in which all of our businesses performed well and each had record achievements. Our metals recycling business had record volumes and reported sequential growth and operating earnings for the third quarter in a row. Our steel manufacturing business posted its fourth consecutive quarter of record operating earnings. We had our highest-ever quarterly operating earnings in our auto parts business led by improvements in the full-service operations.

Let's start with the metals recycling business, which posted a strong fourth quarter on the back of higher volumes, very good markets and improved operating efficiencies. During the fourth quarter, we saw average prices for both ferrous and nonferrous materials rise about 16% from the third quarter. In the case of ferrous scrap, the average net price of $243 a ton was the highest since the first half of fiscal 2005 and was representative of a strong export market throughout Asia and Europe.

I should remind everyone that we report all of our average ferrous and nonferrous prices on a net basis, meaning that sales prices have been reduced by the cost of freight to deliver product to our customers. For income statement purposes, we report revenues on a gross basis, which means the sales have been grossed up to improve the cost of freight and a corresponding expense is included in the cost of sales.

As John discussed, our export sales were diverse and we used our geographic presence on both coasts to our advantage. Our Boston and Providence export facilities shipped cars to Mexico, Turkey and Egypt. Our Oakland, Portland, Tacoma, and Hawaii facilities loaded cargoes for delivery to Malaysia, Thailand, China, Taiwan, South Korea, India and Pakistan. In addition, we used our trading operation to meet customer demand for ferrous scrap in Turkey, Spain and elsewhere.

Another trend we enjoyed in the fourth quarter was that export prices were higher and rose more quickly than domestic prices. In addition, we continue to see strong markets for nonferrous materials with average prices increasing to $1.09 per pound.

As expected, sales volumes from our processing facilities were up from the third quarter due to the timing of sales, up to 942,000 tons. Volumes would've been a little higher, but we had a number of shipments from our Boston facility, which slipped into the first quarter of fiscal 2007.

Higher volume also was one of the factors that led to lower unit processing costs, as we continue to see greater efficiencies from our operating facilities. In fact, due to our investments in capital improvements and because of the competitive advantage provided by our coastal access to the export markets, our operating margins during the quarter excluding our trading business were nearly 17%, which clearly makes us an industry leader in this area.

I should point out that the results from the quarter were supported by approximately $8 million in inventory adjustments. The value of recycled metal and our cost of goods sold is estimated based on a number of assumptions, including the amount of shrinkage that occurs in the material that we have purchased and processed. If the actual results are different, a re-evaluation occurs which flows right through to operating income.

Turning to our steel manufacturing business, we capped our best year ever with yet another record for quarterly operating income. Our average selling price of $548 per ton was a record as West Coast demand for steel products remained strong, particularly in the non-residential construction markets. Prices were higher across the board for all products, including wire rod, despite competition from imports.

Sales were off slightly from record volumes in the third quarter and reflected both strong market demand as well as a continuing benefit of our initiatives to increase output of volumes of 181,000 tons for the second-highest in the mill's history. Fourth-quarter margins improved slightly from the third quarter as record prices more than offset higher scrap and energy costs. On a year-over-year basis, operating income was nearly double from the fourth quarter of last year.

The auto parts business also posted strong performance; fourth-quarter operating income was a record. The self-service business is typically impacted by hot temperatures during the summer months. Despite that, revenues actually increased from the seasonally-stronger third quarter. This is due to the impact of four new self-service stores, which were in operation during the quarter; higher prices for scrap cars; and improved core and full-service revenues.

During the quarter, we opened new self-service operations in Tallahassee, Florida and Wadsworth, Illinois, bringing the total number of self-service stores to 34. An additional store was opened in mid-October in Panama City, Florida, which will be reflected in our first-quarter results. The self-service business benefited from higher ferrous and nonferrous scrap prices, which increased revenues from the sale of scrap cars as well as core part sales. Both categories of revenues increased overall and on a same-store basis.

Same-store admissions were down slightly, reflecting normal seasonality, but part sales actually increased slightly, reflecting an increase in the average sale per admission. Our efforts to integrate the full-service business continued successfully as the GreenLeaf operation comfortably reported its second consecutive quarter of operating income and in fact was slightly profitable for the year as a whole.

In addition, the auto parts business continues to see the benefit of our focus on increasing the velocity of our inventory as the trend lines show higher inventory turns. Increasing the rate at which we turn our inventory provides our customers with a greater selection of parts and accelerates our ability to capture the benefits of high-value core parts before the cars are sold as scrap.

Finally, I'd like to share with you a couple of liquidity figures. Depreciation expense during the quarter was approximately $10 million, and our net debt exclusive of restricted cash was $77 million.

Now, I would like to turn the call back to John for a discussion of our 2007 outlook.

Thanks, Greg. As we've said before, 2006 was a very good year for us and provides a great foundation upon which we can build for 2007 and beyond. Let me talk for a minute about our priorities for the coming year.

First, increasing operating leverage through productivity improvements. In the metals recycling business, that means an unwavering focus on being the low-cost producer, increasing our processing volumes to leverage our investments into mega-shredders and faster inventory turns. In the auto parts business, it also means greater velocity of inventory turns and improving the customer fill rates.

And we will continue eliminating redundancies in operations between the full and self-service distribution models. In the steel business, it means continued reductions in conversion costs as we focus on achieving improved productivity at both the top and bottom of the economic cycle. It also means we continue to pay attention to customer requirements in terms of products and quality. Customer satisfaction is the strong point for our mill.

In 2007, we also intend to focus on increasing our scale through further accretive acquisitions in auto parts and metals recycling. Both industries are highly fragmented and present opportunities for further consolidation. As in the past, we intend to be very disciplined in our approach.

In the metals recycling business, this means looking at acquisitions that already have a strong franchise, that provide opportunities to capture value through improved management or capital investment and that offer synergies to our existing auto or recycling businesses. In the auto parts business, we will look at acquisitions that meet our demographic criteria, expand our presence in existing markets and have a strong franchise. We will also put particular emphasis on opportunities that offer synergies to our existing metals recycling operations.

In 2007, we also intend to make further investments in technology and improved logistics to increase efficiencies. In addition to completing the work already begun on the installation of mega-shredders and new nonferrous sorting systems, we will be working on a number of smaller projects throughout the metals recycling business.

At the steel mill, we will continue the work on modifications to the reheat furnace and the billet yard craneway in addition to replacement of equipment in the rolling mill that will increase wire rod capacity. For the coming year based on current forecasts, we expect to spend between $70 million and $80 million on capital improvements. Approximately 10% of these costs will be related to environmental safety and regulatory compliance, and the remainder split fairly evenly between projects designed to increase output or improve productivity and activities to maintain or sustain existing equipment and infrastructure.

We're very focused on ensuring that we're spending our capital wisely. We have put in place a rigorous process for improving capital requests to ensure invested capital achieves attractive returns. And for 2007, all discretionary projects related to growth and productivity improvements were required to demonstrate at least a 33% return on investment and a payback of less than 36 months. We anticipate that the projects we approve in the latest budget cycle will better these thresholds.

With our strong cash flows and relatively unlevered balance sheet, we believe we will have more than adequate capital to pursue our strategy of growth through acquisitions and internal investments in productivity. As a result, we announced today that our Board has granted the authority to buy back up to 4.7 million shares of the Company's outstanding stock or roughly 15% of the total shares outstanding. We believe this authority, which is not mutually exclusive to our growth strategy, provides the Company with additional tools to maximize value for our shareholders.

Now, let me turn to discuss our outlook for 2007 and then more specifically for the first quarter. In the metals recycling business, the acquisitions we made in early 2006 and the pending acquisition of Advanced Recycling have and will continue to substantially increase our volumes.

Based on our current operations, we expect 2007 volumes in our ferrous processing operations to be between 3.6 and 4.0 million tons, depending on the timing of shipments. This compares to 3.3 million tons in fiscal 2006 and 1.9 million tons in 2005. Our trading volume should add between 1.2 and 1.5 million tons compared to 1.3 million tons in 2006. Thus, for the metals recycling business, overall ferrous volumes will likely exceed 5 million tons in 2007.

Our nonferrous volumes should also increase from 300 million pounds in 2006 to between 320 and 340 million pounds this year. Prior to our acquisitions, we sold 126 million pounds of nonferrous in 2005.

Looking at the first quarter, the metals recycling business will see a significant impact from the shutdown of the Oakland facility to complete the installation of the new mega-shredders as we have noted in the past. The shutdown, which lasted approximately six weeks and which was due to the footprint at that facility, will result in lower ferrous and nonferrous volumes, higher processing costs and overall margins for the quarter.

We do not expect to see similar disruptions for the mega-shredders -- mega-shredder installations in Boston and Portland. At our Boston facility, a number of shipments scheduled for August split into the first quarter, which will offset the decline in volumes from the West Coast. As a result, overall first-quarter ferrous volumes are expected to approximate the 942,000 tons shipped in the fourth quarter. Even though volumes remain about the same, the mix of shipments is expected to contribute to lower ferrous margins in the first quarter of fiscal year 2007 as compared to the fourth quarter of 2006.

We note however that first-quarter 2007 revenues are expected to be substantially higher and margins better than the first quarter of 2006. Volumes will be approximately 70% higher than the volumes in the first quarter of 2006.

Nonferrous volumes are expected to be off 10% to 15% from the fourth quarter but 50% higher than the first quarter of 2006. Pricing for ferrous and nonferrous scrap is expected to remain strong in the first quarter. Based on sales made to date and current market conditions, average net prices are expected to be off slightly from the historically-high fourth-quarter prices but up from the first quarter of last year.

We should note that the primary factors contributing to a decline in margins from the fourth quarter to the first quarter are temporary in nature. And we do not believe performance for the full year in the metals recycling business will suffer. In addition, first-quarter 2007 performance is expected to be improved as compared to the first quarter of last year.

In the steel manufacturing business, first-quarter volumes are expected to be off slightly from the 182,000 tons in the fourth quarter but higher on a year-over-year basis. Non-residential customer demand appears to be strong, but we have seen some falloff in residential construction activity. Based on our current outlook for the market, average net prices are expected to decline $10 to $15 from the record prices in the fourth quarter but remain at healthy levels and are higher when compared to the first quarter of 2006.

In the auto parts business, we expect to see some decline in revenues as we've seen a falloff in the prices for cores and scrapped cars, which will be partially offset by normal seasonal improvements in parts sales and admissions. Even with the lower revenues, margins are expected to improve from the fourth quarter due to improved same-store parts and admission revenues, improved results at the self-service conversion stores and a lower average cost for the inventories sold during the quarter.

In October, we increased the number of self-service stores to 35 with the opening of a new store in Panama City, Florida. We now have five stores in operation, which were converted from the full-service distribution model. We expect the full-service operation to be profitable for the third consecutive quarter.

I would like to conclude by recapping. We just completed a great year, a year in which we achieved records in many respects. In 2007, we see another strong year in terms of revenues, earnings and return on capital.

Overall, we remain optimistic regarding the long-term fundamentals for our businesses. These businesses will continue to be subject to normal cyclical fluctuations, and we encourage our investors to look at our performance on a yearly, not quarterly, basis as we continue to build on our recent accomplishments.

We would like to open up the call for your questions at this time.

(Operator Instructions). John Rogers, D.A. Davidson.

Congratulations on the quarter. A couple of things. First of all, in terms of the share buyback, John, the 4.7 million shares, is that something you expect to invest fairly quickly or is it spread out over the next couple of years? I realize it depends on pricing and the alternatives of dividends, but can you give us a little more thought on that or the Board's thoughts on that?

Well, I think you know that the amount of time they do share repurchases, as you say, will depend on a number of factors, including the timing of our capital expenditures, what acquisitions we see out there and obviously the market conditions for the Company's shares. And we will use those factors to make the decision about when and when it is appropriate for us to repurchase shares.

We haven't repurchased shares for a long time -- since 2001 -- and there are a variety of reasons for that, including the fact that we had a pending investigation. So we will make our decisions based on when we think it is opportune in the market. And when we see opportunities to do so, we will act on them. It won't be obviously all at once or very quickly because we have also noted we still see a lot of good uses of our capital in terms of acquisitions and we see it as good opportunities for technological investments in our facilities.

Then secondly, I was just wondering if you could give us a sense, especially on the scrap side of the business, how far out you can see at this point into the export market only because there is a little bit further lead-times there, kind of what you're seeing in that portion of the business.

Well, I think there's two things I would point out. We've been saying over the last year that we think that the market for export sales has -- continues to be cyclical but also has moved to a different plateau for those cycles. So the overall prices remain higher, even though they will continue to go up and down and continue to react to market conditions. And that has played out.

So, when we look ahead, we see -- we continue to be optimistic about pricing levels. We continue to see an increase in worldwide demand for scrap, primarily because as you know, steel consumption worldwide continues to increase. When we look at our business, we look at steel consumption as one of the major drivers obviously for consumption of our product. It's a major driver when that overall market increases, regardless of whether it's in one geographic sector or another.

The other thing that we look as a driver is the shift to electric arc furnace used from older technologies, basic oxygen furnaces and other technologies in steel making. That's occurring particularly in countries concerned about damage to the environment and energy costs, which are an increasing factor in steel making.

So when we look out ahead, we see our scrap prices continuing to be priced along the lines of what we indicated earlier -- higher plateaus but still cyclical. And we're very optimistic about the future.

(Operator Instructions). Eric Glover, Canaccord Adams.

I was just wondering if you could provide some more color on what you mean by significant margin decline in the metals processing business in the first quarter and then what your expectations are in terms of how quickly that margin can recover beyond that.

Well, I think what we talked about in the first quarter is that there are a number of factors that are affecting our first quarter, particularly the shutdown of the Oakland shredder, which we had anticipated and commented on on our last earnings call.

The mix of our sales in the first quarter also the mix of our shipments and sales will affect our first-quarter margins. We expect on the year to have a very good year, and we expect that the margins for the year will be significantly better than those in the first quarter.

So we don't give specific guidance, as you know, about quarterly margins. But we also commented and I'd emphasize again that our first quarter of this year, both the margins and volumes will be substantially higher than the first quarter of 2006.

Second question, can you just comment on the -- what you're seeing in terms of demand for scrap, particularly from China at this point?

Well, demand remains high worldwide. As you know, we moved our focus to a much broader market in 2006, selling to 18 different countries rather than the 2005 emphasis in our markets on Korea and China.

China was evident in sales for us in the fourth quarter but not nearly the level that it had been in the prior year. The reasons for that of course depend a great deal on the Chinese buying habits, which change depending on what decisions they make in their steel industry. And they are undergoing, as the media has commented, the process of restructuring their steel industry to eliminate a number of inefficient producers and they are increasing their focus on their energy and environmental concerns.

So we think that their consumption of steel will continue to grow, and that means that they will continue to buy scrap. It does mean that they will be in and out of the markets as the other countries in the world that are steel producers are and that they will buy where they think they can obtain the best price for their own use.

For us, we found better places to sell our scrap. As I mentioned, we've sold to China in the fourth quarter. But for the most part, we found other buyers that yielded higher sales prices to us and took advantage of that opportunity.

Sal Tharani, Goldman Sachs.

John, can you give us a color on what's going on in the CIS region in terms of availability of scrap? And does your trading division -- does a lot of business from that region? How does that impact?

Let's see if I can understand and correctly answer your question. The former Soviet Union and Russia in particular are increasing their steel production. So they are increasing their domestic consumption of scrap. They are also selling scrap both through our operations but also a variety of other operations, and a lot of that scrap is being sold into the Far East.

The interesting part about scrap out of the former Soviet Union is that it tends to be a lot of heavy metal scrap, which is of interest to the world's scrap market. For us, we think it is a very important part of what we do because it gives us visibility into the global scrap market. It tells us how the scrap market is operating at any given time and allows us to make determinations about what our customers actually are looking for when we approach them for our own sales. Does that answer your question?

Yes, I just want to know if you have seen a reduction or a decrease in availability in your trading business for the scrap coming out of Russia.

No, it hasn't affected us. We've seen reports that there has been less scrap exported to the west. But I think that's partly due to the fact that they've been selling more into China and into Japan and Korea.

And also your margin in that from trading business improved dramatically from the second quarter -- from third quarter. Is that something you think is sustainable? You had made about $4.50 -- more than $4.50 a ton.

We don't really comment on specific margins, as you know. But we were comfortable that we were seeing the effects of the improvements that we want to make in our trading business, which is as you know not just out of Russia and the former Soviet Union but includes trading activities that we have in the Far East and in other parts of the world. So we are always looking to improve that margin.

The opportunity to do that will depend a great deal on how well we can buy and what the supply side is. But it remains an interesting market for us to be in for a variety of reasons, including the comment I made earlier about visibility of scrap flows and the overall worldwide scrap market.

Fair enough. Also on the auto parts business, just want to get a clear picture on the number of stores. So in first quarter, you will have 35 self-service and 17 full-service, total of 52 stores?

That's correct.

Do you have any other stores which are in operation right now? Is 52 the full amount of number of stores you will have?

I'm sorry?

That's the full amount.

That is full.

Are there any more full-service centers you're going to convert, or is that the final number?

We're looking at converting up to five to six stores total currently.

Five to six more?

No, no, total of five or six.

So you have done already five, haven't you?

Yes. We're taking a look at another three stores, and we will make a decision on that as we go depending on what we think is the appropriate outcome for that.

Is there any location where you have both stores running at the same time side-by-side?

Yes, Greg, you want to comment on that?

Yes, our very first conversion was at Fort Worth, Texas. We also have one in Chandler, Arizona, where the full-service and the self-service run side-by-side.

Do you see benefit of running them together? Or do you think at some point you may want to go in one direction?

No, we definitely see a benefit, and we're working on cross-selling between the two operations as we speak.

Lastly, can you comment on the pricing and import situation for the rebars and wire rod in the West Coast?

Well, yes, a couple of comments. We have obviously seen an increase in imports, primarily in the wire rod area on the West Coast. But it has a rather nominal effect on pricing because the people who are importing have taken advantage of the higher prices on the West Coast. But also, the demand has been very high, so it's been a concern but not one that has had a dramatic effect on our prices.

As we see those imports increase in terms of any other products, we will of course keep an eye on that. But the demand curve has been quite good. And as we commented, we see a little softening in the residential market in the first quarter, which is not surprising. But, we think prices will still remain very satisfactory.

[John Green], [Lexar].

A few questions. I guess the first was on the corporate expense. I noticed that it ticked up, and I know that there was a lot of expense associated with accounting restatements and dealing with the fine issue. I'm just wondering could you quantify that at all or give us a sense as to how corporate expense might look going forward, assuming that that stuff is behind you?

Well, we -- Greg, maybe I should let you handle that.

There really wasn't any significant expense of G&A as far as the restatements are concerned. Generally, it revolves around resolving the Far East situation and the completion of that and the integration of our acquisition. We feel that the run rate is going to be less than in the fourth quarter, depending upon acquisitions in the future of course. But keep in mind, our G&A is not really comparable year to year because we've more than doubled the size of the Company.

Well, I think it's worth a couple of other comments. As you know, when you look year-over-year, we were in a joint venture with Hugo Neu in the prior year. When we were in that joint venture, Hugo Neu was managing the assets in the venture. And so, there was no G&A reflected correctly in our statements.

As a result, as we brought our half of the joint venture into our own control, it had an impact on our G&A. As Greg said, the other significant impacts resulted from the investigation at the time.

But as we see an apples-to-apples going forward, we would expect G&A to decline. If we make more acquisitions, of course that will have an impact on it.

I guess on the nonferrous business, could you guys give us a sense as to how much zorba you expect to generate in the next -- in fiscal '07 out of the 340ish figure that you guys had guided to for processing amount?

Typically, it's 50% of our nonferrous zorba.

I guess could you give us a little bit more clarity on that, I guess where zorba prices are today versus where they were before and how you think about that?

Well, I think zorba prices are a reflection for the most part of nonferrous prices generally and what nonferrous minerals are in the zorba mix. Obviously, it's been a strong year for nonferrous pricing. It continues to be strong. And the zorba prices will reflect that strength going forward unless there is a difference in the market view of those metals that are included in the zorba.

Is it safe to say they are roughly twice what they were a year ago, or I'm just looking for a -- I'm trying just to get a back of the envelope how much margin is created from that from the zorba contribution, comparing sort of next 12 months versus historically where zorba was kind of breakeven or not a very material contribution.

I think the biggest change is volume of the nonferrous produced from our Southeast operation. That is a much more valuable product. As far as the zorba, the increase is about 60% of what I can see right here, so it's not quite double.

I see. I guess just last on your guidance, you guys talked about sort of the revenue. But I just wondering if you guys could give us a little bit more color on your feedstock costs. Obviously, we've seen scrap prices come off a little bit in the US in the last few months. I'm just wondering, does that -- will that play into your numbers? Are you seeing a lower cost of feedstock for your export business? And if so, could you give us a sense of that and the timing?

Well, year-over-year, there has been a pretty significant increase.

Sorry. I meant quarter-to-quarter, I am just looking at your margin going forward versus what you guys just did.

I think John covered that in his discussion. We were looking at I think it was a 10% to 15% reduction in the purchase price and the sales price and for ferrous.

I think that the way you should look at that is that obviously we tend to look at our cost of buying the inflow product in relation to our sales price. Since we sell ahead, it gives us some ability to look at our purchasing and adjust accordingly.

I see. Yes, on the ferrous side I guess, you guys talked about average net selling prices of $10 to $20 per ton lower than sort of the prices you got in the fourth quarter. So, if I understand you correctly, you're saying you think you might get a price decrease in your buying -- your buy price of somewhere in that magnitude as well just on ferrous?

We really don't give specific quarterly guidance. That's a little too granular for us. But obviously if we anticipate a lowering in our sales price, then we obviously work on the buy side to reflect that in our purchase price.

(Operator Instructions). John Rogers, D.A. Davidson.

In one of your comments, John, I think it was yours or in the text you talked about acquisition opportunities on the scrap side and then also on the auto parts side. And I know you won't give us specifics, but is it an active market right now who is -- prices still -- margins still holding up pretty well? Are you finding that there is opportunities out there for acquisitions, or is it just your sense that it's an industry that's ripe for consolidation?

Well, it's a combination of that, John. It is an industry ripe for consolidation, but it's also an active market for us. We see a continuing flow of opportunities. Obviously, people's expectations and the price expectations that they have for sales based on a good couple of years may or may not match our idea of what the long-term value of the businesses that are being offered are.

But we do see a continuing opportunity -- we see continuing opportunities in which we have serious interest. So it's a good market.

Would you look at any Greenfield scrap operations?

It would obviously depend on the location. It would depend on timing and what we see as the competitive environment in the area. But we certainly wouldn't rule it out. And in fact over the course of the last year, look at one or two opportunities that had at least initial interest for Greenfield operations.

Again for a Greenfield operation for us, we would be looking at synergies to the other parts of our business, either our existing metals recycling business or synergy with the auto parts business, which also would be a factor in our consideration.

: Then, just last thing I guess for Greg, tax rate going forward is it -- your full-year rate looks like it was just under 30%. Is that a good rate? And also, depreciation -- the run rate has come up and with the new mega-shredders coming on, will that change significantly?

Actually, I think our tax rate was right around 37.5% or 38% for the year. It was a little unusual because there's no deductibility for most of the fine and penalties of DOJ investigation. And the gain on the disposition was treated different for tax purposes than book purposes. So there was a little bit of an aberration.

I think the rate will generally be less than what we have this year. Because of our credits we get for exports and the depreciation timing, our typical averages more around 35%.

Okay and then on depreciation?

Well, depreciation obviously will trend up as we invested about $80 million last year in CapEx. So I don't have the actual rate in front of me, but it will definitely trend up.

But above the sort of $40 million annualized rate you are at now?

I don't think much above that.

[David Whittal], [Vera Global Partners].

This is David Whittal. Could you tell us a little bit about the new shredders that you've put in -- the mega-shredders? You've gone through the volume numbers that you anticipate for 2007. Could you tell us a little bit about their maximum capacity and maybe a little detail about also the investments in the nonferrous improvement and what you think the ultimate capacity in the nonferrous production can be?

Yes, the mega-shredders of course are the next generation of shredding machines. All of the shredding machines are slightly different. But in general, we look at the capacity of the new mega-shredders as approximately double that of the shredders they are replacing in our operations.

So, if our current shredders are performing in a normal fashion, they produce somewhere around 1500 tons a day, obviously depending on maintenance schedules, the type and availability of materials and other factors. And the new shredders are expected to produce somewhere in the vicinity of 2500 tons a day. We believe that 2500 tons a day number may be low, depending on the type of material available because we have some experience with those shredders in Tacoma.

Additionally, as we've commented in the past, the type of material that is processed by the mega-shredders is different than the current technology allows. A heavier material can be run through the shredders. So that amount of material that can be heavy material that could be run through the mega-shredders increases by 50% or 60%. Obviously, that has a significant advantage to us because the cost to shred rather than to sheer material, which is the process used today on lots of heavy metal, is about 30% to 50% less than in the shearing process.

I guess I would also add a couple of other things about the operating characteristics of the mega-shredders. Because they are a newer technology, they have lower operating costs from the energy side. And so, even if we only have the same volumes that we have with our current shredders, we can expect our operating costs to go down. We obviously would want to take advantage of the higher capacity, and the true advantage of these machines is sourcing additional material and processing greater volumes, which is part of what we have said is one of our focuses for the year ahead.

Can you comment a little bit also on the nonferrous improvements in terms of sorting and bringing out more of the nonferrous stock? Is that something you can quantify and do you have a new--?

That's a little harder to quantify. But what we can say is that the equipment that we're adding on the back end of the shredder residue stream has an increased ability to take out more of the nonferrous material from that stream. As a result, it increases the amount of nonferrous material that we have for sale directly as nonferrous material. And when we can sell that product in a purer state rather than zorba, we get a higher price for it.

Finally, just back to the shredders. Who makes the shredders? And is this a competitive area or is it just a couple of manufacturers who produce these mega-shredders?

Well, I don't think I want to comment too much on somebody else's business, but the shredders are made by a number of different manufacturers -- a Texas shredder and some in Germany. It depends a great deal on where people look to buy these. But I don't have any comment on the business itself.

Ladies and gentlemen, this concludes the Q&A session. I will turn it back to Mr. Carter for any closing remarks. Sir?

Well, thank you very much for being with us today. We appreciate your questions, and we appreciate your time and attention to our business. We're very pleased with the results for our fourth quarter and for the year, and we look forward to a good year ahead.

Thank you for your participation, ladies and gentlemen. Have a wonderful day.