Radius Recycling Inc (RDUS) 2009 Q2 法說會逐字稿

Good day, and welcome to the second quarter 2009 Schnitzer Steel Industries Incorporated earnings conference call. My name is Candice and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a Q&A session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Treasurer and Vice President, Mr. Robert Stone. Sir, you may proceed.

Thank you. As the operator indicated, I'm Rob Stone, the Company's Treasurer and Primary Investor Relations Contact. I'd like to thank everyone for taking the time out of your busy days to join us this morning. In addition to today's audio comments, we have repaired a set of slides which you can access through our website at www.schnitzersteel.com. The link is located in the Investor Relations section of the website under our event calendar. Before we get started, I need to remind you that the Company's presentation and discussion today contains forward-looking statements subject to the Safe Harbor Provisions of the 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 the differ materially from current expectations are listed in the earnings press release issued this morning and are described in detail under the heading Factors That Could Affect Future Results in management's discussion and analysis session of the Company's Form 10k for the fiscal year ended August 31, 2008 and most the recent quarterly report on Form 10q, which we expect to file later today. I will also emphasize that the forward-looking statements made on the call, including our outlook, speak only to the information available to us as of this date, and we do not assume any obligation to update these forward-looking statements. Now, let me turn the call over to Tamara Lundgren, our Chief Executive Officer.

Thanks Rob, and good morning everyone. Welcome to our fiscal 2009 second quarter earnings webcast and conference call. I'm also joined on the call today by Richard Peach, our Chief Financial Officer. After our slide presentation, we will open up the call for questions.

We issued a press release today with the details of our second quarter results. Our second quarter began in December, when the industry was still reeling from a collapse in worldwide demand for scrap and steel products. Credit confidence and for some, cash flow had disappeared from the markets. For the quarter, we recognized a net loss of $7 million and a corresponding loss of $0.25 per share. The second quarter loss reflects as quarter-over-quarter improvement of $27 million or $0.96 per share. This improvement is due to a number of key performance drives which we identified in our last earnings call as second quarter objectives. These drivers included executing on our cost containment plan and reducing our inventories. The results of our cost containment plans resulted in lower SG&A run rates, lower production costs and a reduction of nearly 500 or 13% of our full time employees and approximately 350 contract workers.

The second quarter was also impacted by weak demand and tight supply of material, an $8 million increase in our bad debt reserves that pertains to a very small number of customers and several low margin renegotiated sales that originated in the first quarter but were shipped in the second quarter. Our cash flow from operations remains strong. We generated $91 million primarily from further reductions in working capital, which we achieved by reducing overall inventory values by 28%. This we did through a combination of lower inventory volumes as well as lower unit values. These strong cash flows enabled us to invest $90 million in four acquisitions and $20 million in capital improvements, while increasing our net debt by $19 million. Our net debt to total capital ratio at the end of the quarter remained low at 13%. We continue to remain well positioned to take advantage of further opportunities.

In the midst of these activities, our Company's employees maintain their commitment to our number one priority, safety. Following the excellent improvement in safety in fiscal 2008, we continue to make strides towards our goal of an injury-free workplace. Year-over-year, we have recorded a 44% improvement in total incident rate, a 37% improvement in the number of reportable injuries and a 44% improvement our lost time incident rate. As we navigate through this challenging economic environment, we continue to execute on our strategy of growth through acquisitions, through continuous improvement in operations and through investment in our infrastructure.

Let me now turn to a review of each of our businesses, starting with metals recycling. During the recently completed second quarter, our metals recycling business returned to profitability, generating $5 million in operating income, a $24 million improvement from the first quarter and a confirmation of our belief that our export platform will allow this business to recover more quickly than domestic focused businesses due the the stronger developing world demand for process, ferrous and nonferrous recycled metals. The $5 million operating profit was achieved despite renegotiated and deferred sales that lagged from the first quarter in to the second quarter and also low margin sales of inventory that was written down to market sales prices at the end of the first quarter. As a consequence of these deferred and renegotiated shipments, the average ferrous sales price for the second quarter declined 30% relative to first quarter average prices. However, it is important to point out that actual prices trended upward month-over-month. We were encouraged during the second quarter to see more stabilization return to the market, albeit demand was still choppy and showed softening in the last part of February. Also important to point out is the impact from the carry-forward of relatively high cost inventory. As you may remember, at the end of the first quarter, we wrote down inventory balances to equal market sales prices which essentially meant that those inventory volumes would be sold on average at no profit. Beginning inventory volumes represented more than half of our sales for the quarter, so those low or no profit sales had an adverse impact on our overall quarterly profitability.

The cash metal spread, which is the difference between our sales prices and the purchase cost for raw materials, is one gauge of the health of our business. During the quarter, our cash metals spread was comparable to the second quarter of 2008 and contributed to the profitability of the sales made from inventory purchased during the latter part of the second quarter. We were also encouraged by the change we saw between the first and second quarter market activity. During the first quarter, we saw dramatic price drops for both ferrous and nonferrous metals, sales order renegotiations, cancellations and deferrals as well as overall low, and at times, nonexistent market demand. However, in the second quarter, market demand revived somewhat and particularly from Asia.

Sales volumes in the metals recycling business for the quarter were nearly 1.1 million tons of processed ferrous scrap, a 39% increase from the preceding quarter and just 4% below levels achieved in the second quarter fiscal 2008. The increase over the prior quarter, however, was partially attributable to the timing of several export shipments deferred from the first quarter. One challenge we continue to face during the quarter was the flow of raw material into our yard. The supply of scrap was tight due to the dampening effect the winter months have always had on the amount of material available for purchase, as well as the sticker shock of lower buy prices for the quarter. Nonetheless, our intake volume of purchase material increased slightly from the first quarter levels with intake volumes increasing throughout the quarter. The combination of slightly increasing our intake flow from first quarter levels while shipping significantly more volume enabled us to reduce inventories and to achieve positive cash flow from operations for the quarter. Consistent with our growth strategy, during the second quarter, we completed the acquisition of a business in Puerto Rico. This opportunity added three facilities to our platform and provides us with additional export capability as well as the ability to sell to the US domestic market if conditions warrant. We also acquired a single facility near Tacoma that strengthens our position in the Pacific Northwest. And earlier this week, we completed the acquisition of a business near Reno, Nevada which further builds out the footprint around our mega-shredder and port facility in Oakland.

Now let's turn our attention to quarterly comparisons. As you can see from the charts on this slide five, quarterly revenues for the metals recycling business decreased 16%, quarter-over-quarter to $337 million, reflecting the decline in both ferrous and nonferrous prices. However, our ability to adjust our raw material purchase cost, combined with our cost containment program, our ability to serve markets throughout the world and the easing of the inventory cost issues discussed last quarter enabled us to achieve positive operating income of $5 million. This is 126% improvement from last quarter. As you can see in the bottom left corner of the slide, we continue to serve markets worldwide. In the second quarter, we exported to eight countries with Asia accounting for 65% of our export shipments. While during the quarter we made shipments to Turkey and elsewhere in Europe, Africa and the Middle East, the markets in Asia and principally in China, were stronger. In the lower right hand corner of the slide, you can see that export shipping costs fell dramatically during both the first and second quarters of fiscal 2009. At a time when demand from the traditional export markets off the east coast of the US was weak, this enabled us to cost effectively access markets in Asia, where demand was stronger.

Moving to slide six, here you can see the quarterly detail behind our metals recycling business prices and volumes. If you look at the chart in the top left corner, average ferrous net sales prices of $253 per ton for the quarter were 30% less than the first quarter of fiscal 2009 and 22% less than the second quarter of fiscal 2008. Actual ferrous prices, although variable, our actual ferrous prices trended upward through the quarter before softening in the last part of February. Some of the sales that we made in November during the low point in the market were deferred into December, the first month of our quarter and had a dampening effect on average prices and profitability in the second quarter. However, the overseas markets continue to be a better place to sell recycled metals than the domestic markets and our export platform continue to provide us with this greater flexibility to maximize revenues. If we look now at the chart in top right corner, average nonferrous sales prices for the quarter were 42% less than the first quarter fiscal 2009 and 54% less than the second quarter of fiscal 2008. Unlike the ferrous markets, the nonferrous markets continued to fall for the first half of the quarter before stabilizing in late January and February. The significant drop in nonferrous prices for our absorbent material contributed to the reduced margins for the quarter. The bottom two charts on this page display our ferrous and nonferrous sales volumes and show that although the ferrous volumes were strong during the quarter, the nonferrous volumes were below the levels of the last two years, reflecting, in part, the timing of shipments.

Let's go to our outlook. The outlook -- and we're on slide seven -- the outlook for the metals recycling business for the third quarter are subject to uncertainty, as we expect worldwide demand to continue to be weak, although pockets of strength may appear from time to time. Until there is a release of credit in to the market that will provide increased confidence for capital investments and until we see sustainable increases in demand, we expect that prices are likely to ebb and flow within a range. Having said that, what we currently see for the third quarter is that ferrous prices are expected to settle somewhat lower than the second quarter averages and that the domestic market will likely continue to lag the export markets. Demand for ferrous and nonferrous materials appear to have stabilized. As always, both ferrous and nonferrous sales volumes are highly subject to the timing of shipments.

Third quarter ferrous sales volumes are expected to decline approximately 10% from second quarter volumes with nonferrous volumes expected to increase by about 15%. But remember, this is really driven by a function of timing of shipments, not a significant differential in demand. Demand appears to have stabilized. If markets don't deteriorate from current levels, we expect that third quarter operating income per ton should improve from the second quarter as the adverse impact from renegotiated and deferred first quarter shipments and low margin sales are behind us. However, the third quarter margins are still expected to be reflective of the tough market and be below the lower end of the quarterly range that we experienced during fiscal '06 and '07, and that range was $22 to $62 per ton. Lower sales prices for the nonferrous metals extracted from the sorting process at the back end of our shredders are a primary contributor to the expected margins being lower than the bottom of that range.

Let's now take a look at the auto parts business. Our auto part business, and we're on slide eight, booked a $5 million second quarter operating loss, which is a $4 million improvement quarter-over-quarter. In large part, the second quarter operating loss is due the average metal prices for scrap and cores in the quarter falling 24% from the first quarter levels and compression in our cash metal spreads as the buy prices of scrap cars declined less quickly than selling prices for scrap and cores. While the market for the auto parts business remain difficult in the second quarter, we were encouraged by a steady increase throughout the quarter in core and scrap prices from December levels. We were also encouraged by self service admissions and part sales that were up year-over-year, which maybe be an indicator of the economic environment as people look for lower cost sources to keep their cars running. Full service part sales were down, which is consistent with trends in the professional repair market as customers appear to be driving less and deferring discretionary repairs. During the second quarter, we completed an acquisition in the auto parts business that further expands our Northern California network by two locations, and we completed the buyout of minority partners in two of our existing stores. These acquisitions also provide an additional supply of cars to our mega-shredder in Oakland.

Turning to slide nine, here we can see the quarterly results for revenue, operating income and cars purchased for our auto parts business. The top left hand chart reflects the 13% reduction in second quarter revenue from the prior quarter due to the drop in core and scrap prices as well as lower parts revenue due to the colder and wetter winter months. The top right hand chart reflects the operating loss of $5 million and the improvement from the first quarter due to our cost containment program and the reduced adverse impact from high cost inventory. As you can see from the bottom chart, purchased cars decreased 11% from the first quarter. This resulted primarily from the reduced availability of the scrap vehicles and also in part from our focus on maintaining positive metal spreads. The reduced flow of scrap vehicles available for purchase is likely a function of the weak economic environment. It appears to us that individuals are holding onto their cars longer and not purchasing replacement vehicles. In contrast, it appears lower prices offered for cars is likely driving the reduced flow from commercial sellers. Let's turn to the outlook for the auto parts business.

Looking forward to the third quarter, we expect core and scrap revenues to approximate the levels that we saw in the second quarter, with higher volumes due to normal seasonality offsetting lower scrap prices. We expect higher sequential part sales revenues and admissions in the third also due to normal seasonal improvements in weather conditions. Based on the projected higher volumes and improvement in part sales, operating margins are expected to be positive for the third quarter.

And now, let's turn our attention to our steel manufacturing business. The steel manufacturing business reported a $6 million operating loss which is a $25 million improvement from the first quarter. It's no secret that domestic demand for steel products continued to be very weak during our second quarter and as a result, published industry -- or published report had industry utilization rates hovering between 40% and 45% during most of this period. As we mentioned on our last call, our intention was to run our mill at even lower production levels in order to reduce inventories. While our output did pick up as the quarter progressed, for the quarter as a whole, we produced at about one-third of capacity. The second quarter operating loss included a $6 million FAS 151 expense for costs that could not be capitalized into inventory. As production levels were curtailed and planned outages accelerated in order to reduce inventories, which we accomplished both in terms of inventory volumes and unit values. Due to the inventory reduction as well as to our ongoing cost containment measures, the business made a meaningful contribution to the Company's positive operating cash flow. If you turn now to slide 12, you can see from the chart that prices, volumes and revenues were each down quarter-over-quarter and year-over-year. Second quarter revenue was down 47% relative to the first quarter of our fiscal 2009 and 64% relative to the second quarter of 2008. Sales volumes for finished sale products declined 16% relative to the first quarter of fiscal 2009 and 59% relative to the second quarter of fiscal 2008. Average net selling prices for finished steel products declined 34% relative to the first quarter of fiscal 2009 that included September. But 7% relative to the second quarter of 2008, in this last point, only a 7% decrease in price year-over-year is an example of the discipline that the steel industry is showing in this environment of weak demand.

Now let's turn to the outlook on slide 13. While the steel manufacturing business is uniquely situated to serve the domestic west coast and Canadian markets when they recover, our current outlook for the third in the steel manufacturing business is more of the same; weak demand and a weak prices. This is reflective of the fact that of the three industries in which we operate, the US domestic steel industry is probably the furthest from recovery. Until the sustainable release of credit and the return to health of the construction industries occur, we do not expect to see a sustainable near term pick up in demand. As a result, we are further reducing the number of ships in the rolling mills and the melt shop and employee headcount. Signs of the government stimulus money working its way in to infrastructure projects would certainly be welcome and would provide a kick start to demand. However, based on what we see today, pricing for the third quarter is expected to be somewhat lower than the recently completed second quarter, and sales volumes are expected to be approximately the same as volumes in the recently completed second quarter. Due to the impact of low production volumes and falling sales prices, margins in the third quarter are expected to remain negative but improved sequentially from the margins in the second quarter of this year. We expect our steel manufacturing business to continue to reduce inventory and to contribute positive operating cash flow. Now let me turn the presentation over to Richard Peach, our CFO, who will provide some more color on the financials for the quarter.

Thank you, Tamara. I will talk about our free cash flow, our working capital, some unusual items in our results and then our capital structure. So moving to slide 15, second our quarter cash flow from operations was a positive $91 million. Bringing the total fiscal year-to-date cash flow from operations to $161 million. This positive cash flow rose primarily from the expected reductions in working capital and also from our positive cash metal spreads and cost containment savings. During the second quarter, we closed four acquisitions totaling $90 million and invested a further of $20 million in capital improvements. Yet, we still have a positive year-to-date free cash flow of $33 million, even after the acquisitions and the CapEx. Looking forwards, we currently plan to invest a further $20 million to $25 million in capital improvement projects during the remainder of the fiscal year, which will result in CapEx for the year around 30% less than fiscal 2008.

Moving to slide 16, let's take a closer look at working capital, which continued its downward trend. Our working capital at end of the second quarter was $268 million, which was down $71 million from the prior quarter end, mainly due to lower inventory quantities and values. Since our fiscal 2008 year end, we have reduced our working capital by $167 million or almost 40%. We expect that further decreases in the third quarter inventory will continue to benefit our cash position. Moving to slide 17, I would like to explain a couple of unusual items within our second quarter results. We increased the debt reserves by $8 million in the quarter, just under half of this related to the Aleris bankruptcy filing, and the rest reflects recoverability risk on other receivables on a small number of customers where we continued to work with them to pursue recovery. We continue to use a variety of credit tools to protect ourselves and ensure full payment for shipped goods. These include letters of credit on ferrous export sales, use of deposits, cash in advance and active management of credit limits on our domestic sales.

Moving to tax, our year-to-date effective rate of 40% is slightly higher than recent years due to positive impact of tax benefits in a pretax loss situation. These benefits include earnings from our newly acquired Puerto Rico metals recycling operations which are taxed at lower rate than the US Federal tax rate and in addition, tax benefits related to a reduction in non-deductible executive compensation. The higher rate in the second quarter reflects the lower level of the pretax loss in the period relative to the tax benefits available and the required effective tax rate for the year-to-date.

Moving to capital structure on slide 18. Our net debt total capital leverage increased only moderately to 13% and remains lower than the fiscal 2008 year end. The end of the second quarter, net debt was $141 million which represented an increase of only $19 million since the first quarter, despite $110 million spent on acquisitions and capital expenditures. Should we need it, we have access to additional borrowing capacity through a committed $450 million revolving credit agreement, led by the Bank of America. As of the end of the second quarter, $329 million remained available to draw on the line. The term of the revolver does not expire until 2012 and at the end of the second quarter, we were in full compliance with our debt covenants. Now let me turn the call back to Tamara.

Thank you Richard. We just completed a second consecutive quarter in an environment that reflected very weak demand and soft prices. We achieved significant cost savings from a variety of tough measures including lower end production to match the soft market demand for product, reducing inventories and implementing tight controls for inventory management and reducing personnel. The $0.25 per share loss that we reported is a significant sequential improvement, actually a $0.96 per share improvement, from the first quarter fiscal quarter of 2009.

Our ability to generate strong cash flows in this environment and our low leverage balance sheet with ample liquidity gives us significant advantages. In this quarter alone, we generated $91 million in cash flow from operations, providing the foundation for us to invest $90 million in four acquisitions and $20 million in capital improvements. And as I said before, we closed a fifth acquisition this week. In an economic environment that has required us and the entire industry to play defense, we have been able to get our offense back on the field. Our operating and growth strategies remain solid and together with export platform, give us the ability to be nimble and opportunistic as we await the return of credit and sustainable growth to the world economies. Now let's open up the call for questions.

Thank you. (Operator Instructions) One moment while we compile a list of questions. Our first question will come from the line of John Rogers of DA Davidson. Sir, you may proceed.

Good morning.

Good morning.

I was wondering if you could talk a little bit about the export markets, some more for the scrap and just regionally, what you're seeing?

Certainly. The export market, as I mentioned in the previous discussion, is significantly better than what we are seeing on the domestic side. It clearly varies by region, although we are seeing strength on both the east and west coast, our export into the Mediterranean and into Asia, and we saw this during the quarter and we've seen a stabilization occur and we -- as we are forecasting demand stabilizing in to the third quarter. The Asian demand has actually been stronger and more consistent over the past quarter than the east coast. Turkey has been in the market recently and has been behaving as we have seen in the past, being in and out of market on a regular basis.

But the lower volumes that you're experiencing and expecting to continue, has that been just a function of the lower prices that you are paying for scrap? Is that bring in as much material over the scales?

I think you are asking two questions there. Clearly, the demand on both sides of the world is lower, and so the volumes as a result are lower. But the demand has stabilized versus what we saw occur in the first quarter. Our biggest constraint is what you are eluding to right now, is inflow of supply. Because as I said, see do see demand stabilizing on the export side. The inflow of the raw materials we are anticipating improving as the weather gets better. The first quarter has always been a weak inflow time of the year for us and more so this year, because the bad weather was not just on the -- just not in the northeast, it was also in the northwest.

Okay, so the lower volumes -- I guess I'm still -- I apologize, confused by the lower volumes that you are looking at for your third fiscal quarter. Relative to the second fiscal quarter.

The quarter-over-quarter lower volume.

Yes.

Well remember, we deferred a number of sales from the first quarter into the second quarter as they were renegotiated at the end of the quarter. So we had significantly more sales in the second quarter than you would have seen even in the normal environment because of the deferred sales. And so looking at Q2 versus Q3, you have to take out the deferred sales in order to look at a more normalized basis. So on an absolute basis, we are seeing lower Q3 sales versus Q2 because of the deferrals, not because of change in demand.

Okay, okay. So the Q3 is more of a balance market?

Yes.

In terms of volume.

A more stabilized market, yes.

Okay, okay. At current prices. Okay, great that helps, thank you.

All right.

Our next question will come from the line of Torin Eastburn of CJS Securities.

Hi, good morning.

Good morning.

Do you have any sense of what the volumes in Q2 would have been without the deferrals?

What I think you need to do for that is, we don't segment that out, or we don't break that out, but if you took a average of the Q1 and Q2 volumes, you'd get a more normalized number.

Okay. In APB, assuming trends stay the same compared to where they are now, do you have a sense of when more expensive inventories will stop being a headwind?

We anticipate the high priced inventory overhang in the auto parts business to be flushed out by the end of the third quarter.

Okay. And then lastly, I know it's just being thrown around now, but the possible cash for clunkers plan, do you have any thoughts on how it would affect you, I guess both in terms of supply and demand?

We do. We have been asked this question by a couple of people and for those of you that aren't familiar with it, the cash for clunkers federal legislation that is being proposed got a big boost this week during President Obama's press discussion of the auto industry. He indicated during his press conference that he'd be working with Congress to have part of the economic stimulus package fund a program to get a generous credit when a consumer replaces an older, less fuel efficient car to buy a new or more fuel efficient one. And there's three separate legislative proposals pending in Congress right now that share this goal of jump starting auto sales, stimulating the economy, helping consumers buy more fuel efficient cars, getting older cars off the road, decreasing greenhouse gas emissions. And depending upon the specific version of the legislation, vehicles seven years or older at this point would be targeted for replacement. And the sponsors of these bills have indicated their intent to attract up to 1 million cars per year to be retired each year. And each sponsor is offering varying levels of dollar amounts to attract car owners to turn in their cars, and what is interesting to note is that California and Texas have had programs that we participated in and our involvement in these programs have clearly brought in many thousands of extra cars to our auto dismantling operations. The big difference, though, is that these programs were hindered by prohibitions against reusing and parting out components.

But the programs or the legislation we are seeing being proposed right now and that's under discussion, we believe would provide meaningful incentives to consumers at much higher rates to take their older vehicles off the roles -- off the road and also would allow for high quality, low cost recyclable parts to be put into good repair in other vehicles. And so on the one hand, we are taking a number of vehicles off the road completely and on the second, repairing and providing more efficient and safely running vehicles. But on a bottom line basis, the legislation we do believe would have positive impact for each of our business units, not just the auto parts business. Clearly, the self serve and full serve auto parts stores will see a rise in the flow of autos and it will increase the supply of used parts for our customer base. The full service stores would clearly benefit most from the seven to 10 year old vehicles as well as over time, increase repair opportunities as more consumers purchase new vehicles. and those would obviously also need repairs over time. The self service more dramatically will benefit by a larger pool of vehicles and at the end of the day, the metals recycling business will benefit, or should benefit by an increased overall volume of obsolete vehicles in the scraps supply chain. So bottom line, this could have a significantly positive benefit for us, once it -- if it goes into effect and takes off.

That was a great answer. Thank you, Tamara.

Our next question will come from the line of Luke Folta of Longbow Research. You may proceed.

Hi, good afternoon.

Good afternoon.

I guess my first question is related to your more macro view on how you see the scrap market in China regarding overall supply and demand fundamentals and how far away from a price bottom we might be in ferrous scrap.

It's hard for me to answer that last question. I wish we knew. If we knew specifically, we clearly would have been able to articulate it in our outlook. But China has clearly been a strong source of demand for ferrous scrap. As I mentioned in my earlier remarks, we have been exporting scrap to China from both the west coast and east coast of our operations. They have a stimulus plan that's been put in place, and that seems to have given them a fair amount of traction for maintaining, sustaining and actually increasing the demand that they have shown for US ferrous scrap exports. So I think that's actually an interesting sign in terms of the ability of an economic stimulus plan to impact, this industry. It's much more concentrated in China in terms of its infrastructure focus than what we are seeing in the US, in the domestic economic stimulus program that's been proposed. But we've clearly seen it as an underlying demand support for the purchases that they've made.

I think I heard you say earlier that you were getting push back in order deferrals in fiscal second quarter I believe you said. I'm just curious if you are still seeing that at all in the current quarter.

No, actually, that's not what we said at all. What we said was that we had renegotiations and cancellations that occurred in the first quarter. Those sales that were either canceled or renegotiated then ended up being sold in the second quarter, that's why our volumes in the second quarter were significantly higher than the first quarter and are also going to be higher than what we anticipate in the third quarter. We are not anticipating cancellations and deferrals that we-- in the -- we are not anticipating that to occur in the third quarter. We didn't see it really occur in the second quarter, the second quarter just absorbed those actions that occurred in the first quarter.

Okay. There was no issue with deferrals in 2Q?

No.

Just one final one regarding the acquisition environment or -- M&A environments. Are you seeing a number of targets out there, and can you talk about are valuations attractive and are a lot of the smaller businesses looking to sell?

Well, we clearly made four acquisitions, as I mentioned, in the second quarter and we closed on a fifth one last week. And so we are seeing opportunities and we're actively in the market. I think that sellers are still more on the sidelines than in the market because they are -- there is still a sticker shock price ceiling that's going on. But we do anticipate that as the market stabilizes, that we will see it more opportunities for acquisitions.

Thank you very much.

You're welcome.

Our next question will come from the line of Sal Tharani of Goldman Sachs. You may proceed.

Hi, how are you?

Hi, Sal, how are you?

Good. Wanted to ask you on the China again, I was looking at some statistics that China actually imported in January and February, about 1.1 million -- greater than 1.1 million ton of scrap. If I'm not mistaken, it's the first time since November of 2005 that they exceeded a 1 million rate, and I just wanted to see how you see now -- we have seen Chinese have brought in a lot of iron ore also and built too much inventory of steel, which has clearly gone up. Have you seen that activity steady, or has it come down in recent weeks?

The demand from China, we've seen continue steady. All the purchases in sales ebb and flow throughout the quarter, but as I mentioned before, we saw strengthening demand over the course of Q2 and our outlook for Q3 is stabilized demand.

That is China will play a big role in your outlook?

China will continue to play a role in our outlook.

You think China will be a major buyer again for the quarter for you -- from you versus Turkey, which has been some time in the past?

I think overall, on a relative basis, we are seeing China -- if you take a look at the year-to-date and our forecast, that China will -- or has been and will continue to be a bigger player right now than Turkey was over the course of the last couple of years when Turkey was obviously the strongest player. We are -- in terms of our fiscal year, we are halfway through now, so it would be unlikely for us to see that shift for the course of the whole year.

Okay. Going to your steel business, I notice that you have -- you said you ran the mill at about 33% utilization rate. I remember last quarter you had a view you may actually run it better than the first quarter because you will run out of the inventory -- you were selling from your own internal inventory. So apparently demand in that region has fallen off more than you had expected, looks like. But you say that you will have a better margin despite lower prices and flattish volume. Is that because of the scrap price has come down, is that the reason the margin is going to get better?

Well we did run the steel mill in the first quarter more than we ran it in Q2 -- or than at the end of Q1. Volumes were still anticipating to be weak, demand we're still anticipating to be weak and prices may fall off. And so that's why you see a non -- you see an improving -- it will be sequentially, Q1 to Q2 to Q3 is going to improve in the steel mill. But fundamentally, we need to see a return of credit from to the market. We need to see the kick start of the economic stimulus program before you see a meaningful level of profitability at the mill. It has and will -- and we anticipate will continue to contribute significantly to our positive operating cash flow.

The demand, who is competing with you in the region, because I don't think there is much import coming in. What's the reason for the price decline? Is that you are trying to get more business of the providers over there to gain some more market share, that's why the prices are falling? Or is it a function of just scrap falling and surcharges are falling?

There is just low demand. You are right to point out, Sal, that we are one of only four mills on the west coast, and that gives us the unique operating platform, but there is fundamentally very little demand. Our end users, our customers are running down their own inventories and their projects, their pipelines are very weak.

So the backlogs are actually declining as the projects are being finished.

Well, they are certainly not increasing, and they are certainly wearing down their inventories. So whether they are declining or flat, they are just very, very low.

And the last question, where in the two businesses do you think you will being taking more headcount or cost out over the next quarter or two?

Well we are just about there, companywide. I mentioned in my remarks that we do see some reduced headcount occurring in the steel manufacturing business. But we are -- except for that one segment, we are there.

Thank you very much.

Thank you.

Our next question will come from the line of Eric Glover of Canaccord. You may proceed.

Good afternoon.

Hi Eric.

I was wondering if you could assess the state of the domestic market in terms of scrap supply. For example, if demand does pick up materially overseas for you, is there material waiting to come into our yards with better weather and some improvement on prices, or is there a possibility that there might not even be enough material?

Well, I think that with the decrease in the inflows that we seen for the last quarter now, I'm not sure that there is a lack of material available. We think that with the dramatic reduction in demand for scrap that caused prices to decline so precipitously in the first quarter, that we saw in the second quarter not only the impact of weather on both coasts, but also the fact that scrap suppliers have been reluctant to collect and sell scrap at these dramatically lower prices that occurred in the first quarter and the first part of the second quarter. And people are also just not replacing recyclable goods as frequently as they have in the past. And consequently for all of those reasons, flows have been reduced. In the southeast, which is the only place where we take in a significant amount of industrial scrap, obviously, manufacturing activity has declined and so those flows have been reduced. But we do think that improved weather conditions coming out will help increase the scrap inflow supply. And we also think that suppliers are getting accustomed to new lower pricing levels and that those inflows will begin to stabilize. And over the course of the last few weeks, we have seen overall strengthening in terms of the inflows. It's important to note that while today is April 2, this quarter that we are reporting on began in December. And so when we look at the inflows for that occurred in the last quarter, you really see a different scenario than what we are experiencing today.

Thank you, and my second question is on SG&A, I may have missed this in your prepared comments. But it jumped up on the February quarter versus November quarter. What was that related to specifically, and what can we assume is a good sort of baseline run rate going forward, given potential additional cost reductions?

Hi, Richard Peach here. You asked about SGA being higher in Q2 versus Q1, that's because in Q2, of course, we had the additional bad debt reserves of $8 million in our $48 million for the quarter. So take that out, you're on a run rate 40, and in Q1, we had $43 million of SGA that actually included a credit item of around $5 million, which, if you took that out, you would be 48. So quarter-on-quarter, the underlying run rate is actually down when you strip out one-off items. Does that answer your question?

Yes it does, thanks a lot.

Our next question will come from the line of Evan Kurtz of Morgan Stanley. You may proceed.

Hi, good morning.

Good morning.

Most questions have been asked, but i still had a couple more. First is with coking coal now around 130, which is relatively high historically, and iron ore, likely to sell somewhere relatively high versus where you have seen it historically. Are you starting to see an increase from your blast furnace customers buying scrap? Are you starting to see new blast furnace customers approaching you for scrap?

Good question, but before I answer it, I do want to say I thought you were going to be higher in the queue so you could get the question on (inaudible) that you noted in your -- in the piece you put out last week, so hopefully we got that question answered for you.

Yes, I was slow on dialing in today.

Okay. Well, on your blast furnace question, this is a trend that we have been seeing for the last three years, increasing purchasing by blast furnace users of scrap, and going up to anywhere between 20% and 30 % of their input. And two years ago, three years ago, went we started to see this trend initially, we saw it being driven by focus on a eliminating or reducing -- not eliminating, but reducing greenhouse gas emissions. Now we're seeing it really being driven by the point that you're making, which is the cost advantage to scrap. And so we are seeing more of that interest and we do think that's driving some of the demand that we are seeing out of Asia.

Okay. The other one is more of an accounting question. I was a little surprised by the 61% tax rate this quarter. I was hoping you could provide some guidance for next quarter. Now with profitability rising, is it something more normal towards the -- through the high 30s or so?

Yes, I think for modeling purposes, it's obviously subject to performance, but historically, our tax rate run in the 35% to 38% rate. And given our effective rate for the year-to-date's 40%, I think modeling in the 35% to 40%, band is probably the right thing to do.

Okay, great. Very helpful, thank you.

Thank you.

Ladies and gentlemen, this concludes the question and answer portion of today's conference. I will turn the call back to Mr. Stone for any closing remarks, sir?

Thank you, this is Tamara Lundgren. I want to thank everyone for taking the time to join the call today, and we look forward to talking to you next quarter. Thank you.