Radius Recycling Inc (RDUS) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 Schnitzer Steel Industries, Inc. earnings conference call. My name is Fab and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Rob Stone, Vice President and Treasurer. Please proceed.

Thank you, operator. Good morning. I am Rob Stone, the Company's Treasurer and primary investor relations contact. I would like to thank everyone for taking time out of their busy weeks to join us today. In addition to today's audio comments, we have prepared a set of slides, which you can access from our website at www.schnitzersteel.com.

Before we get started, I need to remind you that the Company's presentation and discussion today contain 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 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's Discussion and Analysis section of the Company's Form 10-K for the fiscal year ended August 31, 2008 and the most recent quarterly report on Form 10-Q, which should be filed later today.

I will emphasize that the forward-looking statements made on the call and contained in the slides posted on our website, 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 President and Chief Executive Officer.

Thank you, Rob, and good morning, everyone. Welcome to our fiscal 2009 third-quarter earnings webcast and conference call. I am 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 released our results this morning for the third quarter. Compared to the second quarter, operating income and margins improved in all three of our businesses. And on a consolidated basis, we just about broke even, with a $1.5 million net loss on revenues of over $410 million.

In the Metals Recycling Business, the differential in favor of export versus domestic demand was apparent throughout the quarter. The quarter saw continued demand for our scrap products from China and the revival of demand in a number of other Asian countries. Consistent with this strengthening demand, selling prices for new export orders trended up as the third quarter progressed. However, average export prices on the volumes shipped during the quarter declined from the prior quarter, reflecting the prevailing market conditions that existed at the time this order took place. Pressuring our margins in the quarter was the continued constricted supply of raw materials and purchase costs, which declined less than sales prices.

Our Auto Parts Business returned to positive operating income performance, reflecting the benefits of a full quarter of cost containment actions, seasonality and an increased flow of cars.

In our Steel Manufacturing Business, the domestic demand for steel products remained low, resulting in an operating loss. But our cost containment actions and variable cost structure resulted in strong sequential improvement. Our Steel Manufacturing business ended the quarter operating at over 50% of capacity.

At our steel mill, we also continued to expand our market capabilities, and recently qualified to supply the nuclear industry with steel products. I will speak about that a little later.

During the quarter, we generated $80 million in cash from operations, increasing our full-year cash flow generation to $241 million. We reduced net debt by a further $64 million, continuing our focus on maintaining a strong balance sheet. And we also continued executing on our growth plan by closing our fifth acquisition for the fiscal year and by further investing in technology to improve our (inaudible) and our operating efficiencies.

Looking forward, demand in both the export and domestic markets appears to be increasing. Customer inventories appear to be low, as supply continues to be the pacing item. All three scenarios are the reverse of what we saw at the beginning of our fiscal year.

Now let me turn to a review of each of our businesses, starting with our Metals Recycling Business. Our Metals Recycling Business achieved another quarter of positive performance, recording operating income of $6 million. While certainly not at the level that approaches its norm over the last few years, we think that it is worthwhile noting that since the start of the financial crisis, our Metals Recycling Business has posted only one quarter of operating loss.

We have been able to achieve this due to our flexible operating platform that allows us to access markets wherever demand is greatest. But most importantly, we have been able to achieve this due to the commitment of our employees to cost containment and continued operations excellence in the face of some very challenging markets and some very tough decisions.

In the third quarter, we saw a broadening of international demand, with China continuing to lead our market, and with Southeast Asia and the Mediterranean region remaining active purchasers. Export prices remain higher than domestic prices. Average ferrous sales prices for shipments in the quarter were lower than average ferrous sales prices in the second quarter. Our sales of ferrous scrap exceeded 1 million tons, similar to the second quarter and just slightly less than sales achieved in the third quarter of our fiscal 2008. Non-ferrous sales volumes and prices both improved from the second quarter.

On the supply side, a continued challenge during the quarter was the availability of raw materials, as the economic slowdown and lower market prices constrained supply. Nevertheless, to keep up with higher expected demand, our Metals Recycling Business increased purchases to a level of intake that approximates the 2008 fiscal year's quarterly average. The impact of the constrained supply market compressed our operating margin for the quarter. We can look at some additional detail on the next couple of slides.

Turning to slide 5 and looking at the quarterly comparisons, quarterly revenues for the Metals Recycling business decreased 6% quarter-over-quarter to $318 million, due primarily to the decline in average ferrous selling prices over the previous quarter. But operating income improved, and that was largely due to the benefits from a full quarter of our cost containment initiatives, as well as to the pickup in non-ferrous prices and volumes.

If we take a look now on slide 6, we have set out the quarterly detail here and trends for our Metals Recycling Business prices and volumes. As you can see from the chart in the top left corner, average ferrous net sales prices of $223 per ton for the quarter were 12% less than the second quarter of fiscal 2009. During the quarter, the overseas markets continued to be a better place to sell recycled metals than the domestic markets, and our export platform continue to provide us with greater flexibility to maximize revenues.

Looking now at the chart in the top right corner, average non-ferrous sales prices for the quarter were 13% higher than the second quarter of fiscal 2009. Non-ferrous prices stabilized in the first half of the quarter and increased in the second half of the quarter.

The bottom two charts display our ferrous and our non-ferrous sales volumes. You can see that volumes were strong, with ferrous volumes exceeding 1 million tons for the quarter and non-ferrous volumes increasing 17% from the prior quarter to 90 million pounds.

We take a look at the end markets on slide 7. You can see in the top left corner of this slide the various export markets we served in the third quarter. China was strong, and we made a number of shipments to Southeast Asia and the Mediterranean countries. In total, we exported to eight countries, with Asia accounting for 84% of our export shipments.

The bottom left corner of this slide shows that while our export shipping costs fell dramatically during both the first and second quarters of fiscal 2009, they increased in the recently completed third quarter. However, when looking at this chart, you should note that the increase in actual freight costs this quarter was mostly due to our sales mix and our increased shipments from the Northeast to Asia. Actual export freight rates increased just slightly from the second quarter, and of course, they were still well below the fiscal year 2007 and 2008 unit costs.

Finally, turning attention to the right side of this slide, this graph illustrates the significant difference between the export and domestic demand and consequent sales. During the last two fiscal quarters, you can see the significant demand and sales decline in the domestic market versus the export markets, which is what has enabled us to sell total volumes, although a different mix, that are only slightly below those of the same periods in 2008. You can also see that while year-to-date sales volumes are down 11%, export volumes are actually up 11%, illustrating our flexibility to sell to export markets when the domestic markets are slow.

Turning to slide 8, we expect to see cautious but improved market demand and prices in the fourth quarter for our Metals Recycling Business due to low scrap inventories at steel mills worldwide. We expect both ferrous and non-ferrous net prices to be higher than the third quarter averages. And we expect export freight rates to approximate those of the third quarter.

Demand for ferrous and non-ferrous metals are expected to increase approximately 15% to 20% from third quarter volumes, with non-ferrous volumes expected to increase by about 10% to 15%. As always, both ferrous and non-ferrous sales volumes are highly subject to the timing of shipments.

We anticipate that the fourth quarter operating margin should improve from the third quarter due to strengthening of both sales prices and volumes, although the supply of raw materials is expected to remain challenging and could pressure margins.

Let's take a look now at the Auto Parts Business. As forecasted, the Auto Parts Business returned to positive operating performance in the third quarter and booked a $3 million operating profit, which is an $8 million improvement versus the second quarter. There were a number of factors which contributed to the sequential increase in operating income.

We were able to increase the volume of purchased cars. We increased the parts sales at both our full-service and our self-service operations. We benefited from higher core prices and revenues. We sold through substantially all of our high-cost inventories. And lastly, but certainly not least, we realized the benefits of a full quarter of our cost-containment actions.

If we turn to slide 10, on this slide, we can see the quarterly results for revenue, operating income and cars purchased for our Auto Parts Business. The top left-hand chart reflects an increase in third-quarter revenue from the prior quarter. Driving this increase was an increase in car volumes, higher prices for cores and an increase in parts sales.

The top right-hand chart reflects the operating profit of $3 million and the sequential improvement from the first and second quarter of this fiscal year. As with the Metals Recycling Business, the supply of raw materials for our Auto Parts Business was challenging, although it eased slightly over the course of the quarter. As you can see from the bottom chart, purchased car volumes increased 8% from the second quarter.

Looking forward -- now on slide 11, looking forward to the fourth quarter for our Auto Parts Business, we expect core and scrap revenues to improve from the levels that we saw in the third quarter, with higher volumes, higher scrap prices and higher core prices. We expect sequential parts sales in the fourth quarter to be stable. Based on the higher volumes and improvement in core and scrap prices, operating margins are expected to remain positive and to improve relative to the third quarter.

Now let's turn our attention to the Steel Manufacturing Business. Turning to slide 12. Are we on that? Okay. The Steel Manufacturing Business --. Sorry. We have got -- are we on slide 12? Okay.

Turning to the Steel Manufacturing Business, the Steel Manufacturing Business reported sequential operating margin improvement from the second quarter, posting an operating loss of $5 million due to continued weak domestic demand for steel products. We executed on the plan we mentioned on our last call to run our rolling mill at lower production levels than demand warranted in order to reduce finished goods inventories.

While our production did pick up in May to slightly more than 50%, for the quarter as a whole, we produced at a little over one-third of capacity. During the quarter, we also affected further cost-containment actions, primarily additional labor reductions. The lower production volume necessitated a $3 million FAS-151 expense for production costs that could not be capitalized to inventory. However, by achieving the lower inventory levels, we have freed up our ability to increase production to meet market demand and to run our operations more efficiently.

Toward the end of the quarter, prices for products to be delivered in June started to tick up after several months of declining prices.

We did continue to invest in the mill to expand our market capabilities, and we successfully completed a 10CFR50 NQA-1 audit to supply the nuclear industry with steel product. Working with Consolidated Power Supply out of Birmingham, this quality program, which by the way is extremely difficult and has taken several years to achieve, allows us to supply specialty steel product for the nuclear industry.

For those of you on the call who are wondering what the 10CFR50 NQA-1 audit means, it is the standard of quality for rebar used in nuclear facilities construction, and passing this stringent audit means that we should be well positioned to be the supplier of choice to this industry.

Turning to slide 13, as you can see from the charts on this slide 13, the domestic steel markets in this fiscal year have been weak, and the third quarter results are reflective of this market. Revenue was down 10% relative to the second quarter in fiscal 2009. Finished steel prices were down 8% quarter-over-quarter and more than offset a 2% increase in sales volume compared to the second quarter. But most importantly, our operating loss was reduced by over $1 million as a result of realizing the benefits of further cost containment initiatives undertaken in the third quarter and as a result of the impact of higher production volumes.

Prices declined month over month through the quarter, but began to stabilize at the end of the quarter. And demand in the last month of the quarter was stronger than the first two months of the quarter, all of which may signal a bottoming. In addition, we saw virtually no imports.

Turning now to slide 14, we continue to believe that the Steel Manufacturing Business is uniquely situated to serve the domestic West Coast and Canadian markets when they recover. However, unlike the Chinese stimulus package, which has clearly had a positive impact on their country's investment in fixed asset infrastructure and therefore market demand for steel and scrap, the US domestic stimulus package has yet to produce a significant impact. But there are signs that the US Federal and state stimulus initiatives may be working their way through the pipeline, as we see West Coast bid lists for construction projects expanding. Although the activity is concentrated right now on bidding rather than on ordering.

At the federal level, the recent stimulus package does include $47.5 billion for transportation, including $27.5 billion for roadways and bridges. And looking ahead, the House recently introduced legislation to reauthorize surface transportation programs totaling $450 billion.

Several states have also been active. In Oregon, the state legislature just enacted a $1 billion transportation funding measure with 37 specific projects to be built over the next 10 years, including $192 million for a major construction project which is within 20 miles of our steel mill in McMinnville, Oregon. However, it may be quite a while before we feel the sweet spot from these programs.

Accordingly, until we see a sustained increase in market activity, our expectation for the fourth quarter is for continued soft demand and prices. We anticipate the domestic sales volumes for finished steel products will be higher than what we saw in the third quarter, and we expect to produce at slightly over 50% of capacity.

We expect prices to improve from the May levels, but since prices steadily decreased in the third quarter, even with the fourth quarter price increases, we expect the average pricing for the fourth quarter to be slightly below the average pricing for the third quarter due to the higher March and April prices.

As a result of higher production and sales volumes, margins in the fourth quarter are expected to improve from the third quarter to breakeven or slightly negative levels. We expect to continue to see low import activity. As it has all year we expect our Steel Manufacturing Business to continue to contribute positive operating cash flows.

Now, let me turn this presentation over to Richard Peach, our CFO, who will provide some more color on the financials for the quarter.

Thank you, Tamara, and good morning, everyone. I will cover all the financial highlights for the third quarter, including our performance trends, our cash flow and our balance sheet.

Firstly, our sequential performance. Underlying our reported third-quarter results is an improving trend of financial performance in each of our businesses. In our largest segment, the Metals Recycling Business, only our first quarter showed an operating loss. And since then, we have had an improving trend of operating income in the last two quarters.

Our Auto Parts Business has also improved steadily since the low of the first quarter, and as we heard earlier, achieving positive operating income in the third quarter.

And in our Steel Manufacturing Business, we have reported sequentially improving performance, while at the same time reducing inventories by producing at less than demand. This emphasis on sequential improvement in each of our three businesses has flowed through to steady reduction in our reported loss per share in each of the last two quarters.

Now, turning to our cost base. Our cost-containment program has been a significant contributor to the sequential performance improvement. Since the last fiscal year-end, we have reduced our employee workforce by 459, or 12%, even after adding new employees from acquisitions. In that same time period, we also reduced our contract workers by around 350, who had been brought in when the market was at its peak last year.

In addition to workforce reductions, we have reduced operating errors, postponed salary increases, suspended our 401(k) match and cut discretionary expenditures, including travel and outside services, thereby ensuring that our cost base matches the current operating environment. Because we started this cost-containment program last year when the market changed, our third-quarter results reflect the benefit of a full-quarter run rate, which we will continue to see into the fourth quarter.

Now moving to our cash flow. Our third-quarter cash flow from operations was a positive $80 million, bringing the total fiscal year-to-date cash flow from operations to $241 million. This is the third quarter in a row of significantly positive operating cash flow, with the positive cash in the third quarter arising primarily from expected reductions in inventories and accounts receivable.

Year-to-date, we have achieved a free cash flow of $97 million, even after investing $144 million in acquisitions and capital expenditures. In summary, we have strengthened our balance sheet at the same time as growing our business.

Note that during the remainder of the fiscal year, we plan to invest an additional $10 million to $15 million in capital improvement projects, which will result in CapEx for the year of around 30% less than fiscal 2008.

Now taking a look at working capital. Since our fiscal 2008 year-end, we have reduced our working capital by $157 million, or 36%. And in the third quarter, inventories and accounts receivable continued their downwards trend. The total value of our inventory was down 11% from the second quarter at $211 million, and is now less than half the inventory value of nine months ago, when the market began to change. Accounts receivable was $86 million and we had no significant collection issues in the third quarter.

Moving to capital structure, our net debt to total capital leverage decreased to 7.6% at the end of the third quarter. Net debt was only $77 million, which represented a further reduction of $64 million from the previous quarter-end. Our balance sheet strength position does well as the market improves, and 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. And at the end of the third quarter, we still had $336 million available to draw on the line. The term of the revolver does not expire until 2012, and at the end of the third quarter, we were at full compliance with our debt covenants.

Finally, a couple of unusual items. The third-quarter results included a gain of $7 million related to a final settlement on outstanding contractual matters that had arisen from a 2005 dissolution of our joint ventures with the Hugo Neu Corporation. Of the total gain, $5 million is included below the line in other income, and just under $2 million is within the operating results of our Metals Recycling Business.

The year-to-date effective tax rate is a benefit of 40%, and the unusually low third-quarter expense of 13% reflects a combination of the small pretax loss and an updated projection of tax benefits for the year. The year-to-date rate of 40% is a better guide for the full year as a whole. Now let me turn the call back to Tamara.

Thanks, Richard. In a quarter in which we continued to face a challenging market environment, we saw several positive signs -- a second consecutive quarter in which all three of our businesses reported improvements in financial results; demand for our products continued to strengthen as the quarter progressed; and there are indications that we may have found the bottom, particularly in the domestic markets, which previously had lagged economic activity overseas.

We continued to generate strong operating cash flows and to further reduce debt to give us the strong balance sheet that enables us to continue our growth. All of these factors provide us with the confidence to continue making investments to grow our businesses through acquisitions, investments in technology and continuous improvements to our operations.

We remain optimistic about the future. To be sure, challenges remain, but our flexible sales platform, our competitive cost structure and our demonstrated nimbleness in adjusting our production to match market demand put us in pole position as the markets in which we operate start to revive.

Now let's open up the call for questions.

(Operator Instructions). Eric Glover, Canaccord Adams.

Hi. Thanks. Just wondering about the mix of ferrous shipments overseas. You mentioned that 84% went to Asia. I am wondering sort of what was your average last year in terms of the mix over to Asia and then towards the Mediterranean region?

Well let's see, Eric. We will take a look and see if we have got some mix in front of us for you. But I think what is interesting to note, while we are looking at that number for you, is that what we are seeing in terms of demand in Asia is we are seeing real demand in China, and elsewhere in Asia and Malaysia, Indonesia, Thailand, we are seeing real demand as opposed to stocking. In Q3 of '08 -- I just got the numbers -- the Asia sales were 56%, so it is higher. The other demand factor that we are seeing is an increase from blast furnaces year-over-year.

Okay. Thanks. My second question is is there a way for you to quantify or speak qualitatively about how much your inflows of industrial scrap have fallen, and whether you think that some of that reduction that you've seen is possibly permanent, given what is happening in the auto industry?

Well, as you know, where our operations are, we are less exposed to the economically depressed areas of the Midwest and the Southeast as other companies. So in our operations in the Southeast, we actually don't have a shredder. And that is where we have -- that is where most of our manufacturing scrap volume comes, is in the Southeast. So it is not as much of an impact clearly in the Northwest and West, and has some impact in the Northeast.

I think, you know, as you are alluding to, the reduced economic activity is the biggest contributor to lower supply. You've commented on that before, and I think that is what your question alludes to. And the raw material constriction, that condition is likely to remain, we think, until the domestic economic picture improves.

Okay. But you don't see any sort of permanent decline in industrial scrap flows?

It is only a function of manufacturing activity. So if our manufacturing activity is going to be permanently reduced, which a lot of people are really focused on trying to avoid -- look at GE's comments last week and the like -- that would be -- that would be the only indication that that would be permanent. So I think the country and the industrial leaders in the country are far from ready to give up manufacturing activity in the US.

Okay. Thanks very much.

John Rogers, D.A. Davidson.

Hi, good morning. I think it was in your comments, Tamara, you talked relative to the steel segment, a charge in there for costs that you couldn't put into inventory. Could you go over that (multiple speakers)?

Right, FAS 151.

Yes. I'm sorry. What was that?

Yes, I will turn it over to Richard.

Hi, John. It's Richard. This is a technical accounting standard. And as during the quarter at certain times we were producing at less than demand, under the accounting rules, there are certain costs that you cannot include on your balance sheet; you have to take the expense. But it was only $3 million, and it is on a reducing trend. And next quarter, as our utilization is expected to go up, we would expect that to be a smaller amount and less of a factor.

Okay, great. And then in terms of scrap prices and what you are seeing right now, you talked about the improvements coming into the August quarter. And I was wondering if you could tell us what sort of pricing you are seeing right now and as it relates to freight rates. I know it was included in the slides, but the conference call was a little bit ahead of the slides, and that freight rates slide, I couldn't see the numbers on that. I don't know if you can provide those to us.

Sure. Let me talk first to your question regarding prices. We actually, as you know, don't disclose those. But if you look at published reports, the sales are happening at the high 200, low 300 levels right now. And demand is strong across the board.

Freight rates are staying relatively stable. The composition of our freight rates is really a function of our sales mix, so when we ship out of the Northeast to Asia, you are going to see higher freight rates than shipping out of the West to Asia.

Okay. And the freight rates you saw in the recent quarter were what?

The freight rates in the recent quarter were in the mid-30s.

Okay. All right. And I mean, you referenced the sequential improvements in the scrap pricing. And I know in the past couple of years, actually going back quite a ways, seasonally this has been the strongest period of the year. And I guess I am just trying to distinguish between how much of this is a seasonal benefit versus real improvement in demand. Any thoughts you might have there.

Well, you are right. The seasonality -- this is a good season for us. But we have -- our customers have low inventories and the destocking, that really is what went on in -- we think in the second quarter, which is why you saw prices falling as dramatically as they did. We think that the destocking is at its end, so we have got a low inventory buildup that is separate and apart from general seasonality that you would normally see in this quarter. And so we think it is more than just low seasonality -- or just -- we think it is more than seasonality and it's a function of low inventories and a buildup. And then what I mentioned before is real demand in Asia.

Okay, real demand for steel or real demand for scrap?

Real demand for scrap -- and for steel, because it is not going into inventories; it is going to melt.

Okay. And your comments relative to the greater use in blast furnaces, do you get the sense that you are taking share from iron or just it's an adjustment in production rates?

I think it is a couple of things. I think one is it's an arbitrage on prices. And I think that it is also a focus on environmental concern.

Okay, that makes sense. All right, thank you.

You're welcome.

Sal Tharani, Goldman Sachs.

Good morning. How are you?

Good, thanks.

A couple of questions. You mentioned several times low inventories at customers. Are you -- I mean, I know that in the US, the mills have significantly destocked their scrap inventories and other raw material. Have you seen similar in other parts of the world? Because if I look at your shipment volumes, they have remained strong throughout the last couple of quarters, and there was never an instance where you actually dropped your scrap shipments significantly. So have you really seen destocking happening in Asia also at the mills?

Well, you're absolutely right. Our volumes have stayed very steady across the course of the year. And so we are looking at reports and we are looking at actual infrastructure demand throughout China that you have commented on and others have written about extensively. And so the upward trend going into the fourth quarter, we think, is a function of destocking coming to the end, and so we are forecasting higher volumes.

Okay. You also are exporting out of the East Coast to Asia. Is that because you don't have enough in the West Coast or is this something you generally normally do? Because that is a longer route and I believe you pay a higher freight rate for that.

That's correct. It is the long way around; we do pay higher freight rates for that. And we do it when pricing and freight makes it make sense and when demand is there. And you have seen the activity in Turkey and the Mediterranean be in and out of the market over the course of the last year, and really out of the market for the first quarter. So when that happens, and demand, which is stronger in Asia, occurs, and prices in freight are right, we ship out of the Northeast.

China, I remember when the prices went really high in 2004-'05, they actually stopped buying scrap. And they have resumed, and now scrap prices are, as you say, in low 300s. But you still see them coming back even at that prices for more scrap?

We don't see China going away. And I think if you take a look at 2004 and you take a look at what is going on in China now, whether you're looking at the World's Fair or whether you are just looking at general infrastructure build, that the demand is different than it was four or five years ago there.

I believe infrastructure is demanding more long (inaudible), is probably where demand for scrap is obviously rising also.

That's right.

How difficult it is now versus before to buy scrap -- procure scrap? I know it is difficult. But I remember that you have been, I mean, squeezed in the past also. Like you remember when the container shipments increased and there was a tough competition and mills were coming back -- I believe it was 2007 or 2008. Is it more difficult now than before, or is it you have seen these kinds of conditions of procuring scrap -- difficult conditions in the past?

Well, we are seeing a -- we are seeing the volumes -- we aren't seeing a change so much in volumes as we are in price. The scrap flows improved coming out of the winter months, and we were able to procure the quantities that we required to support the increasing export sales demand.

I think that as prices continue to go up on the sales side, that that should ease flows. And I say that in terms of where we operate, for the most part, versus in the Midwest and some of the more economically depressed areas of the US.

And last question, what is the gap between now the container shipment freight rates and the bulk ship? Is there a big difference still in these containers much cheaper than bulk rate?

Well, containers are getting harder to obtain. And again, as you know, where we operate we don't have a lot of competition from containers because we are not at large container ports. But there is less trade that you know, and that puts some pressure on container availability. And then there is port congestion that is going on in China as well. So we don't see a lot of that impacting what we do.

Great. Thank you very much. Thanks a lot.

You're welcome.

Timna Tanners, UBS.

Hi, good morning. Wanted to follow-up and understand a little bit more about the availability of scrap. It sounds like you are just clarifying that perhaps it is more of a price than availability. But it sounds like if you don't have a lot of operations in the Midwest, you may or may not have much of an impact of some of the restarts of the auto capacity, or do you expect that to impact you?

That's correct. That is correct.

So probably greater flows from auto less helpful for you guys?

Greater flows from auto manufacturing, is what you're saying?

Exactly, yes.

Well, where that will help us is that will typically reflect stronger economic activity generally. And so that will be a help to us on a national basis as increased economic activity. But in terms of the scrap manufacturing waste that comes out of the auto industry, we have never been a buyer of bundles.

Got you. Okay, and then how much are you seeing greater competition as some of the mini-mills domestically need to start to replenish inventory? Is that part of what is making the cost of procuring scrap domestically more expensive?

Well, again, where our geographic platform is, we are not located in places where we typically compete with the domestic mills for scrap. In the Southeast, where there is a concentration of mini mills around our operations, we don't have shredders.

Okay. So it's really more a function of the economic activity constraining the flow of scrap and your availability of scrap from that standpoint?

That's correct.

Got you. Okay. And then just switching to the balance sheet, I know where to get to get some more detail there. But when you talk about working capital liquidation, is it fair to say that that kind of levels that we have seen recently are probably less likely to repeat themselves as you work down inventories?

It's Richard here. Yes, you are absolutely correct. I mean, having a high peak in 200 -- and having produced the $240 million of operating cash flows and having taken down our working capital by $160 million, we have really taken the biggest chunks out of our balance sheet. So I wouldn't expect going ahead to see such large reductions, especially given that selling prices are beginning to move up.

Okay, that makes sense. And then how do you think about uses of cash. I mean clearly you have alluded to the potential for acquisition. But it seems like there is a lot of competition for some of these smaller and even medium-size scrap opportunities, you know, some of the other companies. Not just scrap companies, large scrap companies, but steel mills are also looking to continue to firm up their vertical integration. So how are you seeing that landscape right now?

Well, on the acquisition side, we have done five acquisitions over the course of our fiscal year, which began September 1. And so I think that reflects the strength of our pipeline and our ability to get deals done. So we will continue to use cash to make acquisitions.

We will also use cash for CapEx. And year-to-date, we are slightly ahead of depreciation now, and we are focusing our CapEx in growth CapEx, R&D technologies, environmental, safety and then just general repair and maintenance. And then lastly, we will buy back shares to offset dilution and as we see opportunistic entry points into the market.

Okay. And then the final question is I guess I just didn't really understand the comments about the Hugo Neu gain. I didn't see much commentary on that. Could you clarify what that is about and if that is a one-time item or what that relates to?

It's Richard again. Yes, it is a [one-time] item. It goes back to the dissolution of our joint venture arrangements with Hugo Neu Corporation. That happened in 2005. And what happened at that time was we recorded a net gain on that transaction that went through our other income line. That net gain was net of certain outstanding contractual items at that time that resulted in a reserve obligation on our balance sheet.

During the third quarter, we reached our final legal settlement on these items with Hugo Neu Corporation, and as a consequence, we were required to take that reserve out of our balance sheet. And $5 million of it went through other operating income -- other income, rather, which is below the line, so it was not part of our operating results.

And you mentioned another $5 million that was above the line -- it was like $2 million above the line.

There was $5 million that was below the line through other income, and there was under $2 million that went to our operating results, because that related to our operating relationship with the Hugo Neu Corporation companies post the dissolution of the joint venture.

Okay, so those are one-time gains that you wouldn't expect to see any further repercussions from?

That's correct.

Got you. Okay, great. Thanks very much.

Torin Eastburn, CJS Securities.

Hi. I was hoping to better understand how the constrain in supply is hurting your margins, and I guess kind of why you're having trouble passing increased price on?

Well, typically when supply falls off, then there is more focus on purchase prices. And I think that what is happening here is that purchase prices are -- or in our last quarter, purchase prices didn't fall as quickly as sales prices.

But I think what you have to focus on is the timing of our reports -- of our reporting of earnings in terms of how we manage our business. You know we sell forward. So our sales prices reflect what we ship in the quarter. Our purchase prices reflect what we buy in the quarter. So that is why we always talk about cash spreads and our positive cash spreads, because typically our cash spreads are what we track and we typically are able to expand those in rising markets. Our reporting is just always challenged by the timing of purchases versus shipments, and so that is why it is important to look at our performance over multi periods.

Okay. Did you have any sales in the quarter that were at no profit due to the inventory write-downs?

No, we did not have any inventory write-downs in the quarter in our Metals Recycling Business.

Okay, thank you. And in the Auto Business, you mention in the press release that the self-service business is down 26% year-over-year. And intuitively, that would seem like a business that would perform fairly well in this kind of environment. Do you have a sense of what is going on there?

There are a couple of things going on there. The major differential is the drop in scrap and core prices on a year-over-year basis, and that is why it is important to look at it sequentially. Last year at this time, prices were at historical highs and way above historical averages. And so that is the biggest differential.

Okay, thank you. And then last one, in your guidance, you say you see scrap demand increasing, and that you would expect a 15% to 20%, I think, sequential improvement in foreign volumes. That is, I think, pretty typical seasonally. So are you being conservative or is there something I am missing?

Well, we think that is accurate in terms of what we are seeing right now. We talked about the seasonality before. This is a -- this quarter typically reflects seasonality. But going forward, we are continuing to see strong demand, so that is what we see for the fourth quarter.

Stronger the demand than you would expect to see seasonally in the fourth quarter?

Our guidance is sequential, so stronger demand than what we saw in Q3. When you look at it on a quarter-over-quarter or on a year-over-year basis, it is very difficult to do that comparison, because last year was just such a record year. If you recall, our fourth quarter last year was our third highest year in the Company's 100-plus-year history.

So our guidance is a function of our view that demand is going to continue to strengthen, that destocking is over and that the volumes and prices in our Metals Recycling Business are expected to be up, as are non-ferrous volumes and prices.

Okay, thank you.

Evan Kurtz, Morgan Stanley.

Hi, good morning. We talked a little bit on some of the other questions about some of the issues facing prime scrap generation. I was hoping we could get some more color on obsolete scrap generation. Specifically, you have been hearing some anecdotal evidence that hulk prices have been lower, so a lot of collectors and [fee] yards might be sitting on unprocessed scrap. And if we see prices move forward here -- move up here in July -- it sounds as they are -- could we see a lot of that supply start to hit the system all at one time?

Well, we are hearing the same anecdotal information that you are, and people's memories of where prices were are still less than a year old. So there may well be some hoarding of inventories waiting for higher prices. And we would welcome the release of that.

Got it. And last question, you are pretty close to breakeven on the manufacturing business this quarter. With operating rates for a full quarter above 50%, as you say, do you think you are going actually go into the black in the fourth quarter here?

Well, our breakeven analysis is really a function of demand/volume, sales prices and raw material costs. And so -- and demand is going to be probably the biggest driver here. If we can get our production continuing to increase from those levels, we've forecasted to breakeven or slightly negative. And the higher that demand and production goes, the higher the chance for it to go into the black.

Okay, great. Thank you.

You're welcome.

Thank you. That does conclude today's question-and-answer session. I would now like to turn the call over to Tamara Lundgren for closing comments.

Thank you, everyone, for taking the time to join our call this morning. We look forward to speaking to you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.