Radius Recycling Inc (RDUS) 2009 Q4 法說會逐字稿

Please stand by. We are about to begin. Good day, welcome to the Schnitzer Steel fourth quarter 2009 earnings conference call. Today's call is being recorded. We will have a question-and-answer session following today's prepared remarks. At this time, for opening remarks and introductions, I'd like to turn the conference over to Rob Stone, vice president, treasurer. Please go ahead, sir.

Thank you, Operator, and good morning. As the operator indicated, I am Rob Stone, the company's treasurer, primary investor relations contact. I'd like to thank everyone for taking the time to join us today. We know it's a busy morning, and we're pleased that you're here. In addition to today's audio comments, we have prepared a set of slides which you can access through our website at www.schnitzersteel.com.

And before we get started, of course, I need to remind you that the company's presentation and discussion today contain forward-looking statements subject to the Safe Harbor provisions of federal security 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 those factors that could cause results to differ materially from those current expectations are listed in the earnings press release that we 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 August 31st, 2009, which should be filed later today.

I will also 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.

So with that, 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 fourth quarter earnings webcast and conference call. Today I'm joined by Richard Peach, our chief financial officer. And after our slide presentation, we'll open up the call for questions.

As you saw in our press release which we issued this morning, Schnitzer Steel reported a profitable fourth quarter, driven by strong export demand and improved raw material flows. This fourth quarter profitability reflects three consecutive quarters of sequential improvement in operating margins at each of our businesses. This financial performance, despite a year of unprecedented worldwide economic challenges, is a result of our company's focus on cost containment, our employees' dedication to operational excellence and our commitment to delivering value to all of our stakeholders.

I want to recognize and to thank all of our employees for their outstanding commitment to making the sacrifices necessary to get us back to operating profitability. Their results have shown that we are a high-performance company built on a platform of operating nimbleness, financial strength, global reach and great execution.

In a very challenging year, we can point to a number of accomplishments. We generated $288 million in operating cash flow. We invested over $150 million in CapEx and acquisitions. We repurchased 600,000 shares, and we were still able to further strengthen our balance sheet by reducing our leverage by over 50% to 7.1%. And lastly, we streamlined our organization through cost containment and profits improvements. While other companies were shrinking during the last 12 months, we were taking advantage of growth opportunities, including the expansion of our platform by adding a metals recycling business in Puerto Rico, which brings to seven the number of facilities with access to deep water.

The benefit from our export platform is clear. The export market demand for processed scrap metal, our primary product, continue to outpace that of the US, driven primarily by the continued infrastructure build-out in China and across Asia. We exported 3.4 million long tons of ferrous scrap in fiscal 2009, which sets a record as the highest level of processed scrap export volume in our company's 100-plus-year history. Our nonferrous sales of 397 million pounds for the year also benefited from our export platform since we export the majority of our nonferrous volumes.

But transcending all that we do is our commitment to providing a safe environment for our employees, our customers and our vendors. And I'm pleased to report that in fiscal 2009, we realized substantial year-over-year improvements in our workplace safety, including a 33% reduction in total number of recordable incidents, an 18% reduction in the total incident rate and a 22% reduction in our lost time rate. And I want to particularly call out and congratulate our employees at the 19 sites in our metals recycling business and at the 21 sites in our auto parts business that have gone the full year or longer with no recordable incidents.

Now let's take a look at our consolidated results for the fourth quarter. Each of our three operating businesses recorded their third consecutive sequential improvement. And all three businesses reported positive operating income levels. In all of our businesses, selling prices trended up as the fourth quarter progressed, with selling prices for ferrous and nonferrous scrap metal, for finished steel products and automobile cores all trending up from June through August. Sales volumes, production volumes and intake volumes were also up across all three businesses. Not surprisingly, this upward trend in prices and volumes was accompanied by an upward pressure in purchase costs as the supply of raw material, although it improved, remained constricted in comparison to prior years, largely due to the sluggish US domestic economy. Nevertheless, our strong commercial buying teams throughout our organization were successful in obtaining sufficient raw materials to meet our increased production and sales requirements.

So let's take a look at each of our businesses, and let's start with the metals recycling business. Our metals recycling business achieved its third consecutive quarter of positive operating margins, recording operating income of $21 million, which is almost 3 1/2 times what we achieved in the third quarter. In the fourth quarter, we continued to see a broadening of international demand. This was a trend that we highlighted to you during our call in June. China continued to lead the demand side of our export market. And Southeast Asia and the Mediterranean regions remained active purchasers. Our total sales of ferrous scrap in this quarter reached 1.3 million tons. This was the second highest quarterly sales volume in our company's history. 84% of this total, or 1.1 million tons, was exported.

We also saw the impact of the stronger export market on our nonferrous sales. This pickup in nonferrous markets resulted in a sales volume of 123 million pounds for the quarter which was the third highest quarterly volume in company history and was 36% greater than our third quarter volume. Nonferrous prices rose 23%.

On the supply side, as I mentioned before, we saw an improved flow of raw materials, but we also saw an increase in intake prices. So if we take a look at the next slide, we can see a little bit more detail. Revenue for the metals recycling business increased 42% quarter over quarter to $452 million as a result of the increase in ferrous and nonferrous sales prices and sales volumes over the third quarter. Operating income improved from $6 million to $21 million as a result of both higher volumes as well as higher prices for the Zorba product, the mixed metal product, which is obtained from our shredding process.

When we look at the next slide, we set out the quarterly detail and trends. You can see, in the top lefthand corner of this slide, that the average ferrous net sales price of $251 per ton for the quarter was 13% greater than the third quarter. Domestic ferrous sales prices also increased both because of increased demand from domestic mills as well as competition from the export market. If you look at the chart in the top righthand corner, as I mentioned before, average nonferrous sales prices and volumes were up significantly. And what can't be seen on this page is that both ferrous and nonferrous selling prices trended up throughout the quarter.

If we look at the next slide, we can take a look at the foreign and domestic demand. Here, if you look in the top lefthand corner, the various export markets we served were quite broad based. China and Turkey were strong buyers. And we made a number of shipments to Southeast Asia and to other Mediterranean countries. In total, we exported to 12 countries, with Asia accounting for 68% of our export shipments. The bottom left corner of this slide shows that while our export shipping rates fell dramatically during both the first and second quarters of fiscal 2009, they increased in the third and fourth quarters. But the rates were still well below fiscal 2007 and 2008 levels.

And finally, if you turn your attention to the right side of the slide, this graph illustrates the significant difference between the export and domestic demand and the consequent sales. During the last three fiscal quarters, you can see the significant demand and sales decline in the domestic market versus the export market. And that's what enabled us to sell total volumes, although a different mix, that are only slightly below those of the same period in the record 2008, which illustrates our flexibility to sell to export markets when the domestic markets are slow.

So let's now take a look at our fiscal 2010 outlook. Our longer term outlook for the macroeconomic factors supporting our business remain positive. And we continue to expect broad-based demand for our products from the world's developing economies. However, in the near term, demand is softening, and sales prices have declined in recent weeks in both domestic and in export markets. Our fiscal first quarter has tended to be our weakest quarter for a variety of reasons, and this year will probably be no exception, particularly when we compare it to a fourth quarter that saw near record sales volume.

In the first quarter, we expect both net ferrous and nonferrous average sales prices to be slightly higher than the fourth quarter averages, as higher sales prices for shipments made in the first half of the quarter are expected to offset the lower sales prices on shipments made in the second half. Demand for ferrous materials is expected to decrease approximately a third from our near record fourth quarter volume. We expect that the export markets will continue to present better opportunities than the domestic markets, and we anticipate that export freight rates will be just slightly higher than those of the fourth quarter. Operating margins are expected to approximate fourth quarter margins because the increase in average sales price is expected to be offset by an increase in average inventory cost.

So now let's take a look at our auto parts business. Consistent with our guidance provided in last quarter's earnings call, the auto parts business improved on its positive operating income in the third quarter and booked an $8 million operating profit in the fourth quarter, which is a $5 million improvement quarter over quarter. There were a number of factors which contributed to this sequential increase in operating income, most notably, higher vehicle purchases and higher prices for automobile cores and scrap metal. Parts sales for the quarter remained at approximately Q3 levels. The volume of cars purchased increased over the prior quarter, reflecting improvement in the flow of cars available to purchase, including an initial but still relatively small impact from the Cash for Clunkers program. We expect that the primary impact of the Cash for Clunkers program will be realized in the first two quarters of fiscal 2010.

If we turn to the next slide, we can see the quarterly results for revenue, operating income and cars purchased for our auto parts business. The top lefthand chart reflects an increase in fourth quarter revenue from the third quarter. Driving this increase was an increase in car volumes and higher prices for cores and scrap. The top righthand chart reflects the operating profit and the sequential quarter-over-quarter improvement throughout the fiscal year. The supply of raw materials for our auto parts business improved with purchase car volumes increasing by 14,000 cars, or 20% from the third quarter. And this can be seen at the chart at the bottom of the page.

Many of you have asked about our acquisition. On October 20 -- on October 2nd, we completed a transaction to acquire, from LKQ Corporation, the assets of six self-service used auto parts facilities and to sell to LKQ our full-service used auto parts operation. Four of the self-service operations we acquired are located near our metals recycling export facility in Portland, Oregon. The additional two facilities are located in the Dallas-Fort Worth metroplex. Richard will address this transaction in more detail in his presentation.

But let me say how pleased we are to welcome our new colleagues to Schnitzer and to our pick-and-pull operations. This transaction is a great fit with our strategy of both expanding our auto parts business in regions where we can take advantage of vertical integration with our metals recycling business as well as expanding our pick-and-pull franchise positions in those regions in which we are already operating.

Turning to the outlook for our auto parts business, we expect the overall revenues to decrease compared to the fourth quarter due to the divestiture of the 17 Greenleaf full-service locations. The Greenleaf revenues are expected to be partially offset by the contributions of the four self-service stores acquired in October as well as the impact of higher car volumes from the Cash for Clunkers legislation. As a result, the overall quarter-over-quarter decline in revenues is expected to be about a third.

The self-service distribution channel has historically had higher margins than the full-service distribution channel. And the disposition of the Greenleaf operation is expected to result in overall margin improvement for the auto parts group. Self-service margins in the fourth quarter of fiscal 2009 were 18%. First quarter margins from continuing operations are expected to decline slightly from that level, primarily due to the integration costs associated with this transaction.

And now let's take a look at our steel manufacturing business. In our last earnings call, our outlook was for breakeven or slightly negative operating margin. I am pleased to report that our steel manufacturing business posted positive operating income and a sequential operating margin improvement versus the third quarter. There were a number of factors which contributed to this sequential increase, including higher sales volumes of finished steel products and a corresponding increase in production levels at both our melt shop and our rolling mill.

For the quarter, we ran the steel mill at approximately 60% of capacity to meet the higher sales volumes, a significant improvement from the prior quarter. While our steel mill was able to sell approximately 35% more tons of finished steel products in the fourth quarter, the market remained challenging. We believe that the increase in volume was attributable to customer restocking and was not reflective of a pickup in overall market demand.

West Coast finished product steel demand is significantly influenced by the demand from California. And we have yet to see any real traction from the federal or state economic stimulus initiatives flowing through to the finished steel markets.

If you take a look at the next slide, you can see the domestic steel markets have been weak. Looking at the revenue chart, in the upper lefthand corner, you can see that revenues in the last three quarters of the fiscal year were down significantly from the corresponding quarters in the previous two fiscal years. The charts on the bottom of this slide show the volume and price trends. As you can see, the fourth quarter sales volume was the highest of any quarter of the fiscal year. Unfortunately, the fourth quarter average sales price was the lowest of any quarter of the fiscal year, with net sales prices for finished steel products 3% lower than the third quarter.

What you can't see from the charts above, though, is that even though prices declined in the fourth quarter, the cost of scrap moved in the opposite direction, resulting in compressed margins. Clearly, fiscal 2009 was a very challenging market for our steel manufacturing business. Yet despite the market challenges, our steel business achieved sequential improvement in operating margins in large part due to the quick actions to control costs by managing staffing levels, number of shifts and production runs at our melt shop and rolling mills and by reducing other controllable costs.

Now let's turn to the outlook. While our steel manufacturing business continues to be uniquely situated to serve the domestic West Coast and Canadian markets when they recover, we do not anticipate that market recovery in the first quarter of this new fiscal year. Until we see a sustained increase in market activity, our expectation for the first quarter is for continued stock demand and prices. We anticipate that sales prices for finished steel products will approximate fourth quarter levels with sales volumes down from fourth quarter levels. As a result of lower production and sales volumes as well as an increase in average cost of scrap and inventory, first quarter margins are expected to be negative and lower than the margins in the third quarter of fiscal 2009 when sales volumes were at comparable levels.

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

Thank you, Tamara, and good morning, everyone. I'll cover the financial highlights for fiscal '09, including our quarterly performance trends, our cash flow, balance sheet and the financial impacts of our post year-end transaction with LKQ.

So moving to our quarterly performance, underlying our reported fourth quarter and full-year results was an improving financial performance trend in each of our three businesses. In our largest business, metals recycling, we delivered positive operating profit of $30 million for the year, including $21 million in the fourth quarter. Given the market conditions earlier in the year, this positive full-year performance was a strong achievement.

Our auto parts business has also improved stably through the year and with our positive operating income in the fourth quarter of $8 million and was just below breakeven for the year. And in steel manufacturing, despite a full-year operating loss of $42 million, we achieved positive operating income of $1 million in the fourth quarter, just above our break-even result. So in summary, the improved fourth quarter operating income in each business was the foundation for the positive earnings per share of $0.36.

Turning to working capital, since our fiscal weak year end, we have effectively managed our working capital and reduced it by $164 million or 38%. The value of our inventory at the end of the fourth quarter was down 57% from the beginning of the fiscal year, and receivables were down 62% in the same period. In the fourth quarter, due to the high level of export shipments, inventories were further reduced by $27 million, and accounts receivable increased by $32 million, reflecting that increase in sales activity.

So moving to cash flow, our fourth quarter cash flow from operations was a positive $46 million, bringing the full year to $288 million. This was the latest in a sequence of quarters with strong operating cash flow. This came arising mainly from positive operating income and reductions in inventories. For the '09 fiscal year, we achieved free cash flow of $106 million even after investing $182 million in acquisitions, capital expenditures and share repurchases and have therefore strengthened our balance sheet at the same time as growing our business.

In all, we completed five acquisitions in the year for a total of $93 million and also invested $59 million in capital improvement projects which was 30% less than fiscal '08 and in line with our annual depreciation of $61 million.

Finally, in the fourth quarter, we repurchased 600,000 shares at a total cost of $30 million. And at year end, we still have 3.9 million shares available to repurchase under existing board of authorizations.

Now moving to capital structure. In the quarter, net debt to total capital leverage further decreased to 7.1%. And net debt at the year end was only $71 million, which represented a reduction of $6 million in the previous quarter end and which was $98 million less than the start of the fiscal year. Our balance sheet strength positions us well, and should we need it, we have access to additional borrowing capacity through our committed $450 million revolving credit agreement. At year end, we still had $350 million available to draw on that line. And the term of the revolver does not expire until 2012.

Finally, I'd like to discuss the financial impacts of our recently completed transaction with LKQ. As Tamara mentioned, in early October, we completed a transaction with LKQ to acquire six self-service stores in the Northwest and in the Dallas-Fort Worth area, and to sell Greenleaf, our full-service operation to LKQ. As Greenleaf had fiscal '09 revenues of $160 million, the net effect of the transaction will likely be a reduction in the revenues of our overall auto parts business. However, as Greenleaf also incurred a fiscal '09 operating loss of $6 million, this will also be eliminated going forward and should lead to improved returns for our auto parts business.

And finally, in the first quarter of fiscal 2010, we will be recording a non-cash loss and sale within discontinued operations. While still subject to completion of purchase accounting, we expect the loss to be not less than $15 million, primarily due to the rate of goodwill.

Now, with that, let me turn the call back to Tamara.

Thank you, Richard. As we conclude today's presentation, I would like to leave you with a few thoughts that reflect our success, our strength and our sustainability. First, our business model is resilient. We weathered the unprecedented economic downturn and were able to improve our profitability sequentially through the fiscal year. We continue to invest in our businesses through acquisitions and CapEx. We repurchased shares, and we still strengthened our balance sheet.

Second, our platform is unique and flexible. It provides us with the ability to meet global demand. And notwithstanding a leaner work force, our export volumes of processed scrap reached record levels for the full fiscal year.

And lastly, as we have said for a long time, we believe that the long-term fundamentals underlying our business are strong. The contemporaneous infrastructure build-out throughout the developing world and our ability to serve the global need for recycled metals is a supply-demand scenario that should support sustainable growth at Schnitzer Steel for many years to come. We will now open the call up for questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator instructions.)

We'll go first to Eric Glover with Canaccord Adams.

(Inaudible) your steel business, since the significant turnaround in demand from your customers, which does not seem likely in the near term, are there any additional cost-saving measures or productivity improvements? Or what can you do in the near term to try and get that business more towards breakeven or even profitable?

Eric, the first part of your comments were cut off. Can you start over again? Apologies.

Yes. I was just, in terms of the steel business, absent a significant or meaningful turnaround in end demand from your customers, what additional cost-saving measures or productivity improvements can you make in the near term to try to get that business closer to breakeven or even profitable?

Well, what we have done in the last few quarters, and what we continue to do, is to manage our production shifts, our employee base, our purchase of raw materials to maximize or optimize the profitability from quarter to quarter. And it really is a function of volumes, primarily demand, than anything else in terms of leading that business into breakeven or positive operating territory.

Okay. Thanks.

We'll go next to Brent Thielman with D.A. Davidson.

Yes, hi. Good morning. I just was wondering --

Good morning.

-- wondering if you could provide some more perspective just relative to metals recycling and the guidance for volumes in Q1. Tamara, just wondering whether you think this is just a matter of timing, perhaps maybe you pulled some shipments forward or maybe some hesitation by some of the mills out there, maybe holding out for lower prices, just some more perspective there on the lower volumes in Q1.

Sure. There has been weakness in the volumes and in the prices over the last few weeks. And there are probably several reasons that we can -- that we can attribute that to. Probably the most important is that it is normal ebb and flow, and particularly when you compare Q1 with last quarter, which as I pointed out, were near record volumes, and that's record volumes as compared to 2008, which was just an historical year. And when you compare that, you really do see a normal ebb and flow. And we continue to see an underlying positive pricing trend and really look at this ebb and flow in effect like many cycles overlaying a rising price trend.

But we can dig a little deeper, and we can look at some differences between the East Coast and the West Coast in terms of what's driving some of that price weakness and some of that volume weakness. On the East Coast, we saw some very strong buying activity, strong activity in the summer and in the early fall. And fundamentally, with the increase, domestic mill demand scrap generations outpaced supply. And a temporary imbalance over the longer term, but still an imbalance notwithstanding. Outlook for the East Coast is we expect to see typical seasoning tightening as we close out the calendar year, as we get into December.

On the West Coast, the outlook is really a little bit different or impacted by different trends. The prices on the West Coast and the volume demand on the West Coast were really impacted also by a temporary imbalance. But this was really between Chinese steel production and Chinese steel sales and domestic consumption. We see that really almost working its way out and should be strengthening in the short term. China is already back in the market. So that should give you a better sense of what's driving the recent activity and what's influencing our outlook.

Okay. Thank you, that's helpful. And then just on the steel business, I mean, we've seen the reported average price drop in the last few quarters. I mean, do you think prices are sort of resilient at these levels at least, or could we see a further pullback? Obviously, you provided guidance for Q1. But just maybe some perspective there as well.

I think there, what is driving pricing and volumes is going to be construction demand on the West Coast and in Canada. And until we see some stimulus dollars start to flow through or until we see a stronger GDP growth in the US, we're going to see -- we're going to continue to see soft demand and soft prices.

Okay. Thanks. I'll jump back in queue.

We'll take our next question from Timna Tanners with UBS.

Yes, hi.

Good morning.

Good morning to you guys. I wanted to ask also about the steel mills just because structurally speaking, it looks like we're getting more capacity in Arizona from two different mills. How does that change the competitiveness of Cascade in your view, perhaps?

Thanks, Timna. Well, as you know, the West Coast market has always been short steel. And so that gap has historically been filled either through imports or by pulling in finished steel products from the middle of the country. So the new capacity that is anticipated to come online will probably fill part of that gap.

Are you seeing an opportunity perhaps to be able to export from the Northwest, given the location?

Not with prices where they are right now.

Okay. And then what -- can you give us any more color on maybe what you're seeing in terms of changes in scrap demand globally and if the recent -- if the uptick that you've seen this year from China you think is sustainable.

Well, as I mentioned, we think that medium and long term, the pricing trends for scrap are very, very strong. The long-term fundamentals underlying this business are, in our view, enviable compared to many other sectors. The contemporaneous build-out that we see in infrastructure occurring around the world is long term and continues. I mean, if you go back and look at the volumes that we've sold in fiscal year '09, they were record volumes for the year. And this is in the worst year that the world has experienced in every sector, but obviously not in ours. What impacted financial performance in our sector was that the US was in a negative to very slow GDP growth scenario which impacted the cost of getting the raw materials.

Right.

But the demand is there. We exported to 12 countries in the fourth quarter. We exported near record volumes in the fourth quarter. So the recent weakening in demand of prices, as I said before, from our perspective, is normal ebb and flow and a mini cycle that we see periodically overlaid over a rising price trend.

Okay. So volumes, you'd expect structurally to stay pretty high from Asia, then, it sounds like.

Yes.

Okay. And then finally from us, can you talk about potential M&A? Obviously, still a very fragmented business. You have a very good balance sheet. Are the scrap -- smaller scrap guys starting to cave a bit maybe on valuation or sell at better points? Have you an update for us on that perspective?

Well, for the year, as you know, we made five acquisitions, our largest one being in Puerto Rico. We continue to seek acquisition opportunities. We see a good pipeline. And so you should expect to see us continue to grow. And again, that's another thing that I think we did differently from a lot of people, was we adapted to the market in terms of the reduced demand that we saw and the different price situations. But we still grew. And so the opportunities are still out there.

Okay. Thank you.

You're welcome.

We'll take our next question from Evan Kurtz with Morgan Stanley.

Hi. Good afternoon.

Hello.

Just a question on scrap acquisition costs. It's a topic that's come up now a few quarters in a row. And I'm just trying to get your thoughts on how long you think this issue could persist. It seems like while the economy is in a downturn, there's just less scrap being generated, period. And how does that affect normalized margins in that business going forward? If you look back in kind of the heyday, there were some quarters out there where you guys were doing 20% plus margins. Is that something that we could see again in the next few years?

Well, on scrap supply, we clearly have seen it ease. We've seen it improve quarter over quarter over quarter this fiscal year. But the robustness is really going to be a function of improving US GDP growth. And so your outlook on that and your insight on that is probably even better than ours in terms of when that will happen. The long-term supply-demand imbalance in terms of demand by the developing economies for scrap that is generated by the developed economies is very much a positive one for our company and for our sector. And so there's no reason why we can't, over time, start to see those margins appear again. But we do need to get the US back to a more positive growth level. We do need to see manufacturing come back on board. We do need to see our infrastructure improved in the US and people getting their jobs back.

Thank you. That was helpful.

We'll take our next question from Luke Folta with Longbow Research.

Hi. Good morning, guys.

Good morning.

Just quickly, you guided to average selling prices to be up quarter over quarter in the fourth quarter. Is that just a timing issue?

Yes.

Okay. And then also, just regarding just to kind of follow up on the scrap margins, is there a probability that in 2010 we see ferrous scrap pricing, sales prices increase, or are competitors leaving the business, or some other factor that could possibly allow you to reach a more normalized $30, $60 per ton EBIT levels in that business? I mean, how do you rate the probability of achieving that in 2010?

That will probably be most heavily driven by supply of raw materials. And so, again, we're looking for a stronger GDP environment, stronger manufacturing environment in the US. And there are indications that we may start seeing that in the second half of 2010.

Okay. In the meantime, is that kind of $15-per-ton mark a pretty reasonable, kind of normalized level for this level of supply flow, do you think?

Probably so.

Okay. And then just kind of a housekeeping question on, with the Greenleaf divestiture, can you give us, first of all, what was depreciation expense in the quarter, and then kind of how that changes in 2010 with that asset now off the books?

Yes, well, the depreciation in the quarter was around $15 million. And I think going forward, we could see a couple of million come out of that going forward. So that may be replaced by some additional depreciation coming from new capital expenditures that we've made in the overall company in the last fiscal year. So I think for guiding purposes, to stick with around the $60 million for the year, or $15 million a quarter, is probably the right thing to do.

Okay. And guys, if I could just ask one more, on Cash for Clunkers, do you think -- does that impact more your auto parts business, or do you think that will have a greater impact at some point on your metals recycling business?

Well, it clearly has a more important impact on our auto parts business. It will ultimately flow through, particularly in Oakland and in Portland to our metals recycling business because that's such a bigger business. And the total cars for Cash for Clunkers was 700,000 cars. But you're going to see the impact much more importantly at the auto parts business because they get two impacts. They get the impact from the increase of -- actually, they get three impacts. The increased admissions, the better and higher priced -- higher quality parts and then the sales of scrap.

All right. Thanks a lot for all the detail, guys, and good luck.

Thank you.

We'll take our next question from Torin Eastburn with CJS Securities.

Hi. Good morning. My first question --

Good morning.

-- to follow up on that Cash for Clunkers question, how many of the cars have you seen from Cash for Clunkers? And what do you expect the timing to be in terms of those falling into your APB business?

Well, the timing, we saw a bit of an impact this last quarter. But the biggest impacts we're going to see are going to be in Q1 and Q2. We're not really disclosing the specific numbers of the clunkers that were processed by the division. But it was a positive program for us. We obviously saw, as a country, 700,000 cars in just a few months. And if more had been available, we're certain we would have seen more.

It was, as you know, probably the federal program that was most real for the public and had the most tangible results of any of the stimulus efforts so far. So it was, at the end of the day, good for the consumer. It was good for the economy. It was good for the environment. And for us, it really showed how all three of our divisions work hand in hand, from collecting the cars to addressing the extraction of the contaminants, to recovering the parts and reselling them and then processing the scrap and turning them into finished steel products. So at the end of the day, it was a good program for us.

Okay. You also mention, in the press release, that in Q4, your margins for the self-service business were, I think, 18%. Given that Q4 is typically pretty strong, is it safe to say that that wouldn't be a profit level that would be sustainable for a full year?

Well, Q1, we guided should be a little bit less than that due to the integration cost of the transaction. But so that's what we're guiding for, for Q1.

Okay. And my last question is about the guidance for the margins in the steel business. What specifically is causing the pressure you're seeing there, and how long would you expect it to be an issue?

For the steel business, the two things that are really impacting margins are the price of scrap and volume.

Okay. Thank you.

Thank you.

We'll take our next question from Bob Richard with Iron Edge Research.

Good morning. Your comments on ebbs and flows are appreciated. But a 33% drop quarter over quarter, that's a pretty big ebb. Do you guys have any sense of what demand would be down quarter over quarter? Is this more of an inventory issue, or is the demand change a number you keep in your head?

Well, we saw very strong buying in the fourth quarter, in our fourth quarter, in June, July and August. And if you look historically at our activity year over year, you see that happening over and over again. June, July and August tend to be very strong demand months for scrap, and the first quarter weakens, as I mentioned, for a variety of different reasons. But we saw strong sales come in June, July and August. And then as I mentioned, the East Coast was weak because there was -- there had been a fair amount of holding back of scrap that then flooded the market when there was an anticipation of stronger domestic mill demand. And then on the West Coast, as I mentioned, there was this temporary imbalance due to the imbalance out of China where they had some -- a lot of exports that domestically -- due to their lower domestic demand, which we, as I mentioned, see ending in the near term.

So what you have to do, I think, when you look at the ebb and flow that I was referring to, is not to look at it on a quarter-by-quarter basis. We have said for a long time that the way to judge this business and to judge the sector is looking at it over several quarters. And that's why we look at these ebbs and flows and call them mini cycles and say there's a rising price trend. And these really overlay that. And so to take a look at looking at two to three quarters at a time and see that ebb and flow will level out and not look as dramatic.

And I appreciate all that. But you don't really have a sense for how much demand will be down quarter over quarter, do you? Can you quantify that?

No, we don't really quantify the demand, no. But again, if you remember where the -- where our scrap is going is into steel products to build infrastructure in the developing economy. And infrastructure projects don't go out of business as the economy strengthens and weakens over time. They may slow down, they may suspend, they may even stop, like what we saw this time last year when credit contracted, but they don't go out of business. And so that's really what -- that is the demand that is driving the sector, is infrastructure build-out. And that is a long-term, steady, positively sloping demand curve.

Appreciate that. In reference to the question earlier on profitability per ton, let's say EBITDA per ton or EBIT, however one wants to look at it, it is rather depressed now compared to previous past history. And what is going to drive that improvement? Did you say availability?

Availability of raw materials, improved supply of the raw materials.

Kind of -- okay. Okay. Thanks for your time.

We'll take our next question from Sal Tharani with Goldman Sachs.

Good morning, Tamara.

Good morning.

I just wanted to understand the margin question again. I always thought that, for Schnitzer, when prices are going down, generally you benefit because you have sold in advance. But you mentioned that your selling price will be higher. But then your buying starts to get better, and you tend to do a better margin. And I'm just wondering that, in the current cycle, we're seeing the prices go up, margins don't improve much. Prices go down, margins either don't improve or get compressed. Is that just simply the availability which is just creating this whole different environment?

Interesting question, Sal. There are really two things that we're seeing that are different this year than what we have seen in the past. And one is something that we've highlighted on the last couple of calls. And that is that -- actually over the last four quarters, we've seen it. We're actually seeing the times -- the order times come in quite significantly. So we're seeing people -- I think I mentioned almost a year ago that there's more of a "just in time" or immediate delivery request by most of our customers as opposed to the longer buying tail that they used to have. And that is obviously driven by their own demand uncertainties, their own desire to keep inventories very low. So you're not seeing that same timing situation that we saw over the course of the last few years.

Okay. And on the auto parts business, since you are exiting the self-serve -- not the self-serve -- the full-service business, am I correct to understand that you were -- the cars you were buying for the full service were more expensive models and later models than your traditional self-service, so your working capital requirement for that business may have come down?

You're correct that the type of vehicles were very different. They were newer models and much more expensive models than the end-of-life models that we buy for the self-service business.

And, Richard, do you want to comment on the working capital?

Yes, Sal, you're absolutely right. It's a more asset-intensive business, the full-service side, and it does involve buying more expensive cars and keeping them for longer, whereas the self-service business, the cars are cheaper, and the focus is much more on through-put and older inventory and cycling that working capital. So there will be a balance sheet improvement in the overall auto parts business as a consequence of this deal.

Thank you very much.

Thank you.

We'll take a followup from Brent Thielman with D.A. Davidson.

Yes, just a quick one, just on the auto parts business. Tamara, I think going back before the Greenleaf acquisition, in terms of EBIT margins, that business was doing high 20s, 30% plus operating margins. And I'm just curious, with Greenleaf out, is there anything structurally different -- and obviously, the market will dictate this as well -- but that will ultimately prevent you from getting back to those levels in the auto parts business?

Again, it comes back to supply. And it comes back to supply and GDP growth and seeing more turnover in underlying cars and other products.

Okay. Thank you.

That does conclude the question-and-answer session today. At this time, I'd like to turn the call back to our speakers for any additional or closing remarks.

Well, thank you very much for joining the call today. And I want to again thank our more than 3,400 employees for working so very hard throughout the recently completed fiscal year and for turning business challenges into opportunities and most importantly into accomplishments that have realized value for all of our shareholders. Thanks again for joining us on the call, and we look forward to talking to you in January.

Once again, that does conclude today's call. We do appreciate your participation.