Radius Recycling Inc (RDUS) 2010 Q1 法說會逐字稿

Good day, and welcome to today's Schnitzer Steel first quarter 2010 earnings call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Mr. Rob Stone, Vice President and Treasurer. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. As the operator indicated, I'm Rob Stone, the Company's Treasurer and primary Investor Relations contact. I would like to thank everyone for taking time out of their busy days to join us this afternoon.

In addition to today's audio comments, we have prepared a set of slides which were made available concurrently with our earnings press release an hour ago. You can access the slides, if you haven't already done so, through our Web site at www.schnitzersteel.com.

Before we get started, let me call your attention to the detailed Safe Harbor statement included in our press release of today, in the slides accompanying this presentation in the Company's Form 10-K for the fiscal year ended August 31, 2009, and in the quarterly report on Form 10-Q which we'll be filing this afternoon.

These statements in summary say that in spite of management's good faith current opinions on various forward-looking matters, circumstances can change and not everything we think will happen always happens. In addition, we have guidance regarding our outlook in the second quarter of 2010 in our press release, and in this presentation, and subsequent to this call we will not be under any obligation to update our outlook.

Now let me turn the call over to Tamara Lundgren, our Chief Executive Officer. She is joined on the call today by Richard Peach, our CFO.

Thanks, Rob, and good afternoon, everyone, and Happy New Year. We certainly like the environment and outlook today much more than we did when we were sitting here last year.

I am going to review with you today our first fiscal quarter performance for 2010, and our second quarter outlook. And Richard will take you through the financials. The results we are reporting today highlight the continuing recovery of demand that we began to see in the spring of 2009.

Compared with last year, we have seen major changes in our external environment. Credit has eased around the world and loan growth has been particularly evident in the BRIC economies, particularly China and India. Our customers have completed their efforts to destock their inventories and we are seeing restocking, albeit at lower levels, which means in shorter cycles becoming the new norm.

Domestic demand has returned although with some volatility and the flow of raw materials into our processing yards has been improving. As a result, we have been able to increase the utilization of our metals recycling and auto parts facilities, both of these operations continue to run profitably.

Further, we took important steps in the first quarter to improve our margins allowing us to bring more money to the bottom line. In short, when we look at our global recycling business on a customer-by-customer basis, we see the demand is stronger and more broad based than it was at this time last year.

And most importantly, we believe that the current demand levels are sustainable and should increase over the long term.

Now, let me go through the operating results for each of our businesses. We will start with our Metals Recycling business on slide six. We delivered an operating profit of $16 million in our first quarter of fiscal 2010. This represents a significant improvement over last year and it reflects improvements in our margins compared with both the fourth quarter and the first quarter of fiscal 2009.

In the quarter, when scrap prices fluctuated by as much as $80 a ton, in a matter of weeks, the key driver underlying our margin improvement was our ability to take advantage of and to effectively manage this volatility through our purchasing program, and our management of our inventory and our forward sales. This allowed us to improve the spread between the price we paid for scrap and our selling prices.

In addition, we were able to leverage our worldwide customer base. For example, when China, which has been a major buyers for the last 12 months, stepped out of the market in Q1 our global platform enabled us to access customers where demand was strongest.

Meanwhile, our intake of scrap remains steady throughout the quarter, a welcome sign, a very welcome sign after periods in the past year when the flow of scraps slowed and it became more difficult for us to obtain the raw materials we needed to meet customer demand. This enabled us to build our inventories to support the increase in demand and in prices, which we expected and which we are currently seeing in the second quarter. We are on track to exceed last year's purchase volumes with improved margins.

On slide seven, you can trace the fluctuations in revenues in each of our last four fiscal years. The decline between the first and fourth quarters is consistent with past years, and the rebound is in line with our Q2 expectations. When we look at operating income on the right hand side of this slide, although operating income declined, operating margin per ton increased.

In addition to the factors that I mentioned on the previous slide that drove margin improvement, there are two other drivers that I want to recognize here. One is the continued excellent focus of our employees on cost containment. We saw the full impact of this in our Metals Recycling business this quarter.

And, second, our MRB operations team has spent a lot of time and focus on optimizing our production capabilities and these efforts resulted in great performance this quarter. As you'll see on slide eight, average sales prices rose slightly from Q4 both for ferrous and and nonferrous scrap. But the reality is a bit more complicated. In particular, prices during Q1 were very volatile.

During Q1, prices fell about $60 to $70 a ton as the industry went through a mini-cycle for several weeks in the middle of the quarter when demand and prices softened temporarily. Toward the end of Q1, the markets and prices began to recover. Before the quarter was over, prices rose to well over $300, and these higher prices will be reflected in our sales in Q2.

As a result, the higher average prices in Q1 versus Q4 do not on their own illustrate the volatility that occurred. Now let's talk a little bit about volume. The drop in ferrous sales volumes in Q1 was consistent with the decline in prior year. Coming off near record sales volumes in Q4, we entered Q1 with low inventories of scrap for processing and this reduced the product we had available for sale.

Also we had a couple of shipments scheduled for the first quarter which will go out in Q2 and that should allow us to capture additional benefit from the rise in prices. We are often asked to interpret the patterns in pricing and volumes from one quarter to the next. Slide nine offers a perspective into some historic quarterly patterns.

The solid line here represents our quarterly ferrous sales volumes since fiscal 2006. The circles highlight the changes from the fourth quarter to the first quarter, and then they trace the subsequent changes from the first quarter to the second quarter. What looked like a regular seasonal pattern of decline in Q4 versus Q1 volumes is not really a result of seasonal impacts.

Each year, different macroeconomic factors, like last year's financial crisis, or business factors like the shipping squeeze in that occurred in the first fiscal quarter of 2008 have been affecting our first quarter volumes. So even though the reasons are different what you can see is the shift in Q1 is fairly normal.

A year ago, sales dropped in the first quarter by 48% compared with the fourth quarter. This year's drop was almost as large. But you can see that in each case the quarter-to-quarter drop in Q1 has been followed by increases in Q2. These increases have ranged from 13% to 66%.

And we have reflected this experience in our outlook for the second quarter. The quarter-to-quarter volatility in volumes is a good indicator and a very good reminder of the importance of looking at this business over several periods.

As you can see on slide ten, our Metals Recycling business continues to be active in the developing markets where demand has recovered more quickly. During the first quarter, we made ferrous deliveries to customers in 10 countries. Our leading export destination was South Korea. In past quarters, the leaders have been China and Turkey.

The shift highlights the key benefit of our longstanding efforts to diversify our customer base, and demonstrates the power of our export platform and our seven deep water ports which enable us to meet demand wherever it is greatest. And one last comment on this slide here, the chart at the bottom of this slide illustrates the relatively low level of freight costs in the last quarter compared with peak periods in prior years.

Looking forward and moving to slide 11, looking forward and consistent with our historical pattern we expect our ferrous sales volumes to increase sequentially in Q2 by about 40% to 50%. We expect our nonferrous sales volumes to remain steady. With respect to prices, we saw sales prices start to rise as we came out of the first quarter.

In Q2, we expect this trend of rising prices to continue. More specifically, we expect slightly higher average sales prices for ferrous metals and we expect a continued strengthening of nonferrous pricing. And on the margin side, while the supply of raw materials remains constrained by weak U.S. economic growth purchase costs for the scrap and inventory have risen at a pace than committed sales prices. Consequently, we expect margins to improved compared with the first quarter.

Now we will turn to the Auto Parts business, starting with slide 13. The Auto Parts business delivered a record operating profit from continuing operations of $10 million, an improvement of $2 million over Q4, and an operating margin of 19%. This marks our fourth consecutive quarter of improving financial performance in APB.

I want to congratulate our APB team on an excellent quarter. Several factors contributed to this performance, including higher car purchase volumes, higher parts sales and higher commodity prices for scraps and (inaudible.) The first quarter also saw the division successfully integrate the four self-service stores we recently acquired near our Portland Metals Recycling facility.

We expect ongoing operating synergies from these stores. Later this month, we expect to complete the acquisition of two self-service stores in Dallas.

Turning to slide 14, as you can see, in the top left hand corner of this slide, Q1 revenues from continuing operations increased sequentially due to higher commodity prices, improved parts sales, and higher car volumes. The Q1 increase in operating income was attributable to higher revenues and improving scrap spreads.

Scrapped vehicles purchased increased 20%, due largely to the federal "Cash For Clunkers" program. But most importantly, and I want to underscore this, even if we exclude the effect of vehicles purchased under that program, our Q1 volumes of cars purchased matched the strong flows of Q4.

So now let's turn to the outlook for Q2. As you can see on slide 15, while we expect sequential revenues to decrease, which is consistent with normal seasonal declines in parts sales and also reflects the winding down of the "Cash For Clunkers" program, revenues should be slightly improved from the self-service revenues in the fourth quarter of fiscal 2009. We expect operating profit margins to remain positive, although to be slightly lower than the Q1 level of 19%.

And now let's turn to our Steel Manufacturing business beginning on slide 17. Our Steel Manufacturing business continues to feel the effects of the weak demand for finished steel products and in particular for long products. If we turn to slide 18, revenues showed a slight increase from the fourth quarter. The drivers included an increase in billet sales and slightly higher average sales prices.

However, the declines we saw in the sales volumes of finished goods partly offset gains in other sales. Operating income meanwhile declined. So this was driven by weak demand, which impacted the ability of steel producers to pass through increases in raw material costs in the form of higher prices.

And on slide 19, you can see a decline in finished goods sales volumes in Q1 compared with Q4 which resulted from the completion of the inventory restocking that had taken place over the summer. Customer inventories and backlog orders remain low by historical comparison and an overall pickup in infrastructure or non-residential construction is required before sales volumes will show a sustainable increase.

Higher net sales prices, which you can see on the right hand side of this slide, were the result of the change in product mix. On slide 20, we review our Q2 outlook for the Steel Manufacturing business. We expect the demand weakness in the markets to continue and sales volumes to decrease approximately 20% from the first quarter.

However, we expect a slight increase in the quarter in average net sales prices due to higher prices for raw materials and low customer inventory. The higher prices are expected to result in margins which are improved from the first quarter but which should remain negative.

Now, let me turn the call over to Richard.

Thank you, Tamara, and good afternoon. I will discuss the financial highlights for the first quarter including our reported performance, the divestiture of Greenleaf, our tax rate, cash flow, and the financial position.

Firstly, the divestiture of Greenleaf means that our income statement is now classified between continuing and discontinued operations. Revenues only include continuing operations as Greenleaf sales are excluded from all periods. As stated in our press release, first quarter revenues of $394 million reflected a decrease from the high sales levels in the previous quarter and the timing of several shipments that were pushed to Q2.

Income and earnings per share from continuing operations are now the best indicators of Schnitzer Steel's performance and in the first quarter we delivered $0.23 of continuing earnings which represents another profitable quarter and a significant improvement year-over-year. And finally on this slide, discontinued operations include the Greenleaf loss on sale and performance while we still owned that business, which we'll look at more closely on the next slide.

As we stated when we announced our year end results, the sale of Greenleaf means our first quarter includes a loss from discontinued operations $15 million net of tax. This mainly represents the non-cash write-off of goodwill of $12 million. In fiscal 2009, Greenleaf operating losses were $6 million.

The divestiture eliminates this performance going forward and enables Auto Parts to focus on the higher returns generated from our sales service business. Operating margins were 19%, and 18% in our last two quarters. The sale of Greenleaf will also reduce our ongoing operating expenses, which we illustrate on the next slide.

As shown in this table, in fiscal 2009 our reported SG&A was $185 million. As Greenleaf represented $23 million, our continuing SG&A was actually $162 million. In the first quarter of fiscal 2010, SG&A was $34 million which included the $2 million credit for environmental expense reimbursement.

Therefore, as the underlying SG&A from the first quarter is similar to the last year's Q1, we expect the total SG&A for fiscal 2010 to be nearer to the continuing fiscal 2009 figure of $162 million.

Now turning to our tax rate. For the first quarter, the effective tax rate on continuing operations was 20.5%. This was (inaudible) to the statutory rate due to a one-time benefit of 12.8% from the enactment in November of the Worker, Homeownership, and Business Act which extends the carryback of losses from two to five years.

Historically, our annual effective tax rate in profitable years has been around 36%, but due to the one-time Q1 benefit we should be slightly less for fiscal 2010 as a whole. We also expect a tax refund in the second quarter of around $40 million which mainly represents recovery of tax losses in fiscal 2009.

Now turning to free cash flow. After five consecutive quarters of positive cash flows, the operating cash flow for the first quarter was negative $90 million. The primary reason was an increase in working capital to rebuild inventories after they have been depleted in the fourth quarter of fiscal 2009 and to ensure we can satisfy the higher anticipated demand in the second quarter.

As a consequence, free cash flow was also negative in the first quarter at $75 million, even though we had net inflows of $23 million from a transaction with LKQ. Capital expenditure was $8 million in the first quarter, and depending on performance we expect to invest a further $60 million to $80 million in the remainder of the fiscal year. The lower end of this range is just above our annual run rate on depreciation of $60 million.

Moving on to working capital. Due to the rebuilding of inventory, our working capital increased by $39 million in the first quarter. But it is still at a comfortable level especially given that we expect higher steel demand and a tax refund in the second quarter.

Note that even though working capital increased, it is still less by $29 million than at the end of the first quarter of fiscal 2009. And finally to capital structure. At the end of the first quarter, our net debt to total capital leverage was 14% and our net debt was $150 million which is still less than the end of fiscal 2008.

Sequentially, the Company's net debt increased by $79 million due in large part to the rebuilding of inventories. However, we expect net debt to reduce in the second quarter due to higher sales and the tax refund. Our strong balance sheet continues to support the growth and expansion of our business, and we have access to additional borrowing capacity through our $450 million revolving credit agreement.

At quarter's end, we still had $316 million available on the revolver and the term does not expire until 2012. Now with that, let me turn the call back to Tamara.

Thank you, Richard. In summary, we achieved our second consecutive quarter of profitability from continuing operations. We reported a significant improvement in our results on a year-over-year basis.

During the first quarter, we were able to build scrap metal inventories to support the rising sales volumes that we expect, and which we are currently seeing in the second quarter. We saw stronger and more broad-based demand in our global markets than existed at this time last year. And we refocused our Auto Parts business on its strengths and we are already seeing results.

In short, our near-term view is positive and we remain confident in the long-term outlook for our business. We come out of a tough economic environment over the past year with a strong balance sheet and a strong, competitive position. Investment opportunities in our business continue to look attractive, and we intend to continue to look at other opportunities to build on our competitive advantages.

Now let's turn the call back to the operator and take your questions.

Thank you. (Operator Instructions). We will pause for a moment to give everyone a chance to signal. And we will take our first question from Brent Thielman with D.A. Davidson.

Hi, good afternoon.

Good afternoon.

Thank you for all of the guidance, I guess, with respect to the Metals Recycling business. I just had one clarification. Obviously, volumes and pricing are going to be a little bit better there. I mean should we assume that we'll see some sequential increase in terms of margins in that business as well?

Yes.

Okay. And then maybe can you talk about what you are seeing in terms of demand in some of the markets that are [dressed] on the West Coast, I guess your West Coast yards versus your yard on the East Coast, maybe just the demand environment you are seeing on those two coasts?

Sure. You know, if you want to describe demand today, in this market, the one word that I think is most reflective of it is broad based. It is really broad-based demand, but to understand it in detail you have to look at it in segments. So, off the West Coast, which is really the Pacific market, it is very strong, it has been firming, and we expect it to continue to firm.

And this obviously includes China, but China is not the whole story. It is really all of Asia. And that is supported when you, when you look at our customer base for just this most recent quarter where South Korea was our largest customer.

And the reason for that demand is probably a multifold, primarily credit eased versus this time last year, and there's been aggressive loan growth in that area. Our customers have lower inventories than historical, and the intensity of use of steel due to their high infrastructure needs is what gives us part of the long-term confidence in sustainable demand in that region.

On the Atlantic side, or what you are -- the East Coast side, the export market right now is soft and that is really driven by Turkey, which is having a challenging time because one of their largest markets, the Mideast is obviously experiencing some significant financial weakness. But if you then take a look at the domestic market, the domestic market has rebounded quite strongly and it is really offsetting the Atlantic export weakness.

And a lot of that strength is due to restocking. The mills in the U.S. have such low inventories that any uptick has a really big impact.

Okay, that's very helpful. Thank you. And then you mentioned the export freight costs dropped a little bit in Q1. Is that a function of the mix of countries you served and do you see heading upwards any time soon?

The bulk rates are steady and they're attractive at this time on both coasts.

Okay. Thanks. I will head back in queue.

Okay.

We will take our next question from Eric Glover with Canaccord.

Hi. Good afternoon.

Hi.

Richard, I was wondering why you expect the fiscal 2010 SG&A to be around $160 million -- I think that's what you said -- even though the fiscal first quarter of the year was around $34 million?

It is really a function of the increased level of activity over the remainder of the year, and the fact that our costs have some variability associated with them.

Okay. Very good. And, Tamara, I was wondering if you could talk a little bit more about the improvement in scrap flows that you have been seeing? How much of that in the quarter was simply due to seasonal factors and what is your outlook for the remainder of the year in terms of intake volumes?

Well, we are seeing very steady scrap flows, and we are on target for sales in Q2 of 1 million to 1.2 million tons. That's a very normal run rate. In fact, it approximates our average quarterly intake for fiscal year 2008.

So we are seeing very steady flows. Having said that, supplies are tight and supplies are tight because there still is no replacement for the lack of scrap that has been generated from manufacturing activities and that has been generated from construction and demolition activities.

And so the weakness in manufacturing, the weakness in [nonres] construction has really tightened overall scrap supplies. But our flows where we are located and the strength of our purchasing program and inventory management is such that we are seeing very steady flows.

Okay. Thank you very much.

Thank you.

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

Hi, good afternoon, guys.

Good afternoon.

My first question is, just looking at your guidance for the, for the Metals Recycling business pricing next quarter, do you think you might be a little conservative there? I mean we have been seeing prices, at least from our channel checks up, in some cases in excess of $50 a ton in January domestically and it seems like maybe more of your mix is going to be headed towards the domestic market. Do you think there's a possibility you could see some upside to what you've been forecasting?

Well, recognize that our outlook on prices reflects average prices over the quarter.

So you are saying it is just the way it shakes out with the declines maybe you saw in December, that is the reason for it?

Exactly.

Now, would you agree that there are, that prices are trending up to the amounts I mentioned in January in some markets?

We don't comment specifically on pricing but we definitely see a rising trend and the reports in the news media are generally accurate.

Okay. Fair enough.

And then just a question on your margin, you did see about a $5 per ton increase in operating profit in the recycling business. I noticed your nonferrous mix jumped up from about 18% to 26% this quarter.

Do you think that was part of the benefit this quarter and do you think that's something that would be an offsetting factor next quarter as your ferrous business starts to increase?

The nonferrous was one of the contributors together with what I mentioned regarding our purchasing program, our production optimization, our cost containment focus, and our inventory and forward sales. But nonferrous clearly helped and we anticipate that nonferrous will clearly contribute in Q2 as well as prices there have risen even more steeply than ferrous prices.

Okay. And just one housekeeping question. What was D&A in the quarter?

$15 million, Luke.

$15 million. Okay. Thanks a lot, Richard. Good luck to you guys.

Thank you.

(Operator Instructions). And our next question comes from the Evan Kurtz with Morgan Stanley.

Hi. Good afternoon, and congrats on a strong start to the year.

Thank you.

Just a question, you mentioned that you were selling a bit more billet out of the West Coast. I was wondering if you can talk about maybe how much of an opportunity you see that being, given that demand is so weak over there.

Is that something that you could possibly grow into something to bridge the demand gap? How competitive are you in that product?

Our billet sales are really quite opportunistic, and in the past quarter when we did it it was really to optimize our operating rates in our melt shop.

Okay. And then the other question I had was the Chinese New Year, how much of a risk item is that for you? Do you see that, that being a potential risk to demand for scrap come February?

Well, we have seen very broad-based demand. So we don't consider that a risk. It happens every year, so they manage through it and we manage through it. But I think the most important point is that the demand throughout Asia is very strong.

The loan growth and credit easing has gone beyond China and is really quite evident in the rest of the region.

Great. Thanks. I will turn it over.

And our next question comes from Sal Tharani with Goldman Sachs.

Good afternoon.

Hi, Sal.

First of all, this is a good format, I think, doing the conference call the same day. I think it saves everybody some time.

Great.

I have a question on the comment you made on moving some shipments from Q1 to Q2. This is not the first time it has happened, it has happened in the past. But there was a -- in the past it was either you couldn't get the ships or it was a tight for fiscal 2008, that issue. What was the reason, are you trying to take advantage of the higher prices this time, is that what is anticipated, higher prices?

Well, we manage our forward sales and we manage delivery of our shipments to optimize profitability. You are absolutely right in 2008 when you saw this happening regularly in the first quarter, and a little bit I think in the second quarter, it was about availability. But this was really just about being able to optimize profitability.

I thought that you already have sold that stuff at a fixed price. That's not the case?

We forward sell it at a fixed price, but we have a window within which we can deliver. So setting the date for the ship we have flexibility and a window.

Okay. The other thing, the average selling price comment for the second quarter is that it will be slightly better, I believe, or somewhat better, I think, is the comments you made?

Yes.

The prices have moved up almost $100 a ton between December, starting from December. Have you gotten some of the price increases in November, is that what happened for you for the export market was up before the domestic market?

Yes, hi, Sal, this is Richard here. This is a function of averaging because we are delivering in the first part of the second quarter sales that we committed to during the first quarter. So what we will see is that selling prices increased over the course of the second quarter, but the average is only slightly up.

Okay. Got it. Last question on the Auto Parts business, 18%, 19% is a decent margin, but it -- I remember before the Greenleaf, the margins used to be sort of mid-20s. I think we were hitting 30 at some point. You think that with Greenleaf out, there's an opportunity to get there once the market starts to normalize, or the new centers you have bought or new stores you have bought even though they are self-service, the margins are going to be less than the historic, than the pre-Greenleaf operation margins?

Well, I think a couple of things. One, we do anticipate seeing continued margin improvement. Getting back to historical margins, when the U.S. economic, GDP levels are below 3%, it is probably not going to be possible for anybody's business, until the, until you see a better economic environment, but we are anticipating widening margins in that business.

And because you don't have Greenleaf, and it is a different, a different business, is your, the autos you buy for this self-service is of a lesser, I would say it costs you less, is that correct?

That's correct. And you can say it, they're lower quality vehicles.

Okay. (laughter) Thank you very much.

Okay, thank you.

And our next question comes from Torin Eastburn with CJS Securities.

Hi. Good evening.

Good evening.

Have you seen the winter weather, and particularly some of the bad weather recently, affect the scrap supply domestically?

We have not seen it impact negatively our scrap loads. As I said our scrap loads have been very steady and we are on target for sales of 1 million to 1.2 million tons for Q2. So we haven't seen a big impact from that.

Okay. And then in the steel manufacturing business it looks like things are still very bad. Do you see any signs of an improvement, or is it just kind of a waiting game at this point?

I think it is a bit of a waiting game. When we look at money that has been allocated, for example, in California for infrastructure projects and we see how little of that has been spent, we take the position that it is not an if, it is a when. But the $64 thousand, million question is when.

Sure. And my last question is about the Class B shares, can you say anything about management or the Board's intentions related to those shares and whether you guys prefer to have them have super voting rights or regular voting rights?

It is not really our preference. It is what it is. The Class B share structure is set that when it falls below 20% of the outstanding shares, the 10 to 1 voting rights go away.

Sure, but in theory you would have some power through either repurchases or issuances to affect that percentage?

Well, our share repurchases are based on a number of factors, and as we said in the press release any actions taken to repurchase shares has always been and will be undertaken in the best interests of the business and the shareholders. And so I don't think it is a question of any particular preference or desire.

Okay. Great. Thank you.

And next we will go to Mark Liinamaa with Morgan Stanley.

Hello. Tamara, in your prepared remarks, or opening remarks you talked about shorter restocking cycles being the new norm in the scrap business. Is that forever? Is that just a maybe a six, 12-month outlook? And can you comment on what the implications of that would be for how you run the business and what margins and volatility could look like? Thanks.

Okay. Well, I think that the shorter restocking cycles are really a function of credit and confidence. And so it is not really just in this industry sector, but pretty much broad based.

Most companies here in our situation, most of our customers are keeping very low inventories and I think that will continue until you see a stronger GDP growth. How long that will take is another big $64 million question.

In terms of how we operate the business, I think it works and plays to our strength of nimbleness, and being able to adjust our sales, our purchases, our production optimization. I mean it really plays into companies that have low fixed costs and high variable costs.

Thanks. And would you have, one of the things that we have talked about in past calls is just the trend toward maybe squeezing margins in the scrap business because of available shredding capacity and still tight supply.

Is that something that we should still be looking for? How are you thinking about that over the next couple of years?

Well, as I mentioned before, our flows are steady, not -- having said that, overall supplies are tighter because we are not seeing any new scrap generation from manufacturing or from construction and demolition. At some point in time that will change.

In the meantime, we are focusing our business in running a very strong purchasing program and focusing on production optimization, continuing our focus on cost containment. And then obviously, the nonferrous extraction investments that we have made that have been very successful help us to maintain, sustain and expand our margins because as my predecessor used to say you get more squeal from the pig the more nonferrous you can extract from the ferrous going through the shredder.

Thanks very much. Good luck.

Thanks.

And we will take our last question from Bob Richard with Southridge Investments.

Good afternoon. Thanks for all the detail and thanks for taking my call. The $110 million build in working capital for the quarter that ended in November, is that trend continuing in this quarter to date? Are you able to share anything on that?

That's a good question, Bob. What I can say is that at the end of November we had $150 million of net debt. As of today, that figure is closer to $100 million. So we have already seen a trend in a positive direction since the quarter end.

Okay. I appreciate your point on the East Coast yards being stopped. Do you think some of that scrap that would have been destined for Turkey, I know mix is an issue, but with iron ore prices maybe going up in Europe 30%, do you think some markets are going to open up to you there, maybe in, north of Turkey due to that iron ore price increase?

Perhaps.

Okay. Last question, the question on the movement of scrap, just a, when do you declare export revenue, when it is on the boat or when it's unloaded? Just curious.

Well, it depends on the, it depends on the specific (inaudible) but it is generally over the [rail] when it is on the boats.

Once it is on the boat you post your revenue?

Yes. Yes, that's right. One thing you should be aware of, Bob, is that these sales are covered by letters of credit. So we don't have a risk following that, the [scrapping of the rail.]

Okay. That helps. Thank you.

And last question, don't want to dwell on the billet sales too much, but billets are mostly domestic, right? You wouldn't export billet on the West Coast, or would you?

The sales that we made of billets in the first quarter actually ended up in Taiwan.

Oh. Okay. Great. Thanks for all of the detail.

Thank you.

And we have no more questions at this time.

Thank you, operator. And thank you all for your participation on our call today. We look forward to speaking with you in a few months when we will report our Q2 results. Thank you.

This concludes today's call. We thank you for your participation.