Radius Recycling Inc (RDUS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by and welcome to the Schnitzer Steel Industries second quarter earnings call.

(Operator Instructions).

And now I would like to turn the conference over to Rob Stone, Vice President and Treasurer. Sir, please go ahead.

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 afternoons to join us today. In addition to the audio comments that we're making, we have prepared a set of slides, which were made available concurrently with our earnings release about an hour ago. You could access those slides through our website at www.SCHN.com. Before we get started, I'm obligated to call your attention to the detailed Safe Harbor statements 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 will be filed later.

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 for the third 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. With that, let me turn the call over to Tamara Lundgren, our Chief Executive Officer. She is going to be joined on the call today by Richard Peach, our CFO.

Thank you, Rob, and good afternoon, everyone. We're pleased to share with you today our strong second quarter results. We saw improvements in all of our businesses, and as we look ahead, our outlook is positive. As you review these results, I would like to emphasize three points. First, global demand for recycled scrap metal, our largest product, is strong. During 2009, a year that included some of the worst economic conditions since the Great Depression, the US exported 3.3% more scrap metal than it did in 2008. And our Company's exports exceeded this increase in growth. This demand was driven by infrastructure projects throughout the developing world, and has continued despite the downturn. We believe the underlying drivers of this demand are likely to remain in place for the foreseeable future.

Second, we're positioned to continue to outperform the market, just as we did this quarter and during the downturn. Our very strong operational performance helped us capitalize on the favorable macroeconomic trends that I just mentioned. And third, we have a track record of translating this outperformance into shareholder value. But before I get into the details of the quarter, I want to take a moment to thank our employees for continuing their record of strong performance and productivity. Their focus and their dedication enabled us to achieve our highest earnings since the downturn began. Now, let me turn to the results, and then Richard will take you through the financials.

We'll follow the slides that we've posted on our website, and we'll start with Slide number 4. We generated our third consecutive quarter of income, and our highest level of earnings since Q4 of our fiscal 2008. We also set a new record for sales volumes of ferrous metals for any second quarter in our history. The result demonstrates that global demand for recycled metals remains broadly based. It's not just about China. It's about supplying steel makers in emerging economies around the world, from Thailand to Turkey. This was also a good quarter for our other businesses. Our Auto Parts business generated record second quarter operating income. And our Steel Manufacturing business, which continues to face a very weak domestic market, moved closer to break-even, thanks to improved pricing and cost containment programs.

Now, let's go through the operating results for each of our businesses. And we'll start with our metals recycling business on Slide 6. This business accounted for more than 80% of our revenues, and delivered an operating profit in the second quarter of $29 million, nearly double our first quarter results. We set a record, a record for second quarter ferrous sales volumes, and exports accounted for 79% of those sales. We expanded our operating margins by 15% to $24 per ferrous ton, up from $21 in the first quarter. And lastly, we continue to maintain a steady intake of raw materials. You can see the details of this performance starting on Slide 7. Here on slide 7, it shows that in the second quarter of 2010, our metals recycling revenues were essentially in line with the second quarter of fiscal 2007. That's important, because that shows that we're at the levels before the surge in demand and pricing occurred in 2008. And importantly, we improved our operating margins quarter-over-quarter.

We expanded these margins through improved productivity, through our continued focus on cost containment, and by optimizing the spreads between our selling prices and the cost of acquiring raw materials. We also continue to benefit from our investments in technologies and process improvements that make us a low cost producer. And finally, our margins benefited from the structural advantages that are unique to our Company. In particular, through our 70 water ports, we have direct access to customers around the world. We have deliberately pursued a strategy, which gives us the flexibility to sell our materials to the strongest markets, wherever they exist, at each point in time.

Now, why don't we turn to slide 8. Slide 8 traces the trends in our sales prices and volumes, for both ferrous and nonferrous metals. Our ferrous and nonferrous sales prices strengthened during the quarter, reflecting the strong broad-based demand we're seeing around the world. On the ferrous side, prices started to rise in late November, and they continued their upward trend throughout the quarter. These prices are in the range we saw during the last industry up cycle from 2006 until just before the market rose sharply in 2008. We also saw improved nonferrous pricing, which contributes to higher revenues and operating profitability.

On slide 9, we show our global reach. While Asia remained our largest export destination, our customer base is very diverse, with shipments in the second quarter to ten countries. China was our largest country of destination for the quarter, representing about 28% of our export sales volumes. This diversity of worldwide market demand demonstrates what we've been saying since the middle of last year, that worldwide demand is broad based. And it is this worldwide demand and our ability to access whichever markets are strongest that drive our business. Meanwhile, as we show in the chart at the bottom of this slide, our freight costs remained at low levels, compared with the prices we've seen in the past, both on an absolute basis, as well as on a percentage of gross sales prices.

On slide 10, we summarize our outlook for metals recycling. In short, we see signs of further improvement in the quarter. In the third quarter, excuse me. Compared with the second quarter, we expect to see average selling prices for both ferrous and nonferrous scrap to show continued improvements. We also expect volumes to increase slightly from the strong levels we saw in the second quarter. And we expect operating margins to approximate, or to improve slightly from the $24 per ferrous ton we saw in the second quarter.

And now on slide 12, let's take a look at our Auto Parts business. Our Auto Parts business achieved record second quarter operating income of $13 million. This was double the old record we set in 2008, and it was our fifth consecutive quarter-over-quarter increase in operating income in this division. The drivers were improvements in metal spreads, strong parts sales, and continued improvements in operating efficiencies. The results also reflect the benefits of our investments in productivity and technology, and in growing our footprint through acquisitions.

Turning to slide 13, revenues for the Auto Parts business in the second quarter were in line with our first fiscal quarter, despite the normal seasonal decline in parts sales. Our Q2 2010 revenues, however, exceeded the second quarter revenues from continuing operations in fiscal 2009 by 75%. During the second quarter of fiscal 2010, our operating profit margin improved to 23%, and increased from the already strong 19% margins achieved in the first quarter. On this slide, you can also see that our car purchases in the second quarter were down slightly from the first quarter. But if you exclude the vehicles we purchased under the Federal Cash-for-Clunkers program, our vehicle purchases approximated the levels achieved in the first quarter, representing the third consecutive quarter of strong levels of vehicle purchases.

Now, turning to the outlook on slide 14, as we look to the third quarter of fiscal 2010, we expect continuing improvements in our Auto Parts business. We expect revenues to rise by 10% to 20% from the second quarter, and we expect the drivers to be higher prices for scrap, as well as normal seasonal improvements in parts sales. We expect our operating margins in the third quarter to approximate the strong margins we achieved during the second quarter. And now turning to the Steel Manufacturing business on slide 16. Our steel mill continues to feel the effects of the weak demand in its markets on the West Coast. Finished steel volumes in the second quarter fell slightly from first quarter levels, although they were still higher than they were a year ago.

The Steel Manufacturing business took further steps to improve its performance. Its operating loss of $2 million represented a 75% improvement from Q1, and we believe the business is on a path to break even. Although demand remains weak, this business is among the few manufacturers of steel products for the West Coast markets. And it remains well positioned to capitalize on the higher spending for stimulus and infrastructure projects when they occur. As you can see on slide 17, our Steel Manufacturing revenues in the second quarter were up slightly from levels a year ago. They were down 19% from the first quarter of fiscal 2010. However, revenues from finished products were in line with Q1.

The Steel Manufacturing business was able to improve its operating margin, because of an improved pricing environment and a continued focus on cost containment. It was able to realize price increases that offset higher raw material costs, something it had been unable to do in Q1. And it implemented a new round of cost containment initiatives in the second quarter, which contributed to the narrower loss, and improved our outlook. For the second quarter, as we show on slide 18, sales volumes for finished steel were down 3% from the first quarter. Compared with last year's second quarter, sales volumes were up 18%. Also, our average net sales prices increased by nearly 7% over the average for the first quarter of 2010.

And on slide 19, we summarized our outlook for Steel Manufacturing. As we look to the third quarter of fiscal 2010, we expect the demand for our steel finished goods to remain weak. We expect, however, to be in an environment of rising commodity prices, so we anticipate further price increases for finished steel products. As a result, we expect to see higher average net sales prices in the third quarter. In addition, we expect a slight seasonal improvement in demand, leading to higher sales volumes, which we expect to be about 10% to 20% higher than in the second quarter. The higher sales prices and volumes, along with our continued focus on managing costs are expected to allow our Steel Manufacturing business to return to break-even levels in the third quarter. Now, I'm going to turn the call over to Richard to review our financials.

Thank you, Tamara, and good afternoon. I'll discuss the financial highlights for the second quarter, including the performance trends on profit, cash flow, capital expenditures, and our capital structure. I'll start on slide 22. In the second quarter, we delivered $0.62 of earnings per share, which represented our best quarter since the fourth quarter of fiscal 2008, and our third profitable quarter in a row. Operating income of $29 million was over three times what we achieved in the first quarter. and our operating margin from continuing operations in quarter 2 was 5.1%, more than double the 2.4% margin we achieved in quarter 1.

On the next three slides, I would like to review the business performance trends that underpinned our results. As shown on slide 23, each of our businesses has an improving financial trend for the last several quarters. This track record in a challenging economy demonstrates our strong focus on operational performance, maximizing the spreads between selling prices and the purchase cost of raw materials, and a disciplined control of costs in all areas of our business. In particular, our metals recycling and Auto Parts divisions have each benefited from higher volumes and margin expansion. In Metals Recycling, the second quarter operating profit was $29 million, which represents a $13 million improvement sequentially, and was driven by strong export sales performance and an improving trend in operating profit per ton.

In Auto Parts, the second quarter operating profit of $13 million, represented a sequential improvement of $3 million. Operating margins improved again in the quarter, and the business is benefiting from our sole focus on sales service since the disposal of Greenleaf. In steel manufacturing we continued to optimize performance while awaiting improvements in demand. In the second quarter, the operating loss was $2 million, an improvement of $6 million from quarter 1. It should be noted that as the steel mill represents less than 15% of our revenues, until business improves, its performance will not be a primary driver of our consolidated results.

Moving to slide 24, I would like to review our margins in more detail, and the drivers of the improved performance. In Metals Recycling, our second quarter operating profit per ton reached $24. This represented a 14% improvement sequentially, and continues the trend over the past five quarters. Several factors have been driving the improvement. Export demand continues to be strong, particularly in Asia, with nearly 80% of our ferrous sales volumes in the second quarter going overseas.

We've also benefited from increased selling prices for both ferrous and nonferrous material, driven by the strength in demand and higher commodity prices. And although supply conditions remain challenging, we've used our network to obtain the raw materials we need. And in addition, we've achieved operating efficiencies through processing more with less people than before the downturn, and by using our sorting technology to maximize the value we achieve from the shredding process.

Now moving to slide 25, in Auto Parts, our operating margins in the second quarter reached 23%, again, a fifth consecutive quarter of improvement in continuing operations. The drivers of these higher operating margins were a combination of improved commodity markets, benefiting the value from scrap vehicles and cores, strong underlying car purchase volumes, steady part sales despite seasonal factors, and continued improvements in operational performance. And in addition, we've grown the size of our self service business, and now have 45 stores, which is six more than we had at the start of our fiscal year.

Moving on, I would like to discuss cash flow on slide 26. Our operating cash flow was strongly positive in the second quarter, at $106 million. The key drivers were higher profit and lower inventory from an increased number of shipments. We also benefited from a tax refund of $41 million received in February. Free cash flow is now positive for the year-to-date, with acquisition activity in the second quarter, reflecting the completion of the purchase from LKQ of two self-service stores in Dallas. And even though we've spent $29 million year-to-date on acquisitions, we are still cash-positive on completed transactions, due to the sale of Greenleaf in quarter 1.

Turning to capital expenditures, I'll discuss that on slide 27. As you can see, on the right-hand side of this chart, in the remainder of fiscal 2010, we expect to spend $30 to $50 million in capital expenditures on top of the $22 million invested in the year to date. Broadly speaking, our capital program can be split between maintaining and growing our business. CapEx to maintain the business covers depreciation, and includes equipment replacement, production-critical expenditures, development of IT infrastructure, and ongoing investments in environmental compliance and safety performance.

Beyond spending to maintain the business, our growth CapEx program includes investments in technology, to create growth and to increase returns. In previous years, that has included mega shredders and installation of back end sorting technologies. As a result, both ferrous and nonferrous sales volumes have grown, with the latter now representing over 15% of total revenues from metals recycling. And this year we are continuing to invest in technologies, which will increase separation and recovery of nonferrous materials.

It's our strong operating cash flow, which enables us to make these investments, and still maintain a comfortable leverage ratio as shown on slide 28. The strong second quarter cash flow reduced net debt to $68 million and leverage to 7%. Our strong balance sheet and low leverage continues to support the growth and expansion of our business. We've a credit facility of $450 million, which does not expire until 2012. And at the end of the second quarter, we had $360 million of hedge room to draw on if we need to. Now, with that, let me turn the call back to Tamara.

Thank you, Richard. We've just completed a quarter which reflects our highest earnings, since the downturn began about 18 months ago. We've maintained our strong balance sheet throughout this period, and we've generated strong levels of cash. This enables us to continue to make acquisitions and to invest in technology, improving the operating efficiencies of each of our businesses. The macroeconomic fundamentals supporting our business strategy were evident throughout the last 18 months, and we expect them to further strengthen over time. Our productivity, our platform, and our vertical integration in the aggregate are unique in the industry. And our performance reflects our ability to react nimbly and effectively to changing market conditions. In summary, our outlook for the third quarter is for continuing improvement in each of our businesses, and our expectations are for continued growth in our platform. We can now take your questions. Operator?

(Operator Instructions).

Our first question in queue comes from Eric Glover. Your question, please?

Hi, good afternoon, and congratulations on the results.

Thank you, Eric.

My first question is on the scrap flows. You mentioned in the press release that you were able to maintain a steady inflow. I was wondering if you could describe that in a little more detail, say talk about the West Coast versus the East Coast, and how the two are maybe different?

Certainly. Our scrap flows, as we said last quarter and as we continue to comment on this quarter, have remained steady. And they are improving. They are improving probably for a combination of reasons. You've got normal seasonality. We had a tough winter around the country. I think there was a day there where there was snow in 49 of 50 states. And so there's normal seasonality improvement that is driving it. I think that there's also improved economic activity in the US, and better prices than a year ago. So we're seeing flows improving, at the same time that we're seeing demand is improving. And that is, that is on both coasts.

Okay, thanks. And then, it looked like the metals recycling operating margin was 5.9%, up from 5% in the prior quarter. I was wondering if you could outline a scenario in which that Metals Recycling margin improves to more historical levels, which was in sort of low double-digits or even around 10%?

Well, that really leaves off from one of the things I just mentioned, which is flows are improving at the same time that demand is improving, and demand is strong. And we saw our margins expand. And we anticipate seeing continued margin expansion, because of our platform, because of our productivity, because of our vertical integration with pick and pull, and because we're able to acquire and attract the scrap flows. So we're, we're continuing to buy smart. We're continuing to produce more efficiently through our technology investments, and just our overall operating productivity. And as they say in central Oregon and Northern Scotland, we're getting more wool off the sheep, and that's really what's driving our margins.

So you remain over confident that over time you can get back to more historical levels?

Well, what we've said in the past, is that if the US economic activity that's really going to drive the increase in scrap flows. And we've already seen the, the benefits of that as the US economy is slightly improving. We're seeing the scrap loads improve. And so that's what is going to drive it to an important degree historical margins.

Okay. Thanks a lot.

Thank you, sir. Our next question in queue comes from Brent Thielman with D.A. Davidson. Your question, please?

Hi, good afternoon.

Good afternoon.

Maybe just a follow-up to some of the previous questions. But as you get into the third quarter here, I mean are you starting to see the spreads between your buying costs and selling prices and open up a bit more?

Yes, we are.

Okay, and then I guess with improving demand, as you've talked about overseas and perhaps maybe some customers trying to get in front of the increases in scrap, are you finding yourself maybe selling a little further out than what would be typical for Schnitzer, or I guess what you've seen in recent quarters?

Well, I think that we are seeing ourselves selling a little bit further out than what we've seen in the past couple quarters, but clearly inside of what our normal forward sale periods are. I, I'm not sure that that's driven so much by people trying to get ahead of prices, as much as we think that it's driven by customers who are getting more normalized levels of inventory. They are nowhere near the same levels of inventory that we saw historically. But, but it is -- it's showing a higher confidence level and approaching more normalized levels of inventory, as opposed to just-in-time restocking.

Okay. That's helpful. And then maybe just lastly on the Steel Manufacturing business, we've heard from some other mills discussing some benefit from some pre-buy behavior, I guess, ahead of anticipated pricing increases. Have you seen any of that at the mill, or do you expect to see any more of that in Q3?

I think that is more relevant and more apparent on the steel side of the business. The purchasing in advance of price increases, particularly because we've seen on the market steady price increases.

Okay, great. Thank you very much.

Thank you. Our next question in queue comes from Timna Tanners with UBS. Your question, please.

Yes, hi, good afternoon, everyone.

Good afternoon.

I think what we're all kind of asking the same question here, and I'm sorry to repeat it, but I think Tamara just said a couple different ways that you're seeing flows improve, and that can help your costs and prices are going up. And yet in your stated guidance, you're talking about operating margins on page 10 being approximate to slightly improved. Are you seeing it be flat to slightly up, or would it be more up, I guess is the question?

Timna, I am only laughing because this is a very regular question for me. Our guidance is what our guidance is. We're less than halfway through the quarter, and so we can only -- we can only give guidance to what we're seeing today and what we're seeing is for it to be approximate, or be slightly up.

Okay, because listening to you sounds like more of a margin expansion. I'm wondering, is there a reason why -- are you seeing costs come down for scrap yet, I guess, is a more direct question? Are flows starting to improve? I know you said that will happen eventually, but are you starting to see much of that, if you could talk about that?

What we're seeing on the flows is what I said before, is that they are steady and improving. The interesting thing we're seeing from a pricing perspective is that, while up until just a couple weeks ago, domestic and export prices were in parity, we're now seeing a differentiation, and probably in the range of $25 to $50 in favor of export markets.

Oh, that's very helpful, okay. So the Chinese have been somewhat out of the market lately. We're hearing a little price sensitive. Can you give us an update on what we're seeing in the Chinese market in particular -- I know that's not your total market of course.

The Chinese market, the Chinese have been out of the market since about the New Year. We are seeing very broad based demand, though, a lot of strength in southeast Asia, heavy, eastern Mediterranean buy. So as you know, the people are in and out of this market on a very regular basis. The Chinese have been very much in this market recently, but their lack of buy now, isn't working to the detriment at all to the rest of the market.

Understood, and finally for me, when you talk about the mill, I was curious, there's a pretty big improvement year-over-year. Can you just give us a little bit more color on both the volume story, what's happening in demand, and also a little bit more on the cost containment efforts, please?

Sure, Rich, go ahead.

Maybe I could start on the cost containment, and then I can talk to volumes. Cost containment, we are operating at the mill now with about 25% to 50% less staff than we had the end of fiscal 2008. So we've gone through a fairly significant restructuring of our operations there. Recently the types of things we've been doing over the last quarter or two, have been consolidating back office functions with a corporate sense, or providing some early retirement, restructuring, or shutting and warehouse-type operations. So it really has been cutting down to the bare bones there, consistent with the operating environment.

And on the volume side, a year ago we were de-stocking ourselves. And so that, that impacted volumes. And we are seeing a slight increase in volumes, as we would expect to from a seasonal perspective.

And just talking year-over-year from your presentation, right? So it looked like you had -- well, no, I guess year-over-year you're talking about seasonal improvement, whereas Q3 you had things declining. And that was just I guess overall economy was still worsening and you were de-stocking, is that correct?

That's correct. We were working off our own inventories this time last year.

Got you . Okay,

Thank you. Our next question in queue comes from Torin Eastburn with CJS Securities. Your question.

Good afternoon. I just have one quick one. There have been reports in the media recently about high metals inventories in China, I think maybe copper in particular. Do you have any anecdotal insight into what the scrap inventories might look like?

Not particularly. Beyond what is, what's been generally in the press. And so nothing really to add to that.

Okay, thank you.

Thank you, sir. Our next question comes from Sal Tharani with Goldman Sachs. Your question, please.

Good afternoon.

Good afternoon, Sal.

On the steel mill side, is there any labor contract coming, or have you just settled one?

We just agreed a deferral of the, of a salary increase with the union, which was very much a win-win for us and for our union. As we've discussed before with you and others, we've had some great relationships with the union in the past. So we were able to provide certainty and extend the contract for a year for the union. We were able to keep our costs where they needed to be for this year. So it's a good outcome for both sides.

Okay. Would you be interested if there is another rebar mill in California -- comes up for sale, a small one? There was news that some of the large shareholders of Tamco have sent a letter to the management that they would like to separate their business or spin their business.

Sal, we don't comment on specific companies that are or maybe rumored to be for sale on the market at any point in time.

Where would your growth be? Would you looking at steel division growth, or you will continue to grow in the other two divisions?

Well, what you've seen in the past is over the course of the last 4 1/2 years, we've done 15 acquisitions and those have been in our Metals Recycling business and in our Auto Parts business.

Okay. Very quickly, on Auto Parts margin, when you talk about margin expansion, I believe you talk in percentage and not dollar percentage, is that correct?

Yes, yes. It's in percentage terms.

Yes, you said margins will be stable. So do you expect that percentage on a higher revenue, because you're expecting higher revenue, is that correct?

That's correct.

Okay. This last thing, what are you seeing in the freight markets for scrap right now over the last, let's say, month or so?

We're seeing good prices there, steady prices for both.

Okay, great. Thank you very much.

Thank you.

Thank you. Our next question in queue comes from Rob Moffatt with Longbow Research. Please go ahead.

Guys, I just got two quick ones here. First, was there any shipment carry-over from the first quarter?

Yes, I think, as I said, quarter one instrument there was a couple of ships that slipped over from Q1 into Q2.

Is there any way to quantify that on a tonnage basis or actual number of cargoes?

No, but we do use mainly use handymax ships, so you're in the 30,000 to 40,000 tons per ship.

Okay, that helps, thank you. Second, it seems that domestic mill restarts kind of added some support to scrap prices over the last couple of quarters. Now with the domestic restarts and subsequent scrap restocking more or less over, do you see that as a risk to domestic and/or export prices in the coming quarter?

Right now, what we're seeing is that domestic supply and demand are more closely balanced. And so what we're -- but what we are seeing is that export prices are rising at a faster rate than domestic prices. So we're not seeing this as a risk at all.

Okay, and if, if demand is balanced, and hypothetically maybe, let's say if scrap prices were to stabilize or to even pull back slightly, would that give you guys an opportunity to lower buy prices and maybe expand margins?

Well, I mean that historically has been what has happened in the US, I mean pre the downturn, stable or weaker domestic prices stronger, export prices have driven higher margins.

Okay, great. Thanks a lot, guys.

Thank you. Our next question in queue comes from Mark Linamaa with Morgan Stanley. Please go ahead.

Hello, all.

Hi, Mark.

We've talked in the past about the potential to maybe grow export scrap volumes, based on your guidance the third quarter is going to be the best of the last four that you have on the chart, and your last three, the previous three. What -- can you talk about the broad based demand? Is there anything out there that leads you to believe that time for growth is now, and what would it take to do it? Thanks.

Well, what we are seeing is, and I've used this word a lot, so I -- forgive me here, but we continue to see that it's broad based and there is price around the world. One of the drivers of the increased volumes were the eastern Mediterranean was back in the market, and that started about five weeks ago. And part of that was caused by lack of buying previously. Part of it's driven by improved product prices, but even the Turkish economy, I think last quarter was growing at around 5%. So you've got that going on the Atlantic right now. We see improved activity in the mideast. We see India buying, buying heavily as well. And as on the Pacific, we see Malasia, Thailand, Indonesia, and really throughout Asia, where their underlying growth is 5% to 6%. But -- I mean I guess I can conclude there.

Do you get any sense that there's increased demand because of how tight the iron ore situation is?

Well, there's always the opportunitistic buying and use by blast furnaces of scrap, when there's a good arbitrage in favor of scrap versus iron ore.

Okay. Thanks.

Thank you, sir. Our next question in queue comes from Lloyd O'Carroll with Davenport & Company. Please go ahead.

Hi, actually this is Chris. Can you just talk about to what extent the margins in the Auto Part business are sustainable going forward, this kind of 20% plus margin?

Well, our Auto Parts business on the self-service side has historically had very high margins. And, what I would say today in terms of what is driving the very strong performance is that, and this may be a tortured analogy, but it's moving from a 4-cylinder to an 8-cylinder operation. Traditionally, it's performance has been driven by scrap prices, by core yields, by parts sales, by admissions. And what we've been seeing over the last couple of quarters, is the improvement as a result of the dedicated focus on the self-service business. The significantly improved productivity, which is a function of both just operating efficiency, as well as some technology investments we've made, and improved buying program. And then of course, very importantly, the larger geographic platform where we've gone from 39 stores to 45 stores. So we do think that it is operating on a sustainable basis.

Okay, and then can you also just talk about competition in your scrap export business? What are you seeing there? And what are the risks that competition could start to push prices on the export, either prices or margins on the export side lower?

What kind of competition are you talking about?

Competition for exporting scrap to, to Asia, Turkey, and so forth. Are you -- s there a lot of competition out there?

No. We can -- I mean the constraint has been and continues to be supply, not, not competition on the, on the customer side. You know, what, what we can say in terms of our operation, is that the access that we have to seven deep water ports is something that's not replicable. I think that with the balance sheet strength that we had to make -- that has enabled us to make the significant investments in things like our mega shredders and our back end sorting systems, has enabled us to be the low cost producer. That, and our geographic platform give us, we think, a highly competitive advantage in terms of selling to the markets wherever, wherever prices are strongest, and as I said, it's a market that clears -- not export demand.

Okay, thank you.

Thank you. We do have a follow-up question from Brent Thielman. Your question, please?

Yes, hi. I just had sort of a bigger picture question, but wanted to get your guys' perspective on the quarterly indexing for iron ore prices versus sort of the traditional annual benchmarks? And any implications that might have for the scrap market?

Well, the iron ore prices, scrap prices have always been highly correlated. And I think that correlation is in the high 70s, low 80s, so it's always been highly correlated. The spot price, scrap prices are always spot prices. And up until recently, ore -- iron ore prices, or contract prices -- so given -- if the iron ore market moves from annual to quarterly, the correlation might get tighter. But it's really more directional, than it is day to day, week to week or month to month price driven.

Okay. That's helpful. Thank you.

Thank you, sir. We have one final question in queue and it's a follow-up question from Sal Tharani. Please go ahead with your question.

Thanks. Can you give us some color on your business you acquired in Puerto Rico in terms of size? And in terms of are you the largest, other competitors, and what are you doing with the scrap over there, who are you sending it to?

Well, we can -- what we bought in January at 2009 now was an operation that had several facilities, plus a shredder. It is the largest operation in Puerto Rico. And we have been -- I don't think we identified where we sell, sell our scraps specifically from any of our sites. But it is an East Coast -- it is an East Coast site, so it sells similarly to our other East Coast operations.

What size is that? Could you quantify what kind of volume that place can generate?

Sal, we don't disclose that on a site by site basis.

That's fine. And in terms of historically West Coast has always been better for you in terms of less competition and buying prices better. Is Puerto Rico something similar to that, or is it more of an East Coast type or a more competitive region?

I think in terms of sales markets, it's much more similar to the East Coast. It is part of the East Coast sales network versus the West Coast.

Okay, and I know you mentioned that the growth was going to come from, but there was news that recently that there is a steel mill being considered -- I think a rebar mill in Puerto Rico. Would that be of interest to you or that would that change any dynamics of your scrap over there?

Again, we don't comment on specific companies that are in the market discussing acquisitions or greenfield developments. What I will say is that we are the largest scrap operator on the island.

Okay. Thank you very much.

Thank you. I would now like to turn the program back over to our speakers for any closing remarks.

Well, thank you, everyone, for joining our call today. We look forward to speaking with you in June.

Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may log off at this time.