Radius Recycling Inc (RDUS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Schnitzer Steel's first-quarter 2011 earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded. At this time, I would now like to turn the conference over to your host, Alexandra Deignan, Vice President of Investor Relations. You may begin.

Thank you, Joe, and good afternoon, everyone. I'd like to thank you all for taking time to join us today. In addition to today's audio comments we have prepared a set of slides, which were made available concurrently with our earnings press release. You can access these slides through our website at www.schnitzersteel.com.

Before we get started let me call your attention to the detailed Safe Harbor statements on slide two, which are also included in our press release of today, and in the Company's Form 10-Q for the first quarter ended November, 2010, which will be filed this afternoon. These statements, in summary, say that in spite of management's good faith, current opinion 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 second of 2011 in our press release, in this presentation and in our 10-Q, which will this filed later today. After this call we will not be under any obligation to update our outlook. Finally, please note that we will be discussing some non-GAAP measures during our presentation today. We've included a reconciliation of those measures to GAAP in the appendix of our slide presentation.

Now let me turn the call over to Tamara Lundgren, our Chief Executive Officer. She will host the call today with Richard Peach, our Chief Financial Officer. Tamara?

Thanks, [Alei], and good afternoon, everyone. Thank you for joining us as we present our first-quarter earnings for fiscal 2011. We have a fair amount to share with you today, including our strong first-quarter performance and an update on our acquisition activities. I'll start us off with a review of our consolidated results and an overview of our business performance, and then I'll move to a summary of our capital investment program and our recent acquisitions. Richard will discuss the first-quarter performance of each of our segments and review our cash flow and capital structure, and then I'll conclude with an outlook for our second quarter. So let's get started by turning to slide four.

I'm pleased to announce that we delivered a very strong first quarter. Consolidated revenues increased by more than 70% compared to the first quarter of 2010, which was a first-quarter record in our 105-year history. Our EBITDA also increased significantly to $45 million, an 80% increase versus last year. Operating income tripled to $28 million, and our earnings per share of $0.64 was more than double last year's first quarter. We also exceeded our fourth-quarter 2010 performance on all of these metrics, which continues our steady trend of improvement, since the global financial crisis began in 2008. This is a terrific start to fiscal-year 2011, and I'd like to thank all of our employees [with] hard work, dedication and commitment to excellence made these results possible. The primary driver behind our strong performance is that growth in the developing world continues to fuel demand for recycled metals. Our geographic alignment with the export markets enables us to serve this demand efficiently through our network of seven deepwater ports.

In tandem with our strong operational performance, we've continued to progress on our growth CapEx program and we announced a series of acquisitions that will be transformational to our platform on both coasts. In Metals Recycling, we announced the acquisition of five new businesses, which extend our geographic footprint into western Canada and enhances our existing operations in the northeast, the southeast and Hawaii. In our Auto Parts Business, we announced the acquisition of a new facility in Waco, Texas, and expanded operations in California and in Oregon. Many of the deals have been in our pipeline for some time, and all are consistent with our strategy for growth. As we integrate these complementary assets with our existing operations, we will enhance our sources of supply, as well as generate operational synergies. During the quarter, we also commenced startup operations of the new nonferrous separation technology at our Metals Recycling facilities in Washington and Oregon.

Now let's turn to slide five and we can dig a little deeper into the factors which drove our first-quarter performance. MRB shipped 1.2 million ferrous tons this quarter, achieving record first-quarter sales volumes. In fact, aggregate shipments in our last four quarters approximate the total process volume shipped during our peak year of fiscal 2008. Our ability to capitalize on higher demand and prices from the export markets enhanced profitability in our Metals Recycling Business. In APB, our Auto Parts Business, we maintained strong car purchase volume and high operating margins despite the slow US economic environment, and most importantly, without the benefit of the government Cash for Clunkers stimulus program that APB enjoyed last year. Our Auto Parts Business continued to benefit from sustainable improvements achieved by its operational realignment to a self-service retail model.

We made investments of $32 million during the first quarter, which included $25 million of capital expenditures, primarily related to our nonferrous recycling technology upgrades, and $7 million on two acquisitions in our Metals Recycling and Auto Parts Businesses. The remaining acquisitions occurred after the end of the first quarter. Our activity during the first quarter clearly demonstrates our ability to progress on multiple fronts by keeping both organic growth in our current operations and expansion through acquisitions, which should further accelerate growth in our sales volumes and improve the returns we can generate.

So now let's turn to slide six. We continued to benefit from broad-based demand in the developing market, shipping to 11 different countries during the first quarter. China and South Korea were our largest buyers, and toward the end of the quarter Turkey came into the market strongly for second-quarter shipments. While we have not yet seen the effect of it, and we may not see the effect for awhile, the recent news from the Chinese government announcing their next five-year plan indicates that they will be increasing their use of scrap in order to reduce energy usage and CO2 emissions. This announcement is very consistent with the trend that we've seen for the past couple of years of increasing demand for scrap from blast furnaces in order to lower electricity costs and decrease greenhouse gas emissions. It's also very consistent with the broader global trend toward greater use of EAFs, due to both their economic and environmental benefits. Both these trends and the Chinese government's announcement point to continued long-term positive momentum in the demand for recycled metals.

So now let's turn to slide seven. In our Metals Recycling Business revenues during the first quarter increased 87%, driven by higher ferrous volumes and higher prices. The result was improved profitability. Our operating income per ferrous ton rose to $21 versus $19 in the fourth quarter of 2010. Building on MRB's profitability and the macroeconomic trends that underpin the continued positive long-term outlook for the metals recycling industry, we continue to pursue growth through synergistic acquisitions. During the first quarter we closed one Metals Recycling acquisition facility in Hawaii, which added to our long-term presence in that market. And since the end of the first quarter, we've announced four more Metals Recycling acquisitions, which expand our footprint into western Canada and strengthen our presence in the northeast and the southeast. Taking a step back, since 2005, we've closed and successfully integrated 15 acquisitions. We're looking forward to continuing our record of success with the integration of the new businesses we've just acquired, particularly since we've worked with most of the management teams for many years, and believe that there are valuable synergies to be achieved by operating as one company.

I mentioned earlier the $25 million of CapEx spending during the quarter. This was primarily related to nonferrous technology upgrades at two of our Metals Recycling facilities. Portland's upgrade became operational in the middle of the quarter, and Tacoma is still in its testing phase. Everett and Oakland are anticipated to come on line in the spring. Over the next several quarters, as we invest new technology into our operational processes, we should see the benefits on our overall performance.

So now let's turn to slide eight for a review of the Auto Parts Business. Our Auto Parts Business achieved a 21% increase in revenues during the first quarter and record first-quarter operating income of $14 million, up 35% over last-year's first quarter, delivering a very healthy net operating margin of 21%. The revenue growth was generated from increasing part sales and core sales, supported by stronger commodity prices. In addition, we maintained strong purchase volumes. Shortly after the quarter ended, we acquired an auto parts recycling facility in Waco, Texas, bringing our total Texas auto parts facilities to five. We also announced an expansion of our operations in Stockton, California and Portland, Oregon, both of which are in proximity to ur Metals Recycling facilities, which enable us to drive further synergies.

So let's turn to slide nine for a review of our Steel Manufacturing Business. The resilience and resourcefulness of our employees at SMB is demonstrated in the mills near breakeven performance, despite very difficult market conditions and lower utilization. Despite the weak market, the mill generated positive cash flow during the quarter, and we remain focused on enhancing operating efficiencies and product diversity to remain competitive. As we begin the new calendar year, there are some signs of increasing near-term demand, although it's still not clear as to whether this demand is sustainable or is being driven by the need to replenish low inventories. What we do know is that the mill is operating at an efficiency level that will enable it to deliver positive results when demand increases and is sustained.

Let's turn to slide 10 and review our acquisition activity. Since the beginning of our fiscal year in September, we've announced a total of seven acquisitions that enhance our supply network, improve our operating efficiencies and extend our geographic reach. As I mentioned earlier, there is an increasing level of global demand for recycled metals to fuel infrastructure and industrial production in developing economies. In order to meet the demand for our product, we are pursuing a dual-prong strategy of organic investments that enhance the yield from every ton of metal we process, and strategic acquisitions that expand our supply network within efficient proximity to our core coastal markets. In our Metals Recycling Business the five acquisitions represent 16 new facilities. In aggregate, these acquisitions will provide approximately 550,000 gross ferrous tons per annum, 40% of which will be incremental. On the nonferrous side, these acquisitions will provide approximately 60 million pounds of materials per annum that is entirely incremental.

In our Auto Parts Business we announced one acquisition in Texas, which will increase our retail footprint to 46. In addition, we're expanding locations in California and Oregon. The additional cars purchased by these operations are all incremental volumes to APB, and in the case of our Stockton and Portland facilities their proximity to APB's shredders in Oakland and Portland will provide additional opportunities for synergies long term. While the acquisition multiples for all of these businesses varies, depending on their size, profitability and potential synergies, the acquisitions should all be accretive to the Company in the first full year once purchase accounting impacts are complete.

I'll turn it over to Richard now, and he can provide more detail on this, as well as discuss the segment performance and give an update on our capital structure. Richard?

Thank you, Tamara, and good afternoon, everybody. I'll start with MRB on slide 11. As shown on the chart on the left, our Metals Recycling Business achieved a first-quarter sales record of 1.2 million tons, which exceeded our prior-year's first quarter by more than 60%. Their ability to meet the strong export demand is driven by our customer relationships, our strong supply network and continual improvements in our shredding process, which transforms raw materials into salable product. As shown on the right, selling prices also continued an upwards trend, increasing by 3% from the fourth quarter of fiscal 2010. However, getting behind the change in the quarterly average, each period have different market trends. Prices were softening coming into the fourth quarter, whereas the first quarter had a rising market trend, with forward selling prices at the end much higher than those at the start.

Moving to slide 12 we'll look at our nonferrous performance. As the chart on the left shows, our first-quarter nonferrous sales volume of 111 million tons was a slight improvement from last-year's first quarter. However, sales volumes were lower sequentially due to strong shipments in the fourth quarter. This led to a low inventory level at the beginning of the first quarter; and while production levels then increased, our first-quarter sales were lower as we built inventory back up to more normal levels. However, standing back and looking at our past four quarters, the underlying trend in nonferrous sales is increasing, and is higher than what we were achieving in fiscal 2008. Moving to the chart on the right, the combination of economic growth in Asia and improving US consumer demand has strengthened commodity prices for nonferrous materials. This has pushed up selling prices and the $0.94 average we achieved in the first quarter was a 12% improvement on a sequential basis.

And turning to slide 13, this shows how the sales volumes and prices translated into MRB's first-quarter financial performance. As the left hand graph shows, MRB's first-quarter operating income of $26 million represents the continuing trend of improvement in year-over-year quarterly performance. Operating income per ferrous ton is graphed on the right and shows that we achieved $21 in the first quarter. This is an increase from $19 in the fourth quarter, even though the second half of the first quarter was impacted by the rising scrap market. These market conditions significantly increased first-quarter purchase prices for shipments that will not take place until future periods. Even though absolute profits were much higher year on year due to the record sales volumes, it's this [lagging thing] that resulted in year-on-year operating income per ton being the same. And finally, the higher purchase price environment also compressed margins on first-quarter sales into the weaker US domestic market. The underlying trend of operating income is up, and we believe a combination of continual improvement, technology benefits and successful integration of acquisitions will enable us to continue improving performance.

Moving on to slide 14 I'd like to discuss further the expected impact of our recent acquisitions. As Tamara mentioned, since our fiscal year end we closed two acquisitions in the first quarter, and since then we've announced another five, of which three are already closed. The aggregate cash spend for these acquisitions will be approximately $225 million, and we expect them to be accretive to earnings per share and against our historic trading multiples. However, in the short term the impacts of purchase accounting will likely dampen benefits to our reported results. In particular, any inventory we acquire needs to be put in our books at fair value, which is typically higher than the original cost. As it gets [pulled thorough] this has the non-cash (inaudible) of eliminating most of the profit on the acquired inventory. However, due to our inventory turns we expect this purchase accounting effect to mainly impact on the second and third quarters, after which the underlying business performance will pull through to the numbers we report.

From an operational perspective, we are acquiring more than 550,000 annual ferrous tons and over 60 million tons of annual nonferrous volume. All the nonferrous volume is incremental to our existing business. On ferrous we are acquiring a mix of 40% of neutons and 60% that we've been buying in the past. However, on both new and preexisting tons we expect to capture additional margins from eliminating a transaction layer and for achieving various operational synergies. The acquired operations will mostly be absorbed within our existing infrastructure, and due to the high level of integration we will be able to restrict the increment effect on our operating and production expense. In summary, once we get through the short-term effects of purchase accounting we expect both the new and preexisting tons will provide accretive benefits and profit improvement. And finally, this accelerated growth in the size of our business has also led us to obtain commitments for an increased new credit facility, which I'll cover later on.

Before that, let's move on to Auto Parts on slide 15. Our Auto Parts Business once again delivered strong car purchase volumes. In the first quarter, volume of 82,000 cars was just short of the first quarter of last year, a period which included a 20% volume benefit from the one-time Cash for Clunkers program. Taking out that non-recurring benefit, our underlying trend year over year was up by 17%, reflecting business growth and operational improvements.

Turning to slide 16, we can see how this pulled through to APB's reported performance. Compared to the prior-year first quarter we grew revenues by 21%. This was primarily through our ability to take advantage of higher commodity prices and from the new stores, which offset the non-recurring Cash for Clunkers event. Operating income of $14 million was a first-quarter record and enabled us to deliver robust operating margins of 21%. This was significantly up from the fourth quarter and was driven by across-the-board improvements in scrap and core sales and in part sales and increased admissions. In summary, APB's first-quarter performance has demonstrated that our business has continued its growing track record of sustainable improvement, which we saw grow the whole of the last fiscal year.

Now turning to slide 17 we'll discuss the first-quarter performance of our Steel Manufacturing Business. As expected, demand for our steel mill's products remains soft. As the left-hand chart shows, this resulted in sales volume of 98,000 tons, a level just below the fourth quarter. However, on a more positive note, rising scrap costs began to flow through to selling prices, which rose to an average of $634. This reflected a gradually-increasing ability to pass on the higher costs of raw materials to the prices that our end customer's paying.

Now, turning to slide 18, you can see that while SMB's revenues decreased, we were able to keep our financial performance at close to break even, and significantly improve it against the first quarter of last year. In the current market conditions, we could not achieve these results without continuing strong discipline over costs, headcount and level of production. We've also minimized our inventory levels and our CapEx, and as a consequence, the steel mill remains cash positive.

And now turning to slide 19, we can look at our cash flow on a consolidated basis. Due to [bulk export] shipments, which occurred near the quarter-end date, some (inaudible) credit were not drawn down until early December and consequently operating cash flow was negative $18 million. Such timing issues are to be expected in our business. Our investing activity reflected $7 million spent on completed acquisitions, mainly Hawaii, and also $25 million of capital expenditures, including significant progress on the implementation of new nonferrous equipment. During the remainder of our fiscal year we expect to spend a further $110 million on capital projects, split evenly between maintenance and growth.

Moving at slide 20 we'll look at the effects of our first-quarter performance on our capital structure. Even with the negative cash flow we had net debt of only $123 million at the end of November. This represented [average] of 11%, which was less than we had at the same time last year. Total debt at quarter end was higher at $180 million, as we had cash balances at the quarter-end date for normal business needs and to fund acquisitions that were closing in early December. By the end of the second we expect to have spent around $225 million on our recently-announced acquisitions, and as a result our net debt will increase.

While we believe the acquisitions we've announced could have been completed within our existing credit facility, we have worked our bank group to obtain commitments for expansion of our credit facility to at least $600 million from the existing level of $450 million. This increase will provide additional flexibility for future growth and extend the current maturity to January 2016. Finally, it is worth noting that we expect this new credit facility will enable us to fund our continuing growth entirely within the bounds of our capital structure and our cash flows and without the need to issue equity and create dilution for existing shareholders.

Now I'll turn the call back over to Tamara, who will provide our second-quarter outlook and some concluding remarks.

Thanks, Richard. From a high level our outlook for the second quarter of fiscal 2011 is a continuation of the improving trends we saw in our first-quarter performance. Of course, we expect some ups and downs within that positive outlook, so let me walk you through the guidance by business segment. In our Metals Recycling Business, although we see a continuation of the strong demand, which is driven by economic activity throughout the developing markets, due to normal seasonal declines in supply flows and timing of shipments we expect our second-quarter ferrous volumes to be below the record levels of the first quarter. We expect nonferrous volumes to increase as compared to the second quarter of fiscal 2010 and the first quarter of 2011 due to higher beginning inventory levels. We expect that ferrous pricing will continue its strong upward trend and that nonferrous prices will improve at a more moderate pace, given the higher historical levels they have already achieved. Finally, we expect our operating income for ferrous tons to improve due to the higher sales prices and increased relative contribution from nonferrous sales volumes.

If you turn to slide 22, in our Auto Parts Business we expect revenues to approximate the first quarter metal, as rising scrap prices are expected to offset seasonal decline in part sales and admissions. In addition, we expect margins to contract slightly from the first quarter, driven by the normal seasonal impact of the winter months on admissions and part sales. And finally, in our Steel Business we expect the overall demand for long steel products to remain soft in the near term. We do expect slightly higher demand to be offset by normal seasonal declines in construction activity, resulting in sales volumes that approximate the first quarter. Average sales prices are expected to increase due the pass through of higher raw material costs. As a result, margins in SMB are expected to improve from the first quarter, but to maintain near break-even levels in the second.

So let's conclude and turn to slide 23. We've had a strong start to our fiscal 2011, generating improved performance in all three businesses and a number of notable achievements, including record ferrous volumes shipped in the first quarter and aggregate volumes for the last four quarters, which approximate our peak performance in fiscal-year 2008, and record first-quarter operating income generated in our Auto Parts Business and solid car purchase volumes. In addition, as we mentioned, we continue to invest in our operations through growth capital for new technologies and maintenance capital on an ongoing basis to ensure optimal efficiency and safety. We also announced seven acquisitions in the first four months of our fiscal year, including two acquisitions, which established a new platform for our Metals Recycling Business in western Canada. Going forward, we expect to see a notable impact from these acquisitions, all of which are expected to be accretive and are expected to accelerate growth and create value for our core export markets.

In summary, we've built a very solid foundation for our Company, both operationally and financially. With a bicoastal network of seven deepwater ports and more than 100 operating facilities we have a unique combination of scope and efficiency. Most importantly, we've proven our ability to generate profitable, sustainable growth over the long term, creating value for our shareholders and our employees. It's clear that the domestic economy still faces a long road of slow growth, but more relevant to us, demand in the emerging markets for raw materials is increasing and not just in our traditional ferrous markets. Demand for nonperishable products, like aluminum and copper, have also been strengthening. We believe the long-term fundamentals underlying our business are strong. The global infrastructure build out throughout the developing world and our ability to serve their raw material needs with recycled scrap should provide us with sustainable dynamic markets for many years to come.

Now, operator, we can open up the line for some questions.

Thank you. (Operator Instructions) Our first question comes from Torin Eastburn with CJS Securities.

Hi, good evening. How are you?

Fine, thank you.

First I wanted to talk about the acquisitions. I was wondering if you could provide any historical financial data for them?

Historical data, no.

Okay. You s -- in this quarter you spent quite a bit more than you have in past years. Is there something about the current time period that makes it feel like now is a good time to make acquisitions?

If you look at the 15 acquisitions that we've done in the past, I think that totaled -- and Richard can correct me -- about $500 million, so in ret -- in comparison we have spent double this on acquisitions in the past, all of which have been successfully integrated and have added to our platform. The timing question is a real interesting one. These transactions we've been working on various ones for various lengths of time and it was just more happenstance than anything else that they all ended up closing within a six-week period.

Okay. And I guess next to turn to the guidance. First, specifically as it relates to MRB, are you including these acquisitions in the guidance? And second, the margin outlook is unusually vague. Is there any more detail you can provide?

Yes, I can. It's Richard here, good afternoon. As you heard me say in my script, in the very short term any benefits that come through from the acquisitions -- and remember, some of them aren't even closed yet so we'll be -- they're closing at various times during the second quarter -- but any benefits in the second will be very minimal for that reason and also the purchase accounting issue that I mentioned to do with the acquired inventory and how that needs to be treated for accounting purposes. In terms of the actual outlook itself for MRB for the second quarter, we should begin to see the benefits of the forward sales at higher selling prices coming through. We also have the -- what might be termed a high-class problem, but it's not currently clear for how long the market will continue to rise. If it does keep rising we will get the benefit from higher selling prices on shipments we've not yet sold. On the other hand, from the mid quarter onwards that could actually lead to us to be paying still higher purchase prices for forward sales that will not ship until quarter three. However, standing back and as last year, eventually we will see the benefits of the higher selling prices come through. That will mainly occur when the market begins to level off and when we then obtain the benefit of our forward sales at that time.

Okay, and then last question. Can you provide a recent net-debt figure? I know it's not the end of the quarter, but in recent days?

Well, as we said, at the end of the quarter it was 123 million. All I can say is it's actually higher on the basis that we completed three acquisitions since the quarter ending and that flowed through to our (inaudible). But in terms of a precise figure I'm not in a position to give that.

Sure, thank you.

Our next question comes from Eric Glover with Canaccord.

Hi, thank you.

Hi, Eric.

Afternoon. Just wondering if you can provide some color on scrap flows as of right now? Pricing has been very strong. I know we're in a weaker seasonal quarter, so if you can just talk about that a little bit.

Absolutely. Let me step back and give you maybe a perspective on both what happened in the first quarter and how that channel improved to the second quarter. In the last quarter -- in our first quarter, both the export and the domestic sales prices strengthened and they're continuing to improve and that should translate into higher average sales prices in the second quarter. If I go around the country, off the West Coast there's broad-based demand throughout Asia. There was during the first quarter, there continues to be in the second. As I mentioned in my prepared remarks, we sold to 11 countries, with China and South Korea being our top two countries, but all the Asian markets look good and we're seeing continuous demand. If you move to the East Coast it's a different, but also positive story. Turkey came in after being out of the market for a while. They came in at the end of the first quarter, continued buying in December, and are continuing to be in the market. And prices started rising in November, affected by the step-up in domestic demand that has been truly a remarkable and positive, something that we really haven't seen since the beginning of the global financial crisis.

In the domestic market November prices went up $45 to $50, December prices went up $60, January levels, depending on the region, have been reported in a $60 to $65 up. So we're seeing a very positive confluence of events and very strong markets. In the past week we've seen recent prices in excess of $500 delivered.

Okay, that's helpful. I was also asking about flows into your yards, given these kind of pricing increases, while recognizing that this is a slower seasonal period given weather consideration?

Well, the flows get hit every winter, obviously, but what we're seeing is that these higher prices are offsetting some of that normal decline. So they're pretty good at our export facilities, they're a little slower at the facilities that have more reliance on manufacturing. And as you know, the tighter supplies are pretty much of a constant right now because the US economy isn't where it has been in the past in terms of consumer demand, C&D and manufacturing, but we are seeing it improve.

Okay, great. And then what was depreciation and amortization in the quarter, and what do you expect it to be for the year?

It was $16 million in the quarter, so it's on a run rate of -- to take us to around $65 million for the year.

Okay, thank you.

Our next question comes from Brent Thielman with D.A. Davidson.

Hi, good afternoon.

Good afternoon.

I guess a question on the events in Queensland. Have you guys seen any indications that in your business, either through orders or something that's just an increase in scrap demand, either by mix or by [some of the mills] in the area?

Well, we haven't seen anything directly at this point. What we're anticipating is that the shortage of coal may drive more EAS uses, which is good for the industry, but the coal supply disruption is probably temporary. If it lasts for more than a month or two there's probably likely to be a negative impact on steel production, which will lead to steel prices increasing in the first half to adjust for that cost push. And we saw that happen in 2008, when Australia experienced some floods there. But what we're anticipating is the disruption, while temporary, will probably lead to increased steel prices, which from our perspective will make room for higher scrap prices, but we haven't seen any of it just yet.

Okay, appreciate that. And then just on the unit margin for MRB -- and appreciate all the factors that are involved there -- but as you look at it for the first half of 2011, do you think you can exceed where you were in the first half of 2010, at least?

Well, looking into -- starting back from that, Brent, in the second of fiscal 2010 we achieved unit margins of $24 per operating ton -- or operating profit per ton, and $21 in the first quarter. So what we would have to do is beat $24 in the second of fiscal 2011 and to be ahead of that. However, due to the [current] uncertainties we can't put an exact figure on it, but we'd very much hope to exceed where we were in Q2 of fiscal 2010.

Okay, fair enough. Thanks, guys.

Our next question comes from Luke Folta with Longbow Research.

Hi, guys.

Hi, Luke.

My question is just to follow up, again, on the Metals Recycling margins. We come at it in a number of different ways, but scrap prices are -- like you had pointed out, appro -- they're exceeding $500 a ton delivered in some cases internationally and getting the sense that they're in the high $400 for (inaudible) crates here in the US in January. But the last time we saw scrap prices hit these sorts of levels [you guys are really not going to cover off the ball on the margins]. Can you talk about the factors that maybe would not allow you to hit those sort of EBIT per ton numbers -- or EBIT margin numbers that we saw last time around? I understand flows haven't completely formalized; but it seems like there's enough -- with the prices going up the way they are, with much higher nonferrous mix next quarter that you're referring to in the press release, seems like we could see a pretty high number relative to where we've been in recent history?

Well, I think you hit the nail on the head there. We're doing a lot of things that are allowing us to expand our margins and produce margins on a relative basis that we think are the best in the industry, and that's a combination of getting closer to supplies through acquisitions, processing more efficiently and extracting more value from every ton of material through improved technology. But these are all things that we're doing to offset the tightness in the market -- in the raw material supply market, which is really caused by the lower growth situation in the US. That appears to be improving. The order books for first time since the global financial crisis in the domestic market appear to be longer out and firming, but the bit -- the dam, if you will, that needs to be broken is that growth number in the US that will release more raw material into the market and enable the purchases to flow more freely.

So are we still kind of on this couple dollars a ton per quarter improvement that you're seeing, or with this big step-up in pricing do you think that we might see more of a shift now?

Well, volatility is generally our friend, Luke. And actually, if you think back to the third quarter of fiscal 2010 we achieved $43 per ton in that quarter, so there's definitely the opportunity to significantly surpass the average level per quarter, depending on the market conditions. But just to repeat, volatility generally helps us due to our selling process and also our supply network.

Okay. And then, with these acquisitions we notice that you've added about 68 million pounds of nonferrous capacity there. Your thoughts on second quarter and moving beyond that in nonferrous volumes. Could we see a double-digit increase in volumes the next quarter and beyond, just on the new capacity alone, not to mention improvement in the market?

Well, again, in the second quarter, of course, these acquisitions are all closing mid way through -- or partly through the course. There's some have closed already, some haven't closed, so we're very much in a part [and quarterly thing.] So I don't think that the second quarter is going to see any significant benefit in terms of volumes from the acquisitions. But in terms of the quarters beyond the second quarter we should be able to see something -- I think, just standing back, that 60 million tons of new nonferrous material and compares to -- and last year's (inaudible) year of 480 million pounds of nonferrous sales. So it's about 10% to 12% increase in terms of our annual nonferrous volumes.

And if I could just ask one more. In regards to the fact that you're going to have to write up some inventory as it relates to this purchase accounting, do you have some idea of what magnitude of impact that could have, and do you plan on breaking that out separately as a non-recurring charge next quarter?

Well, I think if it has a significant impact on our results we would certainly disclose the effect of it. However, one thing we should be (inaudible) on is that this is a non-cash item and we actually will have seen the cash flows from selling all of that inventory. This is really an accounting effect. We turn our inventories per year in 10 to 12 type level of tons, so given that I would expect that within the course of a couple of quarters we will be through this and by the time we get to the fourth quarter we should be past most of the effects of this inventory (inaudible) volume issue.

Okay, thanks a lot, guys.

Our next question comes from Sal Tharani with Goldman Sachs.

Good afternoon.

Good afternoon.

Just wanted to understand this -- the (inaudible) volume from acquisitions. I understand there will be some issues in the near term because some of them have closed, some of them are going to close later on. If I look at last-year volumes ferrous and nonferrous just assume that it's new 220 tons of ferrous and 60 million pounds of nonferrous just on top of that, so 5% increase in volume for the ferrous and 13% in nonferrous if these acquisitions were to close by the end of last year. Is that correct to assume?

Well, the benefits from what we've acquired will not just come from the incremental vol -- the incremental new volumes, we'll also achieve benefits from the preexisting volumes. Because, effectively on all of the tons and pounds that we're acquiring, we're actually capturing profits that were previously obtained by the acquired companies. So to that extent we're getting either the source, so to speak. And on top of that, because we're acquiring companies that are either adjacent to or within our current region there's significant operating synergies that we'll be able to obtain in terms of benefits from really the over -- the utilization an our existing infrastructure, integrating all of our working practices, selling, buying and ability to use back office functions. So there's a whole range of different ways that we will be able to obtain benefits from the deals.

I understand that. So if I look at -- like the (inaudible) acquisition appears to be the company you bought [was itself] the next quarter of scraps. So you probably will get much more benefit than buying a tuck-in acquisition who (inaudible) facility for you in the past. Is that correct to assume?

Well, really each deal will have its own characteristic so it's hard to make a generalization. And although you're absol -- you're correct in that in general terms, an export margin -- ability to export produces margins that are grater than domestic. But on the other hand, some of the domestic companies are already making a considerable margin, so there's no one size fits all in terms of these deals.

Combined with the operating benefits you're going to get, maybe some budgeting benefit because there are less competitors in the marker and the new technology are starting to implement for extracting better on the ferrous -- nonferrous side, eventually your margin should be higher than the historical margin you required in the past?

That's correct, assuming we get back to mid cycle. That's right.

Okay, the last question I have is, which is the largest facility you [bought, you spent a lot of -- the most money doing these seven acquisitions]?

Sal, we haven't broken that out. We haven't disclosed -- we haven't broken down either volumes or prices for any of the acquisitions.

But originally the largest facility of these five facilities you acquired?

Well, we really haven't broken it down and large is kind of how you're looking at it. In terms of number of facilities the western Canada ones total the most facilities in terms of number of yards. Macon has two yards, Stateline has one, I think together (inaudible) and [Amex] has 12, so it would really depend upon how you're asking about large. But except for indicating how many operating facilities each company has we haven't disclosed anything further.

Okay. I was just thinking in terms of volumes, what would be the biggest volume? Would it be at the western Canada or the East Coast one?

Well, again, if you look at the yard break downs that I just mentioned and those have been publicly disclosed.

Okay, great. Thank you very much.

You're welcome.

(Operator Instructions) Our next question comes from Kim Hayes from Davenport & Company.

Thank you. Good afternoon.

Good afternoon.

Just two questions. On your comments about ferrous volumes for the recycling business headed to the February quarter for the seasonal pullback, there was a little bit of a surprise, I guess, to me,. When you look back historically, the February quarter has been higher than the November quarter. What -- can you give some more color on why November was maybe unusually strong, or maybe why you're going to see a decline sequentially this year that we haven't seen in the past?

Well, certainly. The first quarter for us -- as we mentioned before -- was a record quarter. And we had -- we just had a situation in the last half of the quarter where we saw a significant step-up in domestic demand, which -- and in demand of Eastern Med and [thinking that that] drove a lot of -- those are the two things that drove at of activity with that in previous firs -- we didn't see that last year first quarter. And I know what you're getting at, because we've talked about this before. First quarters for us have always been our weakest quarters but for a variety of different reasons. In 2008 it was because freight rates had gone through the roof, the year before we were putting in mega strutters. So our first quarter has been weak historically for a number of reasons. This one was strong, because I think we are just beginning to see perhaps, not clear yet, a more sustainable recovery in US domestic activity.

Okay, that's quite helpful. And then the second question, just to repeat the CapEx, you said $110 million, was that for the rest of the year or for the full year?

That's for the rest of the year.

Okay, thank you, that's all my questions.

Okay.

Our next question comes from Evan Kurtz with Morgan Stanley.

Hi, Evan. Okay, operator, I think we've lost Evan.

Our next question comes from Sal Tharani with Goldman Sachs.

I just wanted -- hi, how are you? Just a quick question on the volume for the ferrous and nonferrous for second. You mentioned that it is going to be higher. Have you given any indication what -- how high we should we expect -- should we expect some as what we saw in the fourth quarter or somewhere in between the two?

Yes, I think our -- I would say that ferrous will actually be lower than the first quarter for two reasons. One, the first quarter being a record, and secondly, normal seasonal effects on supply flows so that the second ferrous volumes should be lower. On the other hand we are predicting that our nonferrous volumes will be higher than they were in the first quarter.

And will it be as high as we saw in the fourth quarter for the nonferrous?

We're not disclosing that. It possibly could be, but certainly it will be higher than the first quarter.

Okay. So all this volume I just want to understand is that on a same-store sales basis the nonferrous volume, is that going to be higher also, excluding the acquisition volume?

Yes, it will be.

Okay, great. Thank you very much.

Our next question comes from Luke Folta with Longbow Research.

Hi, guys, just one quick follow up. We didn't talk a lot about the steel business right now, but can you give us a sense of what your long-term thinking is there, and if that's still -- is that something you would consider core moving forward, or something that you might be able to sell if you got a decent offer?

Sure. The mill's been an important asset and business for us for a long time and obviously has been operating quite well in a weak environment. They've been very disciplined about matching production to demand, they've kept inventories low, they're generating positive cash flow. So we believe that they are well positioned for recovery, as they're operating close to breakeven on very low utilization rates. But vis-a-vis our strategic growth you're going to be seeing us direct the acquisition activity and the like into the MRB and APB business.

Okay, great. Thanks.

You're welcome.

I am showing no further questions on the phones. I would now like to turn the conference back over to Tamara Lundgren for some closing remarks.

Thank you everyone for joining the call today and we look forward to speaking to you again in April. Thank you, operator.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.