Radius Recycling Inc (RDUS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Schnitzer third quarter 2011 earnings release. 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, this conference call is being recorded. And now I'll turn it over to Alexandra Deignan. Your line is open.

Thank you, Tyrone. Good morning. I'm Alexandra Deignan, the Company's Investor Relations contact. I'd like to thank everyone for taking time to join us today.

In addition to today's audio comments, we've prepared a set of slides which were made available concurrently with our press release. You can access the slides through our website at www.schnitzersteel.com or www.schn.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 today and in the Company's Form 10-Q for the third quarter ended May 31, 2011.

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 fourth quarter of 2011 in our press release in this presentation and in our 10-Q which will be 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 metrics 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.

Thanks, Allie. And good day, everyone. We're pleased that you're joining us on today's call where we'll be discussing our fiscal 2011 third quarter performance. As you've probably seen from the press release that we issued before the market opened today, we're reporting strong fiscal third quarter results. Our results showed two trends which we believe are significant.

First, a continuation of strong sequential quarterly increases in earnings. And second, significant growth on a year-to-date basis versus fiscal 2010. This morning I'll start us off with a review of our consolidated results and the operating highlights during the quarter for each of our businesses. And then Richard will discuss the detailed results for our segments including the impact from the acquisitions we've made this year and he'll also review highlights from our financials. I'll conclude with an outlook for our fourth quarter and then we'll open up the call for questions.

So let's get started by turning to slide four. What a difference a year makes. This time last year we had just finished a quarter in which we saw ferrous export sales prices move substantially. The month-over-month move in Q3 of last year was close to $100. Moreover, the big increase in Q3 of last year then reversed itself in Q4.

So fast forward to this year and what we saw in the third quarter and what we expect to continue to see in the fourth quarter are steady high prices, $470 to slightly under $500 delivered for ferrous exports. In other words, Q3 and Q4 of this year are showing us stability in average ferrous export sales prices that we did not see last year and our results demonstrate this. Versus the second quarter of this year, we've grown revenues by 36% and our operating income has increased by 20%.

But as you've heard from us many times, looking at our performance over multiple quarters provides a truer picture of our performance as the timing of shipments and average inventory costs are able to be smoothed out over several periods. On that basis, if we look at our fiscal year-to-date performance versus the first three quarters of 2010, our revenues are up by 43% and our operating income is up by 28%. We've achieved these results by investing in our processing capabilities, through our focus on continuous improvement and through our investments in technology. And also by expanding our geographic footprint which increases our access to supply. These growth initiatives along with higher export prices driving better scrap flows, resulted in higher sales volumes in both our Metals Recycling and our Auto Parts Businesses.

And the efficiencies that we've implemented in our Steel Manufacturing Business also delivered the results we've indicated would happen. The slight pickup in demand resulted in a positive quarter for SMB on higher volumes and higher prices. During the quarter, we continued to maintain strong momentum on our growth strategy, closing two acquisitions in our Metals Recycling Business in Canada and in California. This brings the total number of acquisitions for the year to ten.

Our growth CapEx investments related to the technology upgrades have now been deployed at each of our four mega shredders and are expected to deliver enhanced operating efficiencies and production yields going forward. So now let's turn to slide five for a closer look at the trends driving these results. One of the main differentiators in our results is the benefit we gain from our seven deepwater ports which allow us to access demand wherever it is greatest at any point in time. We're not land-locked.

Consequently, in the scrap market, we're able to react more nimbly than most and export our materials where demand is greatest. This quarter, for example, you might see higher average freight rates in our statistics. This isn't because absolute rates increased. It's because we were able to capitalize on the opportunity to meet higher demand and ship to Asia from our northeast ports. We shipped record quarterly volumes, 1.5 million tons, which approximates the highest quarterly volumes we've ever shipped which occurred in the summer of 2008. In the markets that we serve, demand for recycled metals continues to be strong and broad-based.

This quarter, we also achieved a nonferrous sales volume record, an all-time shipment record of 145 million pounds which reflected an increase of 20% from Q2. The combination of higher volumes and steady high prices led to ferrous revenue growth of 40% and nonferrous revenue growth of 29% during the third quarter. In our Auto Parts Business, car purchase volumes increased 15% sequentially, primarily due to the spring weather and our new stores which contributed to higher admissions to our yards. As a result, APB again achieved strong operating margins of 20%.

And at our steel mill, utilization increased as is typical during the spring when construction projects ramp up. Average sales prices increased 7%, reflecting a firmer market. The net result of our strong operational performance during the quarter was a 20% increase in operating income versus Q2, driven by organic growth and early realization of benefits from our capital investments and acquisitions.

As Richard will discuss in more detail, our capital investments and acquisitions are just beginning to deliver the expected benefits. This steady upward trend in revenues and profits that we've demonstrated throughout the first three quarters of our 2011 fiscal year has been driven by continued global demand for recycled metals, and our ability to efficiently and effectively serve that demand.

So now let's turn to slide six and take a deeper look into the performance of our Metals Recycling Business. Ferrous export sales prices peaked in February to just over $500 delivered, and have remained relatively stable in the $475 to just under $500 range since then. Softer demand in the domestic markets in April and May caused by both lower auto production and the natural disasters in North America resulted in some downward pressure on domestic prices. However, export prices stayed in the relatively tight range which as I mentioned earlier is very different from the volatility we experienced this time last year.

We continue to capitalize on our ability to access demand in the export markets, shipping our ferrous and nonferrous products to 18 different countries this quarter. Our largest export ferrous buyers in Q3 were South Korea, China and Turkey and on the nonferrous side our largest export destination was China. On the domestic front, as demand for ferrous scrap softens somewhat, we were able to opportunistically buy and sell more volumes to supply the increasing demand in the export market. Although versus Q2, our operating income was up by 20%, our operating income per ton of $31 was down.

As Richard will explain in more detail, this was driven primarily by not having the benefit of contract settlements and a boost from lagging average inventory costs, both of which we had in the second quarter, as well as the adverse impact of purchase accounting and acquisition transaction cost. However, because of higher volumes, we made higher operating income in the third quarter and we expect our operating income per ton in the fourth quarter to solidly exceed Q4 of last year.

So let's turn to slide seven for a review of the Auto Parts Business. In our Auto Parts Business, revenues grew 27%, driven by higher commodity prices for scrap and core sales as well as higher volumes. We also benefited from the seasonal uptick which drives additional admissions and parts sales. And we began to see early contributions from the five new locations acquired this year. During the third quarter, car purchase volumes grew through a balanced contribution of organic and new stores.

As we continue to integrate our new stores, we expect to see increasing benefits from implementing best practices and maximizing operating efficiencies. We believe we have a unique and highly successful niche in the recycled Auto Parts industry and we look forward to continuing to expand our operations. So now let's turn to slide eight for a review of our Steel Manufacturing Business. At SMB, higher volumes, higher prices, and continued benefits from operating efficiencies drove the division's strongest quarterly performance in this fiscal year. As a result, SMB delivered operating income of $3 million versus a small loss in Q2.

Our fiscal 2011 year-to-date looks a lot like 2010 in the long product segment of the steel industry. That is, there continues to be little sign of a sustained recovery in the West Coast construction markets. It's our product diversification and our focus on operating efficiencies that have enabled us to achieve profitability and to capitalize on the improvements in demand as they occur. We believe that there's a potential for significant upside when the domestic economy recovers and is able to deliver sustainable growth.

Let's turn now to slide nine. This slide captures our accelerating financial and operational performance. The blue bars on the right side of each graph reflect our performance over the last four quarters. As you can see from the two top charts, we've delivered increasing revenues and earnings growth. The strong upward trend in these key metrics is primarily driven by our ability to profitably increase throughput in our growth businesses.

As you can also see, our ferrous and nonferrous sales volumes both show a solid upward trend. What's not reflected in the blue bars that represent the last four quarters is the incremental impact in volumes we expect to see in future quarters from our recent acquisitions. This incremental impact is illustrated in the final bars on the right-hand side of the lower two charts. As you may remember, when we discussed the acquisitions last quarter, we noted that approximately 40% of the ferrous volumes and 100% of the nonferrous volumes would be incremental as some of the businesses we acquired were already our suppliers.

While the volumes that we were already purchasing do not show up as additional volumes, they do result in additional margin. Taking into account the two acquisitions we closed this quarter, we've acquired companies with annual volumes of 625,000 ferrous tons, of which 40% is incremental, and 98 million nonferrous pounds, 100% of which is incremental. So to wrap up my initial remarks, let's turn to slide ten. We've made a number of acquisitions across all of our major regions. Our strategic rationale is clear. To align ourselves with the supply and demand dynamics of the global scrap and steel industries and in particular, to leverage our unique geographic platform which includes our 7 deepwater ports and in 2012 we expect to be exporting bulk cargoes from our operations in British Columbia. Unlike the US steel markets, which are improving but only very slowly and with a fair amount of patchiness, the demand for scrap metal in the developing economies is robust and growing steadily as the developing economies continue to invest in infrastructure to support their growing middle class and as their governments and the steel mills operating blast furnaces seek to reduce greenhouse gas emissions and energy costs by increasing the amount of scrap metal used in their charges. As you can see from our results this quarter, we're just beginning to realize the earliest benefits from the investments that we've made in our acquisitions and in technologies to improve the operating efficiencies of our core and newly acquired businesses. We have a successful track record of acquiring and integrating companies, having closed 24 acquisitions in the past five years. We're on track with each of our acquisitions and expect to deliver significant synergies as we continue through the integration cycle. So now I'll turn it over to Richard to highlight market trends and our segment performance and to review highlights from our financials. And I'll return to provide our fourth quarter outlook. Richard?

Thank you, Tamara, and good morning, everybody. I'll start my presentation with Metal Recycling on slide 11. As shown on the left, the average ferrous sales price for the third quarter was $440. This was an increase of 16% from the third quarter of the prior fiscal year. Average selling prices also increased sequentially by 5%, but were slightly down from the higher price levels for shipments back in February.

Looking at the graph on the right, ferrous sales volumes in the third quarter were 1.5 million tons. This was a significant sequential increase of 33%. Softness in the domestic scrap market enabled us to increase our inflow significantly and led to a number of bulk shipments to export customers in overseas markets. These shipments included two cargoes that had slipped over from the second quarter and our sales also included an incremental amount from our new acquisitions. On a full year basis we are now trending at record levels due to both organic and acquisition growth.

Turning to slide 12, I'll discuss nonferrous. As the chart on the left shows, average nonferrous prices were $1.12 during the third quarter. This represents increases of 19% year-over-year, and 8% sequentially which were driven mainly by stronger demand for copper and aluminum. On the right, you can see third quarter sales volumes were 145 million pounds. This represented a significant sequential increase of 17%, and was up 20% compared to the same quarter in the prior year.

Nonferrous sales benefited both from acquired volumes and a higher intake which then flowed through to increased levels of nonferrous production. On a year-to-date basis, the underlying trend in nonferrous volumes continues to increase and is on a significantly higher run rate than our last fiscal year. Turning to slide 13. I'll summarize MRB's overall third quarter performance.

Looking first at the graph on the left, MRB's third quarter operating income was $46 million. This continued an upward trend in quarterly sequential performance. The third quarter result included an early contribution of $5 million from this year's acquisitions, which was made of an adverse impact of $2 million from purchase accounting which I'll come back to later on.

In the third quarter, we also absorbed $1 million of transaction expenses which were mainly incurred in connection with the two acquisitions we most recently completed. Compared to the prior year quarter, operating income was down but that is mainly because the third quarter of fiscal 2010 included a sharp run-up in selling prices that created a significant benefit from lagging average inventory costs. This benefit then reversed when the market fell in the fourth quarter.

Against the average of last year's third and fourth quarters, operating income in the third quarter of fiscal 2011 is significantly up. Operating income per ferrous ton is graphed on the right and shows that we achieved $31 in the third quarter. This is 11% higher than the $28 we achieved for fiscal 2010, and is comparable with the average of $32 for last year's third and fourth quarters. Operating income per ferrous ton was lower sequentially than the $38 we achieved in the second quarter.

This was due to benefits last quarter which included a $4 per ton net benefit from a customer contract settlement and from lagging average inventory costs and an adverse impact this quarter from purchase accounting. Moving on to slide 14, we will turn to the third quarter performance of our Auto Parts Business. Auto Parts continues to generate strong growth coupled with excellent operating profitability and increased car purchase volumes.

As shown on the right, third quarter car purchase volume of 93,000 cars was 8% higher year-on-year and 15% higher sequentially. The sequential increase of 12,000 cars was split equally between core growth and additional volumes from new stores. On a year-to-date basis, we purchased 256,000 cars and are trending to exceed last year's annual amount. APB grew revenues by 20% sequentially and 28% on a third quarter year-over-year basis. This strong growth was primarily driven by the combination of benefits from higher volumes, increased parts sales and higher commodity prices.

Third quarter operating income of $17 million maintained strong operating margins of 20%, and included a $1 million incremental contribution from the new stores. The operating margin was slightly lower sequentially as car purchase costs in the third quarter rose at a faster rate than selling prices for cars and scrap.

Moving to slide 15, and before turning to SMB, I'd like to give you an overview of the impact on our results from the acquisitions in Metals Recycling and in Auto Parts. The third quarter results include $6 million of operating income from current fiscal year acquisitions. This includes $5 million in Metals Recycling and $1 million in the Auto Parts Business. This was a significant early contribution from acquisitions, especially as the reported results were adversely affected by $2 million of purchase accounting impacts on inventory.

The effects of purchase accounting are temporary and while we expect an impact on our fourth quarter results, it will be less than the third quarter and will not impact fiscal year 2012. In addition, operating income from acquisitions does not include the benefits from synergies within our core business. Incremental volumes from acquisitions in the third quarter were also as expected and we're tracking towards the annual volumes we've projected upon completing the ten acquisitions in the year-to-date.

We continue to implement our integration plans and expect to achieve significant further synergies as we seek to maximize our investment returns. In summary, the operational and financial performance from the new acquisitions is on track at this stage of our integration process.

Now turning to Steel Manufacturing Business on slide 16. As expected, demand for the steel mills products increased in the third quarter due to the seasonal benefits of spring which increases the level of construction activity. Our third quarter sales volume of 118,000 tons as shown on the right was a 19% increase sequentially but down 10% from the prior year. Demand improvements enabled us to pass through rising scrap costs achieving average selling prices of $734 per ton. This equated to a 16% improvement year-over-year and a sequential increase of 7%.

SMB's revenues increased by 30% sequentially to $91 million, and were up 6% as compared to the prior year. The higher price environment and additional demand enabled us to achieve operating profitability of $3 million. However, the West Coast market continues to be soft and we are exercising strong discipline on operating costs, inventory management and ongoing levels of capital expenditure.

Now turning to slide 17. And before moving to the balance sheet, I'd like to discuss our consolidated operating expenses and our effective tax rate. As our SG&A is largely variable in nature, our significant business growth has led to an increase in this expense. However, to provide more perspective, the ratio of SG&A to revenues has declined this year from 6.7% to 5.8%, which reflects the increased operating leverage of the expanded platform of our business.

Our third quarter effective tax rate was 34.6%. This was higher than expected by 1.6% due to the timing of tax benefits on capital projects and the mix of domestic and foreign earnings which are taxed at different rates. Looking ahead, our expected rate for the fourth quarter and the fiscal year as a whole is currently projected to be 33.6%.

Now moving to the balance sheet and our investment activity, please turn to slide 18. During the first three quarters of fiscal 2011, we spent $293 million of cash on ten acquisitions, all of which have been funded from our existing credit facility. We also spent $75 million year-to-date on capital expenditures, which include $29 million for the third quarter. Our capital program is split almost equally between maintaining the business and our projects for growth, which mainly include the nonferrous technology upgrades, now complete at our four major export facilities.

During the remainder of our fiscal year, we expect to spend approximately $35 million on a combination of maintaining the business and further growth capital projects. Now turning to the impact on capital structure on slide 19. Our net debt at the end of the third quarter was $439 million and represented leverage of 29%. Since the start of our fiscal year, net debt has increased by $369 million, primarily due to our investments in a combination of acquisitions and capital expenditures.

Third quarter cash flow was impacted by timing effects as accounts receivable at the end of the quarter was up sequentially by $84 million mainly due to the record number of bulk shipments that went out in the month of May. These bulk shipment amounts have already been collected since the end of the third quarter. Now, I'll turn the call back over to Tamara who will provide our fourth quarter outlook and some concluding remarks.

Thanks, Richard. Let's take a look at our fourth quarter outlook on slide 20. For MRB in the near term, we see markets remaining strong and relatively stable, continuing to build momentum over time as economic activity continues to improve globally. In addition, we expect to continue to generate benefits from the investments that we've made year-to-date which will positively impact our bottom line.

From an operational perspective, we expect that ferrous volumes will approximate the record high third quarter volumes as a result of continued seasonal benefit in supply flows and strong demand, subject, of course, to timing of customer shipments. Nonferrous volumes are expected to increase approximately 10% from third quarter volumes as a result of increased production and enhanced technology. We expect both ferrous and nonferrous volumes to be positively impacted by contributions from the recently completed acquisitions. Average net ferrous sales prices are expected to approximate the strong Q3 levels while average nonferrous prices are expected to decline slightly.

On the whole, we expect MRB to generate stronger operating income per ton versus Q3 due to increased contributions from our acquisitions and higher nonferrous production. Operating income per ton in the fourth quarter is expected to solidly exceed operating income per ton in the fourth quarter of 2010. And for the year as a whole, operating income per ton is expected to exceed 2010.

Turning to slide 21. In our Auto Parts Business, we expect revenues to approximate the strong performance achieved during the third quarter. APB's margins are expected to decline slightly from the third quarter of 2011 due to normal seasonal decreases in admissions and parts sales and higher inventory costs, but we expect to exceed the margins achieved in the fourth quarter of fiscal 2010.

And finally, in our Steel Manufacturing Business, average net prices, sales volumes and margins are expected to approximate the levels achieved in the third quarter. To conclude, let's turn to slide 22. 2011 is continuing to be a terrific year for our Company. Last week, American Metal Market named Schnitzer Scrap Company of the Year. This award recognized our commitment to operational excellence including safety and service to our customers, as well as our significant growth and our contributions to the industry's global advancement.

None of this could have happened without the commitment to excellence of our 4,000 employees. This is their award. They're the ones who are out there every day supporting our suppliers, serving our customers, and delivering for our shareholders. As we look at the strong positive trends in our markets going forward, we're very optimistic about our future.

We've clearly demonstrated our expertise in identifying and executing strategic acquisitions which enhance our supply flows and overall distribution capability. And we continue to be at the forefront of our industry, investing in operational efficiencies, focusing on sustainable processes throughout our organization, and delivering continuous improvements which reflect our best-in-class approach.

We believe the combination of strong market dynamics, our geographic footprint and our successful strategies will continue to generate growth and long-term sustainable, superior performance. So now we'll open up the call for a few questions.

Thank you, ladies and gentlemen. (Operator Instructions) Eric Glover of Canaccord.

Hi. Good morning.

Good morning, Eric.

Yes, I'm trying to get a better sense of how metal recycling margins will benefit from the integration of the acquisitions and greater efficiencies from your new sorting and separation equipment. So if we assume, for example, that ferrous scrap prices remain flat going forward which is pretty much what you've guided for, but if we assume that continues through, say, fiscal 2012 as well, how should we think about MRB margins improving in that kind of environment?

Well, maybe I could take this one. Good morning, Eric. I think you need to look at -- let's look at the acquisitions on the nonferrous technology separately. And, firstly, I think in the nonferrous growth technology, what we are all about here is extracting more nonferrous from the stream.

What you're going to see there is the benefits come through in various places in the income statement, both through higher volumes and through higher margin. We've already said that our overall investment in this nonferrous technology is around $60 million, which we're expecting to produce returns that are significantly in excess of our cost of capital. I think it's early days at the moment, as we've only just implemented, but by the middle of the next fiscal year we expect to be at a run rate which meets our return expectation.

Moving to the acquisitions, as Tamara talked about the incremental tons that we bought and those we were already getting, plus the nonferrous. So the additional profits will probably come from 2 places. One will be additional profits from capturing tons previously supplied by suppliers because we're cutting out one transaction layer, and then from further operating synergies which will include amongst other things reducing our conversion costs, improved logistics, sales synergies and consolidating operations.

In terms of those returns, we've told you we've invested over $300 million. We are expecting returns in line with our cost of capital. I think you can see from our results, we've made a great start in Q3. It's already accretive to our earnings per share. But with significant synergies still to come, we expect those results to improve significantly over time and within a year to 24 months down the line to be getting up there near to our cost of capital. Does that help?

Yes, that is helpful, actually. Thank you. My next question is there's been some talk in the industry about over capacity in the shredding market. I'm wondering if you could address that issue, specifically in the markets in which you operate and whether you're seeing increased competition from shredders in your markets?

Good morning, Eric. It's Tamara. In the markets that we operate, as we have said before, we are -- we do not consider there to be an oversupply of shredding capacity. We think that the markets are equally balanced where we operate.

So what we have seen is strong supplies, good supply flows. As I mentioned in my comments, a lot less volatility than we saw last year and good demand from our customers. So we're not seeing in the regions that we operate any problems from over capacity. There's, obviously, competition which we've seen for the 106 or 107 years now that we've been operating and that's normal course.

Okay. And final question is should we expect the pace of acquisitions to slow in fiscal 2012 versus the prior year? And what are you guys seeing in terms of asset quality in terms of the companies that are remaining to be acquired?

In terms of pace of acquisitions, we've done about 24 acquisitions in the past 5 years and they've -- we've typically done 5 or 6 a year and you saw fewer than those in our fiscal year 2009 which was a result of the global financial crisis and a lot more in this past fiscal year. So it's balanced out to be 5 or 6 in each year over the last 5 years. Our pipeline remains robust and so you should continue to see us make acquisitions going forward.

Can you address the quality of the assets that you've seen now?

I'm not sure I understand that question. There are a lot of great companies out there. The companies that we have been lucky enough to acquire and integrate have been some great acquisitions and there are a number of other companies out there that we think are equally attractive.

Thank you.

Timna Tanners of Bank of America.

Yes, hello. Good morning to you guys.

Welcome back, Timna.

Thank you. Went by fast. Just wanted to ask two questions. The first is, I just wanted to discuss a little bit what the normalized earnings environment you see for the scrap business. We've talked in the past about a target EBIT per ton level. And it sounds like you had really strong pricing or steady pricing as you mentioned and strong volumes. So can you remind us or talk through with us what it's going to take to get to that better normalized number that you talked about historically from the current $31 per ton to maybe closer to $40?

Sure. Well, we actually like what we're seeing in terms of margin trends. We're very focused on growing operating income while achieving attractive returns on capital and so what we've been able to do and what you saw on a couple of the slides that we presented is we've been able to continue to increase our net income and we've been able to improve our returns through higher volumes.

So when you look at the last couple of quarters you have to adjust for the one-offs. And absent the one-offs we're not seeing compression and we're clearly forecasting for higher operating income per ton. In the fourth quarter, we're clearly going to see year over year higher operating income per ton. And the drivers that will continue to push that forward for us are the strategies that we've been pursuing now quite successfully for the last few years, which is acquisitions, investments in technology to enhance our extraction and continuous improvement. And those have been driving our margins steadily upward and we continue to see that trend.

The other thing that is not in our control that will clearly help margins is a stronger improvement in the US economy. And the economy has definitely improved since last year but quite slowly, although steadily. And that's helped with supply flows. And so the more traction the US economy can get, the better it will be for us.

So we still think we can get to that step change. Granted things have been improving and I'm not trying to take away from that but I'm just wondering about the step change to some of those levels that you've seen historically. Is that something you still think is reachable or has anything changed structurally?

We definitely think that they're reachable and the step change for us will be when you see the full impact of us getting through the integration cycles with our acquisitions, the 10 acquisitions we've done, and the full start-up, all the joint product upgrades are deployed. But in our 2 largest facilities in Everett and Oakland they're still in the first few months of operational maximization, if you will, or optimization, and so those will be the 2 step changes for us and you should expect to see them going forward into 2012.

Got you. Okay. And then my other question is about what you're seeing in terms of demand from China in particular, it sounds like things have been really steady there. There's some concern just because of the rolling power outages that they have every year but that seem to be pretty significant this year. And especially how that might affect any melting of scrap for their furnaces. So do you think that will have any impact? What are you hearing over there?

We are seeing very strong demand from China and there are seasonal ups and downs. As you point out, they have every year. They're growing and they're growing at quite a good pace and there's great debate about whether it's 9% or 8% or 7%. But the fact of the matter is they're growing and they need more material today than they did yesterday and they need more material tomorrow than they do today. So we see their demand as very steady. They were our second highest destination this past quarter and we're not seeing their demand fall off.

Okay, great. Thanks very much.

Thank you.

Torin Eastburn of CJS Securities.

Good morning. My first question --

Good morning.

Is about the volumes, your ferrous volumes this quarter, if you just take them and annualize them, it's close to $6 million. Do you think that's a fair goal for next year?

Well, as you said, Torin, it's Richard here, we're running well up in ferrous volumes, 33% up on the second quarter and the $1.5 million is a historic high. It may not be there every quarter, but somewhere between $5 million and $6 million doesn't seem like an unreasonable run rate given our new scale of our business.

And then my other question, in APB in Q2 and Q3 your margins were good but down from last year. Can you just explain in a little more detail what's driving that?

Yes, I can. I think first of all, I'd like to just point out that APB is growing from 39 to 50 stores in 18 months, so it's grown by 25%. So you have to look at the overall returns of APB both in the absolute profits and its margin. And they're trending up.

But if we look first of all against Q3 this year against Q3 last year, you're correct, the margins are less this year. It was 27% last year, 20% this year. That's because Q3 of last year included a significant average inventory accounting benefit from the increases in the commodity markets during that year and that then reversed in Q4. So the average of the 2, Q3 and Q4 last year, is actually quite similar to Q3 of this year.

When we look at Q3 of this year against Q2 of this year, and the 20% margins we've achieved this quarter are actually in our view still very strong but they are slightly less than Q2. That's purely a function of higher car purchase costs in the third quarter relative to sales because the second quarter included a small benefit from lagging average inventory costs. So the underlying cash performance is actually very similar.

Okay. And just to follow up on that. There weren't big swings in metal prices this quarter. Do you think that the margins that you're seeing in APB now are representative of a steady state profitability absent big movements in metals prices?

Yes, yes. The only thing that can affect them is seasonality. As you know, in our outlook for the fourth quarter, we're pointing to seasonal effect on car sales just due to hot weather. In some of our areas that has an effect on emission levels. But that's a seasonal effect. Very much believe the current level of margins are sustainable, as has been proven by our track record over the last several quarters.

Great. Thank you.

Sal Tharani of Goldman Sachs.

Good afternoon. How are you?

Good morning.

Couple of questions on a comment you made about sending some shipments from the East Coast all the way to Asia. Was it the demand from Asia was higher than the Mediterranean countries that you had to do that?

Sal, we do this from time to time and it's really a function of price, freight rates and demand. So we pointed out because, as you know, freight rates have been steady to downward trending and when you look at our freight rates you really have to look at cause as opposed to rate and because those freight rates from the East Coast to Asia are higher than East Coast to Mediterranean, you can see an upward trend in freight rates, but it's really the longer voyage. And demand was stronger throughout the quarter in Asia. That resulted in these higher prices and attractive freight rates, and so we were able to take advantage of the nimbleness and some more volumes.

So actually the freight adjusted operating -- the profit was actually better sending to Asia than to the Mediterranean countries?

That's right. At that point in time.

Okay. The other thing, Tamara, you mentioned stable prices for scrap and this is, we're seeing in the US also, in the narrow band of $20 plus or minus for the last 4 or 5 months. It looks like July will be very stable also. We haven't seen that for quite some time. Do you have any idea why we are seeing such stable pricing in scrap in this period of time? Since 2004, we have hardly seen such long stability in scrap prices.

Well, when we look at it, we think that there are a number of factors driving it and if we -- if you look at it versus last year, for example, we think that there's less sensitivity to inventory levels. If you remember, last year there was a lot more fear. It was when people were first talking about were there green shoots and was it at all sustainable. And so last year the inventory levels that customers carried were so low that a slight pickup in demand resulted in an outsized impact on inventories and on prices as people chased inventory build-out.

We think that while inventories are low on an absolute basis, they're definitely higher than they were last year and demand and utilization is slow and almost constant. There's a little bit of pickup in mill utilization but it's not dramatic. So we think that's a big driver of why domestic prices have been staying steady. But also I think you had the balance of less demand because of the floods and power outages in North America.

You also had lower auto production because of the impact of the Japanese tsunami. So I think all of those together and just this very slow, moderate recovery is keeping domestic scrap prices at this stabilized level.

Okay. And last question. There was some news in American Metal Market about some tipping fees in Hawaii. Is that a big impact for you if you lose that benefit?

Well, actually what happened, and it wasn't reported in American Metal Market, is that the city council in Honolulu overrode the mayor's veto 6-2. So the Bill 36, which was a compromise bill regarding the tipping fee discount, has been passed and will be effective July 1. So there will be a slight reduction but it will not be material.

Great. Thank you very much.

David Lipner of CLSA.

Hey, guys. Now that you're kind of through the nonferrous technology CapEx rollout, are there any other specific internal growth plans that you could speak to?

Well, our focus on continually investing in technology and improving our processes continues. So there are other projects that we have underway at various of our facilities, none of which we're prepared to discuss publicly. But I think that you will see continuous improvement and continuous enhancement in our margins as a result. We are undertaking the building of a new shredder in Canada in connection with the acquisitions that we made up there.

Great. Thanks.

Chris Olin of Cleveland Research.

I just have one question left over and I'm not sure if you hit on it. But I was curious if the after effect from the earthquake in Japan had any effect on your export business or the way Asia was buying material?

I think that's a great question, Chris. Thanks. Japan, as you know, wasn't exporting in the first 2 months of our quarter. They didn't really start exporting scrap again until the end of May. And so as a result, that did bring China and Korea to the US markets to buy because of the lack of supply from Japan.

Japan is now exporting. Demand is still staying strong. And most of their mills, if not all of their mills, are now up and running. So we haven't yet seen the impact from the reconstruction that will occur in Japan but we do expect that will occur and it should be positive for our business.

Okay. Thank you.

Brent Thielman of D.A. Davidson.

Hi, good morning.

Good morning.

Yes, Richard, sorry if I missed this, but did you say it was a $2 million hit related to the purchase accounting adjustments?

Yes, hi, Brent. The $2 million had to do with how we have to value inventory that we acquire from our acquisitions. So what we are required to do under the accounting rules is value that inventory at fair value which is well above the original cost and effectively you eliminate the margin on that inventory until it is sold through.

So we calculated that, that affected the results from our acquisitions in the third quarter by $2 million. Now, as I said, it's a temporary effect and it works its way out of the system because as soon as you've sold all that inventory that you acquired, the purchase accounting effect is gone and then you're selling inventory that you've acquired since the acquisitions where you get your full margin. So when the purchase accounting effect goes, the margins go up. And as I said, there will be a small effect still in the fourth quarter but after that it will have worked its way out of the system. Does that help?

That is helpful. And then second question, just, on the guidance for volumes, obviously, to approximate record levels you did in Q3, is it fair to say visibility in the export business is getting better or could you put some more color around it?

Well, the demand is clearly very strong. Visibility is better versus the depths of the global financial crisis but I think it's back to normal. We sell forward 4 to 8 weeks and as though we think the visibility is back to where it has been historically.

Okay. Great. Thanks.

Thank you.

Luke Folta of Jefferies.

Good morning.

Good morning. One question left I have is on the uses of cash over the next 12 months or so. Can you give us a sense of what your priorities are as far as funding internal or acquisition growth versus paying down debt?

Certainly. Our uses of cash, you can really prioritize in the following way. Growth opportunities continue to be primary. We're a growth Company. We have a track record of investing well.

So that's first use. Paying down debt is second. Offsetting dilution from stock issuance that we do in connection with our ELTIP program would be third. And then opportunistic share repurchases would be fourth.

And then how do you see that balanced over the next, say, 12 months or so? I'm just trying to get a sense of where your debt levels might be sometime toward the end of fiscal 2012.

You should expect to see us continuing to invest in growth, whether that's acquisitions or CapEx. We generate a lot of cash as you've seen in the past, so we do anticipate that our debt levels will come down. But that strategy is one that we've pursued in the past and you should anticipate that we will continue to do going forward.

Okay. Great. Thank you.

Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Well, thank you, everyone, today for joining us on the call. I look forward to speaking with you in October when we report our fourth quarter and full fiscal year 2011 results. In the interim, have a very safe and enjoyable 4th of July holiday. Thank you.

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