Radius Recycling Inc (RDUS) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Schnitzer Steel's fourth quarter 2012 earnings release conference call. (Operator Instructions.) As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Alexandra Deignan. Ma'am, you may begin.

Thank you, Mary. Good morning. I'm Alexandra Deignan, the company's Vice President of Investor Relations. I'd like to thank everyone for taking the time to join us today. In addition to today's audio comments, we've prepared some slides that you can access on 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 2, which are also included in our press release of today and in the Company's most recent Form 10-K. 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.

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 to 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, Ally. Good morning, everyone, and welcome to our fourth quarter and fiscal 2012 earnings call. Before I begin the review of our financial and operating results, I'd like to take a moment to thank all of our employees for their unwavering focus and their commitment to our Company during what has clearly been one of the most challenging years in a decade for the metals recycling industry. We faced a lot of headwinds this year from the effects of the European financial crisis and the economic slowdown that has been occurring throughout the world. This is not the first time that we've been faced with a tough economic environment, and just as we've done in the past, our team has exhibited the strength of purpose and the resiliency that we've shown for over a century.

During a year in which we saw a softening in demand and pricing across all of our markets, we streamlined our operations to generate significant SG&A savings and synergies. We increased our nonferrous volumes, we maintained a strong balance sheet, we generated significant cash flow, and we returned capital to our shareholders through share repurchases and an increase in our dividend, while ending our year with 30% less net debt.

With that introduction, let's turn to Slide 4, and I'll provide some further details on our consolidated performance and some macroeconomic and market trends before turning it over to Richard, who will provide the segment and financial review, and then we'll open up the call for some Q&A.

As you may have seen in this morning's press release, we reported adjusted earnings per share of $0.10 for Q4. Our adjusted EPS number excludes a $5 million pre-tax charge associated with corporate restructuring initiatives that we announced on August 28. These initiatives were primarily targeted at reducing SG&A, streamlining our operations, and generating cross-divisional synergies between our metals recycling and auto parts businesses. Together, these changes are expected to result in annual pre-tax savings of $25 million.

As we noted in the market outlook that we provided in August, our fourth quarter performance was adversely impacted by a sharp drop in ferrous sales prices, which occurred in early June. The downward pricing environment also constrained the supply of scrap during the fourth quarter. Slower global growth rates, economic and political uncertainty in the world's largest economies, and a stronger US dollar have all led to falling prices, lower demand, and lower scrap availability. As a result, we've seen unusually low inventories being held at the mills. But as we have seen before, when mill inventories are unusually low, a slight uptick in demand can result in a sharp upward move in prices.

And if we turn to Slide 5, we can see the movements in export sales prices more clearly. As you can see on this chart, ferrous export prices have declined throughout our fiscal year, which began in September 2011 and coincided with the escalation of the European financial crisis. Weakness in consumer consumption and in construction and manufacturing activity has led to an excess supply of finished steel globally, and together with the prolonged political and economic uncertainties, continue to weigh on customer buying activity. As a result, our customers are holding very low levels of scrap inventory.

If history is a guide, which in this uncertain economic environment is not a given, we typically see a push-up in pricing as restocking occurs in anticipation of winter weather challenges. Pricing could also receive a boost from an improvement in global steel demand following policy stimulus.

Now let's turn to Slide 6 to look at our quarterly ferrous sales pricing. Looking just at the quarter, ferrous export prices fell sharply in June, by about $70 to $80 a ton. This sharp drop continued the downward pressure in sales prices that we've experienced for most of the fiscal year. Prices rebounded slightly in August for September shipments but trended down again in September and October. Over these last six months, that equates to a drop of around $100 a ton. Nonferrous prices also trended down during the quarter, but not as sharply.

While domestic and export markets are typically influenced by different factors, both export and domestic prices retreated during the fourth quarter due to the weak economic environment and lower steel mill utilization levels. While the peak-to-trough was much greater, average export prices in Q4 decreased $43 from Q3, while average domestic prices declined $53 sequentially.

If we turn to Slide 7, we can take a look at our sales volumes across all four businesses. As you can see on this slide, annual ferrous sales volumes declined 4% in fiscal 2012 to 5.1 million tons, primarily due to the sharp lower pricing environment, which impacted the availability of materials during the fourth quarter. On a relative basis, total US ferrous exports were down 7% for the 12-month period through August 2012, so our performance was better than the overall market.

On the nonferrous side, our volumes increased 11% year over year to 629 million pounds, reflecting the full-year benefits from the acquisitions we made in fiscal '11, and from our investments in nonferrous extraction technology, which has allowed us to recover more material from every ton processed through our shredders.

In our auto parts business, car purchases of 339,000 were slightly lower than in fiscal year '11, reflecting the weak domestic economy as well as the slide in commodities prices, both of which dampened flows of end-of-life vehicles.

In fiscal '12, our steel mill increased volumes 2%, which drove a full-year utilization rate of 58%. While fiscal year '12 as a whole looks generally flat from a volume perspective, the quarterly analysis reflects a different trend.

So if you turn to Slide 8, we can look at volumes on a quarterly basis. On this slide, you can see the significant drop in ferrous sales volumes that occurred in the fourth quarter -- 13% sequentially. This was primarily driven by the sharply lower price environment. On the nonferrous side, volumes increased 10% sequentially to 169 million pounds in the fourth quarter. The stronger nonferrous volume performance primarily reflects the benefits from our investments in nonferrous extraction technology and our larger platform.

If we turn to Slide 9, we can take a look at quarterly volume trends for our auto parts business and our steel manufacturing business. Fourth quarter volumes in our auto parts business were down 9% sequentially, driven by the effect of falling commodity prices on sales, which impacted the availability of cars. In the steel manufacturing business, volumes were up 22% sequentially. However, lower selling prices, combined with unscheduled down time, offset the benefit of the increase in sales volume.

Let's turn to Slide 10 for a review of the export market destinations for our scrap. During the fourth quarter, demand continued to be broad-based, with 84% of our external shipments exported to a total of 18 countries. Our ability to ship to diverse destinations mitigates the impact of slower sales in any particular country. In the fourth quarter, Turkey, South Korea, and Taiwan were our top ferrous export destinations, while for the full year, Turkey, China, and South Korea were our leading export destinations. For our nonferrous sales, China, the US, and South Korea were our top destinations for both periods.

While US ferrous export sales were down year over year, steel usage and scrap demand in the developing markets are not disappearing. These economies are not coming to a halt. Urbanization is continuing and infrastructure is still being constructed, and on the nonferrous side, materials like copper are needed to support a wide range of economic activity, from power to consumer products.

While we intend to provide our Q1 market outlook in November, current market conditions have continued to be challenging. Looking at our first quarter, we anticipate significantly reduced volumes in MRB due to continued weak demand in September and October, lower mill utilization rates and customers inventories, and the impact of the lower price environment on supply flows. We also may have an adverse impact from average inventory accounting if prices do not strengthen considerably towards the end of the quarter. We are, however, seeing some early signs of price strengthening in November that could benefit our December shipments.

So let's now turn to Slide 11 for a brief review of our capital allocation before I turn it over to Richard. Despite the challenging market conditions encountered throughout the year, we delivered strong operating cash flow of $245 million, and we reduced our net debt leverage to 18%. We accomplished this while continuing to invest in operating and growth CapEx, increasing our annual dividend to $0.75 a share and repurchasing over 1 million shares of stock. Our ability to generate strong, consistent cash flows despite falling prices and lower sales volumes reflects the strength and resiliency of our business model and geographic platform, and the excellent talent we are proud to have on our team.

To further strengthen our position, in August we announced the implementation of new initiatives to extract synergies between our MRB and APB divisions by integrating operational and administrative processes and reducing overall costs. We also realigned our organization to simplify our structure, enabling our teams to work more easily across organizational boundaries. We have consolidated parallel structures, reduced layers of management, and increased spans of control.

These organizational changes were unfortunately accompanied by reductions in our workforce, which none of us took lightly. This restructuring has been a necessary step in our continuing effort to lower our cost of doing business, to empower new leadership to implement strategic initiatives, and to increase our profitability as we face the continued headwinds of a weak global economic environment.

So now let me turn it over to Richard for a detailed look at our segment performance and our capital structure.

Thank you, Tamara, and good morning. I'll start on Slide 12 with a review of MRB's financial performance. Operating income per ferrous ton was $11 in the fourth quarter and, on average, was $12 for fiscal 2012. Our fourth quarter operating income was $13 million, which was down $5 million compared to the previous quarter. The fourth quarter included benefits from higher selling prices in the early part of the quarter, before the fall in the market. We also increased nonferrous volumes through a combination of increased sales activity and higher production from our separation technologies. In addition, the cost trend on SG&A continued to fall, including a $2 million benefit from a reduction in environmental liabilities.

Average inventory costing, which we use to calculate the cost of goods sold, had an adverse impact on the fourth quarter compared to the previous quarter, of approximately $18 million. Consequently, MRB's fourth quarter operating cash flow performance significantly exceeded our reported results. Towards the end of August, lower-than-anticipated purchase prices for scrap and higher shipments of nonferrous enabled MRB to exceed their market outlook for the fourth quarter. Looking at MRB's fiscal 2012 as a whole, operating margins were compressed compared to historical levels due to a combination of soft demand and the constrained supply of scrap.

Now moving to the auto parts business on Slide 13, operating margins in the auto parts business were also impacted adversely by average inventory accounting, which caused approximately $9 million of the reduction in operating income compared to the third quarter. Other factors which contributed to the sequential change in operating income included the impact on revenues of falling commodity prices and the normal seasonal impact on admissions of hot summer weather. However, we exceeded our market outlook for the fourth quarter, as higher ferrous and nonferrous gross margins in August led to better-than-anticipated financial performance.

For the full year, our auto parts business had operating margins of 11%, despite significant volatility in commodity markets and reduced availability of end-of-life vehicles.

Now turning to our steel manufacturing business, on Slide 14. In our steel manufacturing business, fourth quarter sales volumes increased by 22% sequentially and are up by 2% on a full-year basis. Sales prices in the fourth quarter decreased by 7% sequentially due to downward effects of lower costs for raw materials. This offset the benefits from the higher sales volumes, which, combined with unscheduled mill shop downtime and adverse effects of average inventory accounting, resulted in an operating loss for the fourth quarter of just less than $3 million. Rolling mill utilization was 64% in the fourth quarter, and for fiscal 2012, the average utilization was 58%.

Now moving on, we'll review our cost reductions on Slide 15. In August, we announced initiatives designed to produce further synergies from our investments in fiscal 2011 and to streamline our organization, including a workforce reduction of 7%. We are taking steps to reduce organizational layers and to increase the use of shared services across our Company, in particular between our metals recycling and auto parts businesses. The initiatives are expected to lower annual pre-tax operating costs by $25 million. Around $7 million of the benefit will be realized in cost of goods sold, and $18 million in SG&A. We are on track and expect part-year benefits in fiscal 2013 as we implement the initiatives throughout the year.

In total, our restructuring charges are expected to be approximately $12 million, which includes severance costs of $4 million, lease termination costs of $5 million, and $3 million of other related costs. During the fourth quarter, we incurred $5 million of the restructuring charge, which equates to approximately $0.12 of diluted earnings per share. We expect to incur the balance by the end of fiscal 2013.

Now I'd like to review our cash flow and capital structure on Slide 16. In the fourth quarter, we generated strong operating cash flow of $108 million, which contributed to operating cash flow of $245 million for the fiscal year as a whole. The primary drivers have been our positive EBITDA and reductions in working capital, mainly from lower inventories and reduced accounts receivable. Our performance demonstrates that we are able to generate strong cash flows in different types of economic environments.

Capital expenditures were $79 million in fiscal 2012, which was 25% lower than the previous year. Our major projects include the construction of a new shredder and nonferrous technology for our metals recycling operations in Canada. We expect the new shredder to commence operations in the second half of fiscal 2013.

As a result of our strong cash flow, we were also able to continue our share repurchase activity and fund our dividend increase, while at the same time reducing our net debt to $245 million and our net debt leverage to 18%.

Now, I'll turn the call back over to Tamara for some concluding remarks.

Thank you, Richard. Market conditions remain challenging, with little clarity on a multitude of economic and political challenges, both domestically and abroad. In the US, fallout from our own fiscal cliff could further slow already sluggish GDP growth, through the combination of higher tax rates and preordained spending cuts. Outside the US, Europe continues to struggle with austerity measures and the negotiation of bailout funds.

On a relative basis, Asia continues to be the bright spot for overall growth, even taking into account the reduced growth expectations this region has experienced due to the significant impact of the European crisis. Recent announcements of stimulus packages and monetary policy easing should help reignite growth and infrastructure spending in the region.

Additionally, Turkey continues to produce at a strong rate, and with approximately 70% of its scrap imported, should continue to be an important source of demand in the ferrous export market.

We expect the economic environment to remain challenging for the near term, but we have consistently shown the ability to successfully navigate difficult markets. We have proactively realigned our business to adjust to current market conditions and to drive profitable growth. The long-term fundamentals driving both fixed asset investment in the developing world and increased EAF steel production throughout Asia, Turkey, and the Middle East still remain. We believe that market conditions for our businesses will improve as infrastructure continues to be a global priority and when the economic headwinds, which have restricted supply in North America, begin to lessen.

Furthermore, we remain steadfastly focused on driving shareholder value by concentrating on operational performance, strategic growth initiatives, and balanced capital allocation. We intend to maintain our conservative capital structure as a means to weather the well-known cyclicality of our markets, and to drive shareholder value through profitable growth and by returning capital to shareholders.

Operator, let's open up the call for questions.

(Operator instructions) Joe Krawczak, Longbow Research.

So I guess, firstly, just wondering how you'd characterize buying sentiment amongst your core export markets now? I mean, particularly, I guess, Turkey and China? I'm trying to get a sense of where you'd say inventories currently stand.

Well, I think that we're seeing some firming in the market. You know, overall, the tone has been cautious, and we've seen that reflected in the drop in prices. But China re-entered the market a few weeks ago. They were out for most of September and October, and they're back in the market. And as you know, for the full year, they were our second-highest buyer. And although they weren't in the top three for Q4, they did buy during Q4. And Turkey was our top buyer, both for the full year and for the quarter, and they're continuing to buy. So while prices are down there by probably about $50 since June, they are also in the market. There's a holiday going on right now, so we expect to see them back in the market next week, and as I noted in my remarks, we are beginning to see prices firming.

And would you say inventories are still at pretty low levels right now?

Yes.

OK. And do you think they're low enough that we could potentially see a sustained period of buying this winter, or do you think it's going to continue to be that lumpiness, month to month?

Well, I think the major reason why people are keeping low inventories is a lack of confidence, and a lack of confidence because of the political and the economic uncertainties that are raging not just in the US, but throughout the world. So I think restocking will occur (1) because they're unusually low, (2) when we see increased confidence, and (3) because there is beginning to be a recognition that supply shortages made this, because prices did fall so dramatically in September and October.

Okay, great. Thanks. And then secondly, are you seeing any further consolidation opportunities in the auto parts business, and I guess more broadly speaking, where you see this business going over the next year or so? Do you have a goal number of locations in mind?

Well, we did see acquisition opportunities in both of our businesses, both in auto parts and in metals recycling, and we've got a good pipeline of opportunities with both of those businesses.

Okay, great. Thank you very much.

Brent Thielman, D.A. Davidson.

I guess I was trying to understand some of the moving parts in the quarter just a little bit more, and I was curious in the metals recycling business, did you see much of a benefit from sort of that late improvement in the scrap market during the quarter, or does that fall more into the first quarter?

Well, prices rebounded a little bit in August, as I mentioned, but then continued to fall in September and October. And we're beginning to see price firming in November, but the primary benefit of that will be in December's shipments, in all likelihood.

One thing I would add, Brent, the falling scrap prices in August that Tamara mentioned was one of the reasons why we beat our outlook, because those falling prices led to our cost of goods sold being slightly less than we had anticipated.

Okay. So it did have a modest impact, probably fair to say? Okay, and then I guess on the auto parts business, I think you talked about some sequential pressure due to seasonality, but how are auto parts admissions on a year-over-year basis?

Well, auto parts admissions on a year-over-year basis are reasonably stable, Brent. Just a second here. Admissions in fiscal '11 and fiscal '12 were actually very similar, at 5.4 million, so they're flat.

Okay. And then obviously this latest quarter, you had some unusual moves in commodity pricing, and certainly an unusually low level of earnings there. I guess even with this pressure on prices into the first quarter, do you expect some sequential improvement from that business?

Yes. I think we would, because we had this seasonal effect in the fourth quarter of lower part sales. And then secondly, we had a very significant impact of average inventory activity in the fourth quarter. That was around about a $9 million adverse effect in the fourth quarter when we compare the fourth quarter results to the third. We wouldn't expect, in the first quarter, that to repeat in full, although that is subject to where commodity prices are going and, as you heard Tamara mention, in September and October we did see prices fall, so that's something we're monitoring closely.

Great, thank you.

Phil Gibbs, KeyBanc Capital Markets.

I may have missed this if you talked about it earlier, because I'm just jumping on, but what should we think about as far as the shredding capacity expansion up in Western Canada?

Well, we are building out our shredder there, and we would expect that to come online in the first part of 2013.

Okay. Any sense -- can you give us any sense how much that adds, as far as your capacity?

We haven't disclosed that, and we don't disclose shredder capacity by region. But it is a terrific growth opportunity for us, and we're expecting great things from that region.

Okay, and then just a follow-up here, if I could. So moving into late October and November, what have you seen as far as any differentiation in the export market from ferrous and nonferrous? Has one been stronger than the other, one been weaker than the other, or both of them been following each other?

Well, we will provide our outlook towards the end of November for the first quarter, and so I really am limiting my remarks to what I indicated before, which is that we are seeing price firming right now in the ferrous market. And the nonferrous markets for us, I think you've seen, have continued to be growth markets for us. We are now doing significantly over 600 million pounds of full year in our nonferrous markets.

OK, and just lastly here, as far as your view on China, what are you seeing there as far as their demand? Are they shifting to more internal use of scrap? Has the demand slowed? I'm just talking about your most recently finished quarter, not necessarily what you see this quarter. Thanks.

Yes, well, you know, they did buy in Q4. I think that they do arbitrage between iron ore and scrap, but they also need the better quality scrap that comes from the US versus the scrap that they internally generate. So they were buying, but they're back much more strongly in the market over the last few weeks than they were earlier in the quarter.

There was recent data out on China today where it shows that their manufacturing is indicating -- manufacturing activity is showing signs of recovery, and that follows better-than-expected September numbers that came out on IP, on industrial production, and investment and consumption. So there may be a bit of a nascent economic recovery that's coming through that will continue to get some support of policy stimulus.

Luke Folta, Jefferies.

I also joined the call late, so I apologize if these questions are repetitive. But your nonferrous shipments in the quarter were pretty strong relative to ferrous. It's one of the higher percentages I've seen in a long time, and I'm curious to know if there was some timing involved in that, or if it's related to more capacity you have, or anything you could say on that on would be helpful.

Hi, Luke, it's Richard. It's timing of sales. We had a couple of things happen there -- a strong selling quarter, and then also some high production as we ran through inventories on nonferrous as well, which helped. So our shipments of nonferrous in August were higher than we'd originally anticipated, and that's one of the reasons why our Q4 outlook was exceeded by our actual results.

Okay. And then if I look at your cost performance in the quarter, SG&A and then corporate expense on the segment side, if you strip out the $5 million that you characterize as restructuring, it's a pretty decent step down. I guess I'm trying to understand, of the $25 million annual savings you've targeted, if we use this quarter as the run rate, how much of that savings is in the adjusted number already? So when we look at the go-forward rate, what's the base we should be using?

Yes. Well, firstly, I'm glad you mentioned our reducing run rate on costs. That's been something we've been aiming to achieve. It's good that people are noticing it come through in our numbers.

And the $47 million of SG&A in the fourth quarter did not include any of the restructuring charge. That is disclosed as a separate line in our income statement, so that's our underlying cost. In addition, because we only announced our restructuring program right at the end of August, there are no significant savings in that $47 million, either.

So if you stand back, our SG&A for the year was around $206 million, and we've said that out of our $25 million of annual savings, $18 million of that is SG&A, and $7 million is cost of goods sold. So in terms of SG&A run rate, you would start with the $206 million. We've also said that we'll be implementing the restructuring initiatives throughout the year. We expect a part-year benefit of that $18 million to benefit our SG&A coming off the $206 million for fiscal '13. Does that help?

Yes, that's exactly what I was looking for. Can I ask another one?

Sure.

Also, I've recently become aware of some fairly interesting technology that's available that can be used to recycle copper wire from the scrap flow. I just thought it was interesting and wanted to know if you guys are taking advantage of that opportunity or plan to at some point in your future.

Well, we have invested in technology, leading-edge technology, for the last, I would say, last seven years, and so it's a tribute to a very strong team we've got internally that stays on the edge of both extraction and separation technologies. So we've made a lot of investments, you'll continue to see us make leading-edge investments, and we're happy to take you on a tour of our facility so we can show everybody.

Be happy to go. Thanks for taking my questions.

Timna Tanners, Bank of America.

I want to just ask a few lingering questions, if I could. We've heard a lot of companies talking about recycling nonferrous and recovery of nonferrous. I think Steel Dynamics and CMC are the latest, and some private companies, even. Is there a risk that we get too much quantity of this product and depress the margins on it?

No, I don't think so. I think that the main advantage of the technology is that it allows us to get to intrinsic value of the metals that are being extracted and separated. So I don't think that we would end up with an overflow. What you end up doing is getting a better price for the materials that you're selling.

Okay. All right, so that's helpful. And then I just figure we haven't asked this for a while, but I just wanted to revisit Cascade. It's definitely been a tough environment for non-res, but we have seen better performance from some of the other rebar-focused companies in the region. We know all the challenges there, but the mill hasn't really been decently profitable since before '08, when non-res was maybe at an unsustainably high level. So how do you think about how to manage that business or how to mitigate the risk of pressure from that segment going forward?

Well, we believe that Cascade is uniquely positioned geographically to benefit from a rebound or strengthening of the non-res market. And as you point out, home sales are up, home-building's up, and non-res usually lags that six to nine months.

Prior to the global financial crisis, it was our highest-returning asset, generated a lot of cash flow, and had a lot of demand for its products in the region in which it operates. So there will be a turnaround in the market coming, and we think it's uniquely positioned to benefit from that. And it is not a drag on cash flow, it is not a management distraction. It's well positioned for a recovery.

All right, then, thanks.

Evan Kurtz, Morgan Stanley.

Maybe just a quick question on the longer-term outlook for margins in the metals recycling business. And barring a full-blown demand recovery for steel, say we're in a slower-growth environment going forward, do you think $12.00 or $13.00 a ton is sustainable, or -- I know you're making efforts to bring down your costs. Is there something the industry could do to help as far as consolidation/maybe removing some of the (inaudible) that's been added over the past decade or so?

I do anticipate that we'll see some consolidation occurring in the market. That happens naturally, and that obviously gets accelerated in weaker economic environments. There are a number of drivers that can improve margin, not just in MRB, but in all three of our businesses, and probably the biggest lever and the biggest disruptive factor has been the fall in GDP. So the biggest lever is an improvement in that.

And that can take a number of different paths. The resolution of the fiscal cliff, supportive energy policy, predictable, reasonable regulatory and tax environments, and investments in our country's infrastructure can all be underlying drivers that will lead to higher margins.

Okay, maybe just a more specific question. I have a contact in Turkey who was telling me that, given where billet and slab prices are right now, there's been a lot of incentive for EAF furnaces to actually shut down hot ends and just roll merchant slab and billets, given that the prices are almost on parity with the scrap these days. Is that a widespread trend that you're seeing, or is that maybe just something that's happening on a limited basis?

I think to the extent that that's happening, that's happening to address the hiccoughs that you see in the demand cycle. So I don't see that as a long-term trend.

But you are seeing that, to some degree?

What you mentioned, we had heard of as well. So I can't tell you that we're seeing it or that it was impacting sales, but I think I heard the same thing, or we heard the same thing that you've heard.

Okay, great. Thanks, guys.

Dave Lipschitz, CLSA.

So my quick question is in back of Evan's question about margins. If China and Turkey are just going to continue to go in and out of the market, creating big fluctuations on a month-on-month -- two months down, one month up -- what do you do to change yourself to increase your margins, or do your margins just continue to stay under pressure, whether it's due to inventory adjustments or anything like that?

Let's step back for one second. China and Turkey are two big buyers, but South Korea, Taiwan, Malaysia, Indonesia -- we sell to 18 different countries. So we can, to look at China and Turkey as the two big buyers on one coast or the other. But this is a spot market, has always been a spot market in terms of how we sell our product, so volatility is part of the nature of the business.

So I make that comment at the outset. In terms of margins, and certainly margins and volumes, they both are cyclical, and they both will improve with higher growth rates. They will improve with stronger economic underpinnings. But what we do to drive our margins is really focus on a number of things -- cost efficiencies, operating efficiencies, using technology, extracting synergies between our businesses, and expanding the size of our platform. And those are objectives that we've been pursuing for the last six or seven years. And they're ones that we will continue to pursue, and we've been successful at doing so.

Okay. Just also another follow-up on the SG&A question. So you did $47 million on the quarter, and if I do the math on what you talked about, that gets you to a $47 million run rate going forward. So is the $47 million rate, is the going run rate in terms of with the $18 million off, or is it off of the $188 million minus $18 million? That's where I was just a little bit confused.

I think that's a good question, David. No, because remember, we disclosed that in the fourth quarter, we had a couple of non-recurring items in SG&A. First of all, we had a $2 million reduction in environmental liabilities. And secondly, we had a $2 million reduction in our compensation accrual. So that puts the run rate at just above $50 million, which is consistent with the $206 million for the year. So that's our starting point, and we're seeing that there's annual cost reductions of $18 million in SG&A and $7 million in cost of goods sold. So really, our FY '13 SG&A is a function of how quickly our restructuring initiatives are implemented, because we'll have a part-year effect. We've made a very strong start there, and we're hoping to have the majority of them implemented by the time we get halfway through the year. So we'll have quite a strong part-year effect of that coming through.

Okay, and just -- you know what, that's it. Thank you very much.

Sal Tharani, Goldman Sachs.

I wanted to ask (inaudible) about the availability of scrap or going deep into the pool of the scrap, and you had this second pool which grew very rapidly in the very early years but has stagnated in terms of adding more capacity. I know you did that Greenleaf acquisition which didn't fully pan out, and you got out of the full-service business, or most of the full-service business. I was wondering if there is an opportunity or there are services or other wrecking places available where you can expand into regions or geographies or types of self-service or full service.

We are going to be expanding our auto parts business, and you should expect to see us add a number of new facilities to that platform this year.

This fiscal year?

Yes, fiscal year '13, correct, which is what we're in right now.

Great. Thank you very much. That's all I had.

Arun Viswanathan, Longbow Research.

I guess my question's a couple of questions. Have you seen any change in competitive activity, with the volatility this year in scrap prices? Have you seen any weaker, smaller competitors exit the market, and do you expect that to happen?

Well, I do anticipate that there will be consolidation in the market occurring over the course of the next year or two. We made 10 acquisitions in fiscal '11. We didn't make a lot of acquisitions this year. But I think this weak economic environment is going to drive more consolidation.

Okay. And then the other question I had, I guess, is from a structural standpoint. Last year, it seemed like scrap wouldn't go below $400, and this year we've dipped into $325 and $315 and so on. And then we've gyrated back up to $425. Is volatility the new regime, or are we going to, just because of the export markets, or how do you guys look at the scrap market and how do you plan for it?

Scrap prices have always been volatile, and volatility is our friend. We are able to navigate quite nimbly through the volatility. And so this isn't a surprise. What we don't like to see is falling prices without the rebound. And clearly, we've seen a lot more of that this year than we saw in fiscal year '11. If you remember, fiscal year '11 saw some volatility, but the overall trend was an upward trend.

Our fiscal year began with the European financial crisis in the fall of 2011, and we saw volatility, but the overall trend, as you saw on one of the charts that we put up, was a declining trend. So we were in two very different markets between fiscal '11 and fiscal '12. The performance was very different, but there was volatility in both.

Right, and I guess the change has been that the macroeconomic backdrop has weakened, especially in China and Europe. So if that remains, would the trend on scrap prices remain downward?

I think that depends upon what your time horizon is and your ability to forecast and what your perspective really is on what caused the market disruption, if you will, the prolonged fall that we've seen over the past 12 months. And I think the biggest disruptive impact has been the fall in GDP and the uncertainty and the non-resolution of some significant economic and political issues. And I think with resolution of that, with clarity, I think there are a number of fixes that could be undertaken where you'd start to see that rise come back up.

Recognize 12 months ago, we weren't in a dramatically different economic environment, but the outlook was more positive. And so in fiscal year '11, we had operating margins in our metals recycling business of $31.00. We had margins in our auto parts business in the high teens and low 20s. And that was all with more certainty, more confidence in the market. And these past 12 months, the overall market has lost confidence. I'm not talking scrap market; I'm talking general economic market.

So I think that things could turn. The ability to forecast when that happens is left to others. But it is fixable.

Okay, and then -- I'm sorry, just one more. What's your outlook, then, for scrap feedstock and how the flows evolve and prices evolve for feedstock?

I think it's been a tried-and-true maxim in the scrap industry that rising prices bring out more scrap. And so I think that as prices rise, we will see supply come into the market, but clearly with increase in consumer activity, increase in manufacturing, increase in construction -- all of those things need to happen. They're the underpinnings of an increase in GDP that will drive sustainable supply.

Okay, thanks.

Mark Parr, KeyBanc.

I had a question just in general. You had mentioned that in your fiscal '12, you didn't make a lot of acquisitions because of the economic climate, and I certainly can understand that. But you seem to be indicating an expectation that you'll be resuming or getting back into the acquisition situation here fairly meaningfully in the current fiscal year. Just curious. That must come along with some optimism about the profitability, the cash-generating characteristics of your business. Could you talk a little bit about what you think has the greatest potential there to change things? And what's the basis for -- or just in more general terms, what's the basis for a more aggressive tone from an acquisition perspective?

I think you know with respect to acquisitions that you can't force them to happen, and you've got to look at the opportunities that present themselves. And different market environments present themselves. Succession planning at certain companies present themselves. So there are a lot of -- acquisitions are fundamentally opportunistic in timing, which is why we made 10 acquisitions in fiscal '11, and we had made very few in fiscal '10. So you can't really time them. And so I'm looking at our pipeline and I'm looking at our priorities, and that's really what's driving, if you will, the tone of my comments.

Okay, all right. Thanks very much.

Thank you. I show no further questions at this time and would like to turn the conference back to Ms. Tamara Lundgren for closing remarks.

Thank you. I'd like to thank our team members, our shareholders, our suppliers, our customers for joining us today and for your interest in our Company. We look forward to speaking with you again when we report our first quarter results in January. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.