Radius Recycling Inc (RDUS) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Schnitzer Steel first-quarter 2013 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 follow at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Ms. Alexandra Deignan. You may begin, ma'am.

Thank you, Kevin. Good morning. I'm Alexandra Deignan, the Company's Vice President of Investor Relations. Welcome to Schnitzer Steel's first quarter of fiscal 2013 earnings presentation, and we thank you for taking your time to join us today. In addition to today's audio comments, we have a prepared set of 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, and in the Form 10-Q, which will be filed later today. 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 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. Good morning, everyone, and welcome back from the holiday break. Today we'll be reviewing our first-quarter performance for fiscal 2013. As we normally do, I'll provide some commentary on our consolidated performance, and on the macroeconomic and market trends impacting our businesses, and Richard will provide the segment and financial review. I'll make some closing comments, and then we'll open up the call for Q&A.

But before we begin, let me take some time to make some general comments. Calendar-year 2012 was another tough year for the metals recycling and steel industries. Weak GDP growth in the US and throughout the world led to muted demand. The fiscal cliff issue in the US, the European economic crisis, and the slowdown of China's economy and many emerging market economies came together to create some of the strongest headwinds our industry has faced in over a decade, depressing private sector confidence and inhibiting growth.

While we had hoped that by the end of 2012 the phrase "fiscal cliff" would have disappeared from our lexicon, it appears that we may lurch from partial resolution to partial resolution for at least the next several months. If, however, the US successfully navigates its fiscal challenges, and if Europe continues to stabilize, and Chinese and emerging market GDP growth reaccelerates, 2013 could be the beginning of a steadier environment, and an upward cycle in the metals recycling and steel industries.

We have started to see some improvement in demand and in pricing in the ferrous and non-ferrous markets. Some of that is seasonal, as winter weather makes scrap scarcer, and drives prices higher, and some of that relates to recovery in iron ore prices and the infrastructure commitments in China; however, customer inventories are still at low levels. One of the indicators of the return of private sector confidence will be higher customer inventory levels, which should also reduce some of the price volatility that we've been seeing so much of this year. In a scrap-constrained environment, hand-to-mouth buying by customers results in significant peaks and troughs in pricing. Putting it all together, demand in pricing for ferrous and non-ferrous scrap could improve as 2013 progresses, and scrap supply should then improve on the back of higher prices in advance of a recovery in domestic GDP growth.

With that commentary, let's turn to slide 4 and take a look at some of the highlights of our first quarter of fiscal 2013 that ended on November 30. While our financial performance was adversely impacted during the quarter by falling prices and soft global markets, we remained steadfastly focused on maximizing operational efficiency and investing in future growth. All three of our business segments generated positive operating income, despite tougher market conditions in Q1 of fiscal 2013 versus Q4 of fiscal 2012.

Our consolidated SG&A is 14% lower in Q1 as compared to the prior year. We've been able to significantly reduce our cost base through the cost-reduction, efficiency and synergy initiatives we announced in August in connection with our restructuring, as well as through the continuous improvement programs we undertake in each of our businesses and functional areas.

In addition, we continue our growth to enhance operational synergies. Since the end of the first quarter, our auto parts business has completed a number of acquisitions and commenced several greenfield developments, which will, in the aggregate, add 10 new pick-and-pull stores to our franchise. If you look at our facility map, the green dots represent our new locations. We're increasing our APB stores by 20%, and these new sites support the core markets in which our metals recycling business has existing operations, or strengthen our APB presence in an existing region.

These new acquisitions include four stores in British Columbia, which expand our presence in western Canada near our metals recycling facilities, and a greenfield location in Calgary, to further enhance our APB operations in that region, and support our MRB presence in Canada. In the Midwest, where we have an existing APB franchise, we expanded our footprints with the addition of two stores in the Kansas City area, and we acquired a greenfield location in Springfield, Missouri. And in Massachusetts we acquired two stores, which will start to build our auto parts presence in the Northeast, and provide synergies with our metal recycling facilities.

In aggregate, these investments will enable us to further penetrate core markets for our auto parts business, leverage existing operational resources and enhance scrap [flows] to our metals recycling business. We expect that it will take approximately 12 months for all of these sites to be fully developed and accretive to earnings. Once fully integrated, these new stores are expected to provide a significant boost to our operating performance by increasing our annual purchase car volume by about 15%, and slightly less than 50% of that is expected to be incremental to our 2013 fiscal year. Finally, it remains a strategic priority to maintain a strong balance sheet which supports our capital allocation objectives, preserving the ability to continue investing in growth opportunities while at the same time returning capital to our shareholders.

So, let's turn now to slide 5 and take a look at our consolidated first-quarter operating performance. As we described in the market outlook that we issued at the end of November, ferrous sales prices trended sharply lower during the Fall, as broadly weaker economic outlooks and lower utilization rates continued to moderate global demand for recycled metals. For our first quarter of fiscal 2013, we reported a loss of $0.06 per share. Our reported results were negative due to the aggregate $0.10 impact of a non-cash tax item and a restructuring charge associated with our cost-reduction initiatives that we announced in August 2012. But most importantly, all three of our businesses reported positive operating income, with both APB and SMB up sharply since Q4.

During the quarter, we shipped 955,000 ferrous tons and 119 million non-ferrous pounds. Ferrous volumes were 19% lower, and non-ferrous volumes were 30% lower as compared to the fourth quarter. These volume declines were a result of softer demand due to slowing global growth, reduced flows of raw materials, and the timing of certain shipments, which will move into Q2.

Let's turn now to slide 6 for a look at the ferrous export index prices during the quarter. As you can see on this chart, which represents the broad market activity, ferrous export prices on both the east and west coast declined sharply between September and October, rebounding partially in November for December shipments. It's worth mentioning that US export ferrous shipments to China fell off dramatically from August to October. Over the Summer, iron ore prices dropped between $40 and $50 a ton. But as iron ore prices have recovered, the Chinese have become more active in the ferrous US scrap export market. Currently, we're seeing a more stable market for recycled metals globally, driven in part by the restocking that occurs about this time of year in anticipation of Winter weather challenges, in part by the recovery in iron ore prices, and in part by the slowly improving demand for steel.

Let's turn now to slide 7 to look at scrap supply trends in the US. The domestic supply of scrap continues to be constrained by low US GDP growth and weak consumer activity. Although we're currently experiencing challenging market conditions for supply volumes, we believe the cycle will turn as economic conditions improve. As the top chart shows, the average US car on the road today is 11 years old. And looking at the broader basket of consumer durable goods, including washers, dryers and other appliances, domestic appliance shipments continued their decline over the past year, but are expected to pick up as housing starts improve. While autos and appliances have finite lives, the timing of their replacement can be cyclical and dependent on economic conditions.

Let's turn now to Slide 8 to look at global demand trends. During the first quarter, we exported 82% of our external ferrous sales. And looking back over the last 10 months, US scrap exports, broadly, have declined 11%, while our, Schnitzer's, ferrous export volumes declined 10% during the same timeframe. In the first quarter, we shipped ferrous and non-ferrous products to 14 countries. Turkey, South Korea and Taiwan were our top ferrous export destinations; and similar to Q4 of fiscal 2012, China, the US, and South Korea continued to be our top non-ferrous destinations.

While we intend to provide our second-quarter market outlook in February, I will note that market conditions have improved recently. At this time, we anticipate higher ferrous and non-ferrous shipments during the second quarter, due to improving demand for recycled metals, low customer inventories, and the timing of shipments.

Now Richard will provide a review of our segment performance and our capital structure. Richard?

Thank you, Tamara. I will begin on slide 9 with the selling price trends in metals recycling. Softer demand in September and October led to ferrous export prices falling sharply by around $50 per ton. However, compared to the previous quarter, average net selling prices for the first quarter were down by only $20 per ton because the early part of the quarter included shipments for higher priced sales that we had made before the market declined. Lower export prices had the biggest impact on the lower quarterly average, while domestic prices stayed relatively flat. Non-ferrous prices increased sequentially by 6%, due to improved sales mix and a slightly stronger market for non-ferrous commodities.

Turning to slide 10, we'll review MRB's volumes and financial results. Ferrous sales volumes of 955,000 tons decreased 19% from the fourth quarter. This was due mainly to reduced flows of raw materials, which resulted from the lower price environment, as well as two bulk export shipments which moved into the second quarter, representing around one-third of the sequential decline. Non-ferrous sales volumes were 119 million pounds, which was a sequential decrease of 30%, due to lower beginning inventories and the reduced flow of raw materials.

Operating income for metals recycling was $6 million and operating income per ferrous ton was $6. Overall, the first quarter was adversely impacted by the sharp decline in selling prices and the lower sales volumes; however, MRB's first-quarter result was slightly better than our market outlook, due to improved gross margins in the month of November.

Now moving to our auto parts business, please turn to slide 11. First-quarter car purchase volumes were sequentially lower by 2%. This was driven by the effect on car flows of falling commodity prices and a limited availability of end-of-life vehicles. However, operating margins increased significantly, to 9%, due mainly to lower average inventory costs, which more than offset the impact on revenues of the drop in commodity prices. Improved gross margins in November meant that APB's result was also slightly better than our market outlook. Looking ahead to the second quarter, we expect to incur up to $2 million of start-up costs and transaction expenses related to our 10 new retail locations.

Now turn to slide 12 for a review of our steel manufacturing business. Steel manufacturing achieved $3 million in operating income, due to higher rolling mill utilization of 70%, and lower cost of scrap. Rolling mill utilization was higher, in part due to increased production to compensate for down time which had occurred in July. And in the second quarter, we expect utilization to be lower sequentially due to normal planned maintenance, which took place in the month of December. Average net sales prices of $680 approximated the fourth quarter, and reflected the steady market conditions. Sales volumes were sequentially up by 3%, to 130,000 tons.

Now moving to Slide 13 for a review of our capital structure. During the first quarter, total debt increased by $20 million, and resulted in leverage of 23%. The debt increase reflected higher working capital, as we rebuilt inventories from lower levels at the start of the quarter, and also because we had two shipments that moved into the second quarter. However, net debt at the end of the first quarter was significantly lower than the comparable quarter in the prior fiscal year. The inventory increase resulted in a cash outflow from operations of $60 million, and excluded a non-cash valuation allowance on our Canadian deferred tax assets of approximately $2 million.

Our Canadian operations are currently undergoing a transition, as we move towards the implementation of a major scrap processing and export facility. A combination of transition costs and the impact of weak market conditions required us to reserve against the projected recoverability of certain deferred tax assets; however, improvements in future profitability have the potential to reverse these tax reserves in future reporting periods. Capital expenditures were $27 million; and for fiscal 2013 as a whole, we anticipate a capital spend of up to $90 million.

Now, I'll turn the call back over to Tamara to conclude our formal remarks on slide 14.

Thanks, Richard. The global economic outlook remains challenging, but we're cautiously optimistic that market conditions are modestly improving. Macroeconomic headwinds aside, we remain vigilant on five areas we can control -- market leadership and operational excellence in each of our businesses; delivering sustainable cost reductions; enhancing inter-divisional synergies; and executing on growth initiatives within the strategic parameters of our core business. For our metals recycling business, that means strengthening our position in our core markets, developing our new franchise in western Canada, and continuing our focus on operating efficiencies.

In our auto parts business, we're successfully executing on new store openings through acquisitions and greenfield developments. These growth initiatives further penetrate core markets for our auto parts business, leverage existing operational resources, and enhance scrap flows available to our metals recycling business. And in our steel manufacturing business, we continue to demonstrate our ability to optimize performance in weak markets and deliver value on improving trends.

We are on track with our restructuring initiatives, and we will continue to assess adjustments to our cost base to reflect the current market environment, while preserving our ability to take advantage of stronger future demand and improved scrap flows. Our financial strength remains a core priority, as it supports our balanced capital allocation strategy.

In the midst of the challenging global economic environment, our resiliency as a company is directly attributable to the hard work and dedication of our employees. Every player in the recycling market faces significant challenges in this economy. And while we are not satisfied with our recent financial performance, we have demonstrated our ability to navigate this rapidly changing market while delivering improving sequential operating performance, and continuing to execute on our growth initiatives.

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

(Operator Instructions)

Our first question comes from Arun Viswanathan with Longbow Research.

Hello, guys. Thanks for taking my question. My first question has to do with really the feedstock outlook. How much of the difficulty that you faced in that market over the last year is attributable to GDP versus maybe some structural changes in consumption patterns and so on?

Good morning. We think that it is really the low US GDP growth, together with high unemployment, which impacts consumer demand and consumer confidence, which is impacting scrap availability. And so as a result, as you can see in our acquisition activities, we're focusing on investing in new supply channels through APB, and we're obviously continuing our focus on cost reduction. But if you look at the statistics, cars on the road averaging 11 years and 130,000 miles, and the decrease in appliance sales, which would impact with home construction and housing starts, we feel that it is cyclical and we anticipate an improvement in supply availability as the economy improves.

Okay. Thanks. I guess what I'm trying to get at is, if we do see an improvement in GDP, what kind of margin improvement would you expect? Do you expect that in a more robust economic environment, you can get back to where you were, margin-wise, in MRB in the last cycle, or is it structurally going to be at a lower level?

Well, if you take a look back at, for example, fiscal year '11, when we were in a year of improving growth, slowly but recovering GDP, and really on track, we had $31 of ton operating margins in the course of fiscal year '11. That obviously came down quite dramatically at the beginning of our fiscal year '12, which was last fall, when the European debt crisis hit. And that obviously affected not only Europe, but Chinese activity. So it wasn't that long ago, but there was a different tone in terms of global economic growth in fiscal year '11 than what you saw in fiscal year '12.

If you look at fiscal year '13, you could start to see a similar recovery. China's clearly exhibiting stronger performance. Their new administration has articulated very positive comments in terms of their growth coming from urbanization and infrastructure investments. You see Europe stabilizing. And obviously, the US remains to be seen. But if the US does start to enact pro-growth reforms, we could start to see recovery in the US, as well.

And then just quickly lastly, given that you're more levered now to the export markets, do you think that precludes you from again reaching that $31 a ton, or how quickly can you switch back to domestic shipments if global markets remain weak, especially in Europe? Thanks.

Well, the stronger markets, traditionally and for the longer term, are expected to be the emerging economies, whether that's throughout Asia, as well as China, India, Turkey, are all anticipated to grow at higher levels than the developed economies, whether that's the US and as well as Europe. So we anticipate longer growth coming from the export markets.

Okay. Thanks.

Thank you.

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

Good morning.

Yes, Tamara, on the auto parts initiatives, you mentioned the new sites would be accretive and incremental to earnings, I guess, within the next 12 months. Is there potential dilution to margins here near term as you invest in the new stores?

Brent, hello. It's Richard. As you all heard in my remarks, we do expect some start-up costs over the course of the range of fiscal '13, and then the second quarter will also have some transaction expenses related to the completion of these deals. So therefore, what we are projecting is certainly accretion, but not until we get into fiscal '14 and through these start-up costs, because we have to convert some of these stores to our sales service model. A couple of them are greenfield, so they need to be built up from scratch. So that is just all part of the normal activity as we build the business in these 10 new locations.

Understood. Is there any way to handicap the start-up cost, transaction expenses?

Well, I think what we said is we expect up to $2 million in the second quarter. But I would then just remind you that what we've seen in the first quarter here is a significant increase in the EPB core business result, back up to a 9% margin even in this weak market. So we're very positive about our auto parts business, especially now having increased our amount of locations by 20%.

Sure. And then on the steel business, I know it's smaller, but certainly provides some leverage. You posted one of the better quarters there in some time. You made the comment about steady market conditions. Can you talk a little bit more about the environment and whether you think this sort of profitable levels are sustainable in a steady pricing environment?

Well, we are seeing improved demand, primarily coming from the private sector. And obviously, their performance is contingent on economic recovery on the west coast, but we're beginning to see that in the private sector. So what we're seeing is a quick rebound, which is what we had anticipated would happen with the steel business when the economy starts to show improvement on the west coast.

Okay. And just lastly, is it fair to say with regard to MRB that China's emerged as your top customer thus far this quarter?

We would not disclose that at this point in time. But China is back in the market actively; and as you could see for the last six months, they haven't been in our top three.

Yes. Okay. Thank you.

You're welcome.

Our next question comes from Phil Gibbs with KeyBanc Capital Markets.

Good morning.

Good morning. I had a couple questions. The first was just on the auto parts business and the purchased car volumes being down high single digits year-over-year. What should we take from that? I would have expected them to be up a bit or at least stable, given your initiatives to get more flow into the yards.

Well, the supply of autos is impacted by the same macroeconomic supply issues that's impacting the metals recycling business. They were relatively flat quarter-over-quarter, and we see supply modestly improving in that business. And longer term, we see significant opportunity for improvement, just in light of the -- as I mentioned before, the age of the vehicles on the road and miles driven.

Okay. Any color you could give on CapEx for fiscal '13? And then secondarily, what should we be thinking about as far as purchase costs for these acquisitions you made following the first quarter?

Sure. Richard, why don't you address the CapEx as it relates to --

Yes. On CapEx, Phil, we're expecting for the year, fiscal year as a whole, up to $90 million in CapEx. But obviously, that's subject to performance. And we have the ability to vary our projections at any time. But currently, it's $90 million. Around half of that is normal maintenance CapEx, which includes equipment replacement, environmental initiatives and safety enhancements. The rest of it is growth projects, the major project being the implementation of a major shredder up in our Canadian operations, and together with some further technology investments.

Okay. And any color you could provide on the acquisitions, the eight that you made following the quarter? I mean, I assume there's some costs associated with that?

Well, yes, in terms of the acquisitions -- the eight acquisitions, as will be disclosed in our 10-Q we'll file later today, came at a total cost of $23 million. And then on top of that, for two greenfields, the investment is up to around $5 million for them.

Okay. Should we expect you, as a company, to be making more of these type of investments this year?

We have a good pipeline in both of our businesses, so we review those opportunities on a steady basis. It's always difficult to project timing, but we do anticipate growing both the APB business and growing the core platform of MRB, to the extent that we see opportunities that are attractive.

Thank you very much.

Thank you.

Our next question comes from Martin Englert with Jeffries & Company.

Good morning.

Good morning, everyone. Just had a question on when to expect the cost for the self-service auto parts business to flow through the cash flow there. Will the eight facilities be flowing through in the current quarter and then the two progressively throughout the year here, for the greenfield?

Good question. The eight facilities will come through the second quarter cash flow; and then the greenfields, which is around up to $5 million, of course, that comes through our CapEx. A significant portion of that will be in the second quarter, but there will be some parts of it that will be in the remainder of the fiscal year.

And then would you expect, once these facilities are fully ramped up and you have everything operating, a similar EBIT contribution in sales per location compared to your existing ones?

We're anticipating when they're fully integrated that they are going to add about 15% to our annual car purchase volumes. And slightly less than half of that, as we mentioned, should come through fiscal '13. But we have an operating model within pick-and-pull, and so the metrics against which each store is measured is a function of their location, their interaction with the other stores around them. And so we do expect these to be accretive to the auto parts business within 12 months.

But for the most part, due to the ramp-up cost, the accretion isn't going to hit until fiscal '14?

That's correct.

Correct.

Okay. Excellent. Thank you very much.

Thank you.

Our next question comes from Timna Tanners of Bank of America.

Good morning.

How are you?

Perfect.

Good. Just wanted to dive in a little bit more on the export volumes, because as you said, that's your avenue for growth and historically a big part of your business. And November quarter's results were pretty surprising, granted you'd warned us, but the amount of drop off. So I guess my first question along those lines is how much visibility do you have into your exports for fiscal 2013 in terms of volume?

Well, we sell forward anywhere between three and six weeks, and so our specific flows take that type of window. Overall for 2013, we do see that there's a potential for better markets than in 2012, and that's primarily due to three significant macro trends. You see China coming out stronger. You see their new administration having made those positive comments regarding the source of their growth deriving from urbanization and infrastructure investment. You see their PMI showing improvement. You see iron ore prices improving. And they, probably more than anyone, arbitrage significantly iron ore and scrap.

You see Europe stabilizing, and that has not gone, obviously, throughout the world. And the US, while it remains to be seen, should be on a recovery path over the course of 2013. And that will, all of that, should lead to a rising price environment, which is what we are beginning to see now, but that should lead to a rising price environment in 2013. But these issues remain to be seen and the stability that could appear remain to be seen.

Yes, and I didn't want to contradict you and I heard your points, but I guess our folks on the ground in China are talking a little more cautiously in terms of slow growth in China, and absolutely growth and all what you said. But seems to us like the growth could be slower. It seems to us like the iron ore strength may be somewhat temporary, given some supply constraints globally and given the restocking that you mentioned in front of Chinese New Year.

So that's why I was trying to get a sense of when you talk to your major customers, is there anything else that you're seeing that gives you confidence that this is a longer term phenomenon instead of maybe some short-term market strength in iron ore, and so on? So that's what I was trying to get a better handle on, anything out of Turkey or anything out of your major trading customers?

Well, recognize, iron ore and scrap don't move dollar for dollar, but long term higher correlation remains. So the recent peaks in iron ore isn't what's driving my commentary. It's really the modestly improving trends that we're seeing now and the fact that there is a potential for improvement this year versus 2012.

Fair enough. Okay. And anything in the lines with the greater consumption of scrap in the furnaces that you're seeing and greater demand for scrap relative to iron ore? Some of the initiatives that we had heard a while ago, in terms of recycling and environmental needs out of China, anything there?

Well, we clearly do see that arbitrage taking place on the pricing. I mean, you saw that in the first 10 months of the year with China's drop off in purchasing scrap and utilizing more iron ore. But again, their government has been saying for years, and reiterated this year as well, a higher focus on environmental concerns, as well as their continued focus on electricity cost. So we're continuing to see more players increase their use of scrap in blast furnaces, but I think arbitrage -- price arbitrage takes precedence over the other issues.

Okay. Fair enough. Thank you.

Thank you.

Our next question comes from Chris Olin with Cleveland Research.

Good morning.

Hello. Most of my questions have been answered. I had one question on the auto parts business. When you look at the greenfield opportunities in your analysis, what is the bigger driver to your decision process? Is it the need or the revenue capture that you think you can get, or is it the amount of cars or the supply of cars in that area that you'd like to be a part of?

When we look at greenfield opportunities, the first thing that we'll look at is right now whether or not we can be synergistic with our MRB franchise or if we can enhance an existing franchise position that APB has. Those are the two avenues we look at when we identify locations. And then we obviously do the demographic studies and look at the demand profile as we do market research to assess where a greenfield opportunity should be sited and how we anticipate it will perform.

Then secondly, I apologize if I missed it, did you comment on how many potential greenfield sites could be added over the next year?

No, we didn't comment on that. We said that of the 10 new sites that we will be adding to the auto parts business, two of those 10 are greenfields.

But anything beyond that? Any kind of --

We did not comment on anything beyond that.

Okay. Thanks a lot, Tamara.

Thank you.

Our next question comes from Tim Hayes with Davenport & Company.

Good morning.

Good morning. Most of my questions have been asked. Just one. Are you seeing an increase in flow of scrap in the Northeast following Sandy?

Sandy did not hit the geographic areas where we are operating, so we don't expect an impact in our regions from Sandy.

Next question, Operator?

Our next question comes from Sal Tharani with Goldman Sachs.

Good morning, Sal.

Good morning. How are you?

Fine, thank you.

I wanted to understand a little bit on the margin side, from $6 or less, the historical average of $35 you used to do, the path to it. There are two issues. And I understand the cyclical issue, which is the lower weak economy and China slowdown, temporary or permanently we'll see that. And that may be -- and global GDP go back to 3.5% to 4%, US back to 3%, and you can recover. But the structural issues, I just want to understand, how do you think about it in terms of more shredding capacity, more competition.

In the east coast now, we are seeing people, your competitors are opening up port in the regions you are. There's another export port being talked about in upstate New York. And those, I think, will remain there. And I just want to understand that, are you thinking that eventually you can go back to those kind of levels or the structural issues will, even with the cyclical issues are winding down, that you'll never go back to those kind of margins?

Well, I think what I said earlier on the margins is, the first thing that we've got to see for sustainable improvement in margins is an increase in demand and higher growth. And I recognize you mentioned you understand that. But that higher growth brings higher prices, and higher prices bring higher scrap out of the economy and also generate higher scrap levels. So I think that that's the biggest issue that's going to drive it.

And then we focus on the things that we can control. And so you see us investing in new supply channels through APB. You see us focusing on our own cost structure and improving our operating efficiencies. You see us enhancing synergies between our two MRB and APB businesses. And you don't have to look too far back, when you saw us at $30 margins. But the difference between that environment and this environment was a rising price situation and just stronger global growth. Those two things are the biggest difference. We've had competitors in our regions for 50, 60 years. So managing through the competitive environment is something that we do every day and have done for decades. So I think that it is not a structural problem, but it is really an economic underpinning that will change the dynamics of our margins.

Okay. Any view on what do you think DRI will impact the scrap market in the US, with five million ton from new core and others are talking about building more DRI plants in the US?

Well, I think that's a really interesting question, Sal. You know, in the narrow sense, DRI may impact the pricing of prime scrap by affecting the premium that prime scrap has historically received. But in the larger sense -- in the larger sense, DRI should be very positive for the scrap industry. The business case for DRI is predicated on low and stable natural gas prices. And if this assumption, if low and stable natural gas prices proves true, then there should be a big step up in the demand for steel, generally. You know, low and steady natural gas prices will change the cost base for many industries across the country. It should attract new manufacturing. It should create stronger economic growth. That will improve our GDP growth. That will increase the overall demand for steel in the country, and that should serve to increase both the supply of scrap -- and getting back to your first question -- and our margins. So I think the impact of DRI might impact, as I said, prime scrap might impact on a local level or regional level, but there's a much bigger story and a much more positive story for the scrap recycling industry.

Great. Thank you very much.

Thank you.

The next question comes from Evan Kurtz with Morgan Stanley.

Good morning.

Just a question on the $25 million savings program, hoping to get an update there. How much was realized in the past quarter and how do you see that playing out in the next few quarters? Thanks.

Sure.

Hello, Evan. It's Richard. Well, first of all, you'll see that in the first quarter our SG&A was $48 million. And if you look back to the first quarter of fiscal '12, it was $56 million back in that quarter. So year-on-year on a quarterly comparison would mean an $8 million reduction, which is about 14%. So we're very much on this trend of reducing costs. Our cost reduction program as our whole, as you mentioned, is $25 million. That's well on track. We said we would reduce our workforce by 7%, and most of these actions have already taken place. There's still some cost to fall off as the year progresses, and we're continually reviewing our cost base, given the market conditions. But in summary, the program's very much on track.

Okay. And I don't want to beat a dead horse here, but it definitely seems like one of the issues that's been a headwind for Schnitzer over the past year here is that US prices have been more in line with export prices, generally there's been a pretty nice premium between Asia and Turkey prices versus US pricing, and that's really collapsed. And you've talked about the demand angle. Maybe some of that will come back as demand picks up. Could you also talk a little bit about emerging market supply and how you see that factoring into the equation? Are you concerned that maybe over this weaker period here we've actually seen supply start to catch up with demand, in regions like China, as their scrap reservoir grows?

No, I think it will be a very, very long time before we see export demand from the US being significantly affected by scrap generated in the countries where we export to today. I usually talk about how long it took -- I mean, recognize, there's only three exporting countries right now, or regions, the US, Europe, and Japan. And I talk often about the fact that it took Japan 40 years -- or 50 years after World War II to become a net exporter. And you still don't see many other countries -- I mean, Korea was on the cusp of being an exporter and increased their EAF production and is still a major importer. So I think it will be many years. The world may move faster today than it did post-World War II, but the contemporaneous build out of infrastructure urbanization development across the world, I think, will sustain exports from the US for decades to come. I think the drop off in demand is really due much more to macro-economics than it is to an increasing supply in the emerging markets.

That's helpful. Thank you.

Thank you.

(Operator Instructions)

Our next question comes from Bridget Freas with Morningstar.

Thank you for taking my question.

Good morning.

On the 10 new auto parts stores, seven are considered geographically optimal in terms of synergies as metals recycling. How does that compare to the existing 51 stores? About how many of those would you consider to be in close proximity? And would you say the auto parts business is becoming more critical as a supply channel in this environment?

Well, we are enhancing the synergies between APB and MRB from an operational perspective, and so you can see that we are focused on developing that new supply channel in geographic proximity to metals. But there are really two locations in the Midwest and in Texas where we don't have MRB operations where we have APB operations, and everywhere else, for the most part, it is synergistic. I actually don't have the break down in terms of number of locations, Bridget, but we can follow-up with you and give you that later.

Okay. And then can you talk about what's going on in the non-ferrous scrap market? Selling prices picked up quite a bit in the quarter, considering the drop off in volumes. And it seems that non-ferrous volumes and pricing don't tend to move together as much as they do on the ferrous side. But is there any other color you can provide on non-ferrous, or was this just a difference in mix?

You answered the question.

All right. Thank you.

Thank you.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing remarks.

Well, thank you, everyone, for joining us today and for your continued interest in our company. We will look forward to speaking with you again when we report our second quarter results in April. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.