Schnitzer Steel Industries Inc (SCHN) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Schnitzer Steel Industries' fourth quarter 2008 earnings conference call. At this time, all participants are in listen-only mode. We will have a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference call is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Rob Stone, Treasurer. Please proceed, Sir.

Thank you, Operator. Good morning. As the operator indicated, I'm Rob Stone, the Company's Treasurer and primary Investor Relations contact. I would like to thank everyone for taking time to join us today.

In addition to today's audio comments, we have prepared a set of slides which you can access through our Website at www.schnitzersteel.com.

Before we get started I need to remind you that the Company's presentation and discussion today contains forward-looking statements subject to the Safe Harbor provisions of the federal securities laws, including estimates of future performance and views on future market trends. Actual results may differ materially from those projected in the forward-looking statements.

Examples of factors that could cause actual results to differ materially from current expectations are listed in our earnings press release issued this morning and are described in detail under the heading Factors That Could Affect Future Results and the Management's Discussion and Analysis section of the Company's most recent quarterly report on Form 10-Q and our report on Form 10-K for the fiscal year ended August 31st, 2008 which should be filed later today.

I will also emphasize that the forward-looking statements made on this call including our outlook speak only to the information available to us as of this date and we do not assume any obligation nor do we intend to update these forward-looking statements.

The current volatile market makes it difficult to provide a reliable outlook. Since we are nearly two months into our fiscal quarter, we are able to provide you some insight on the expected results for the quarter. However predicting even one month forward in this environment carries risk.

So it is important for me to repeat that we do not plan to provide any earnings updates to our outlook prior to the first quarter call in January.

Now let me turn the call over to John Carter, our Chief Executive Officer.

Thank you, Rob, and good morning, everyone. Welcome to Schnitzer Steel's 2008 fourth quarter earnings Webcast and conference call. I enjoyed on the call today by Tamara Lundgren, our Chief Operating Officer, and Richard Peach, our Chief Financial Officer.

As Rob said, we have added slides to our normal presentation format which are available to you on the Webcast. After we go through our presentation today, we will be available to answer your questions.

Turning to our first slide, we put out a press release today with the details of our fourth quarter and full year results. These results were outstanding. We surpassed previous quarterly and annual records on all fronts -- revenues, operating income and earnings per share. We improved operating margins, broadened our customer base and delivered a strong return on capital.

We invested $177 million in our business through value-enhancing capital expenditures and acquisitions. Yet our net debt increased only $39 million, reflecting our strong operating cash flow.

At the end of the fiscal year, our net debt to total capital ratio was under 15%. Our financial results are a testament to the earnings power of our businesses and the hard work by our management team and each of our 3700 employees to take maximum advantage of very strong markets during the year. And we did this while continuing to make a safe working environment a cornerstone of our operating philosophy and our top priority.

Obviously, toward the end of the quarter, the world economic environment changed. I know a lot of you on the call are more focused on the uncertainties of the future rather than past performance.

We believe that the Company, however, that the factors which contributed to our excellent fiscal year 2008 financial results -- namely our consistently strong operating performance, investments and technology and an export platform which provides us the flexibility to sell where demand is greatest -- are factors which will serve us well as we deal with the current market turmoils. And while there is certainly limited disability in the future, we reacted quickly to the current situation and believe we have positioned ourselves such that our first quarter looks like it will be relatively comparable to the same period last year in a number of key areas.

I should caution everyone upfront, however, that there obviously remains a great deal of uncertainty regarding the direction of the market. And given the level of reasonable volatility the risk that our outlook could change. Let's spend a few minutes reviewing fiscal 2008.

First, the fourth quarter -- revenues were $1.3 billion, marking the first time that the Company exceeded the $1 billion mark in a quarter. Operating income was 96% higher than the previous quarterly record, which was set in the third quarter of fiscal 2008. And earnings per share more than doubled the previous quarterly record.

Of note, we generated $120 million in operating cash flow in the fourth quarter alone. That means we more than offset the normal increase in working capital associated with higher raw material prices. And with the expected benefit in the months to come of declining working capital levels as prices fall, that means we have generated cash as the markets rose and we will likely generate cash as market prices declined as well.

Looking at the full year, for the first time, our consolidated revenues exceeded $3 billion at a rough 42% year-over-year. Operating income increased by a greater rate -- 88%, which means margins also improved. Earnings per share daily nearly doubled and we delivered a very solid 25% return on our capital.

Looking at the three-year trend on our next slide, you can see that since 2006, consolidated revenues have nearly doubled. Operating income is up 130%, and earnings per share is up 85% with 2006 having benefited from a onetime gain from the disposition of joint venture assets. These increases have been driven by a combination of a focus on increasing throughput, improved operating efficiencies, investments and technology and infrastructure, and good markets with each of our businesses contributing to the increases.

Now let me turn the call over to Tamara to review our business performance.

Thank you, John. The fourth quarter has typically been a strong one and this year was no exception. For the quarter, our Metals Recycling division exceeded $1 billion in revenue and its quarterly operating income of $182 million was nearly double the previous quarterly record set in the third quarter of this year.

It is important to note that, included in these results, is a $49 million pretax charge to year-end to adjust year-end inventories to the lower of cost or market. This accounting charge was driven by the unprecedented drop in the market which began in the latter part of the quarter.

The 46% increase in annual revenue was a result of both higher market prices and our focus on higher throughput, which we will discuss in a bit more detail in a couple of slides. The 115% increase in operating income was a result of a number of individual factors driving improved performance, including improved nonferrous extraction and improved shredder availability.

The first performance driver I would like to acknowledge is safety. The Metals Recycling business made enormous strides in this area. Challenged to improve its performance by 10% year-over-year, the division improved its total incident rate by 42%, it's recordables by 19% and its lost time incident rates by 59%. That the improved safety record occurred at a time when we significantly increased production volume is a tribute to the focus and the leadership of our team to this effort.

As you can see in this next slide, we put a tremendous amount of emphasis on increasing throughput at our facilities. And it shows up in our sales volume. In the markets of the last few years, where you could sell everything you can produce, we have made expenditures to increase capacity and improve efficiencies. And we have used the additional scale to aggressively purchase more raw materials.

As a result our sales volumes have been on a steady upward trend. After increasing ferrous processing sales by 30% in 2007, we added another 11% in 2008 to achieve volumes of nearly 4.8 million tons.

Fourth quarter ferrous sales volumes were nearly 1.5 million tons and exceeded the previous quarterly record by 19%. Our nonferrous volumes also went up by 15% in 2008, after a 36% increase the prior year. This reflects not only higher purchase volumes, but the impact of the expenditures we have made in technology to increase the recovery of nonferrous materials at the back end of the shredding process.

The revenue from each incremental pound of material we recover with our state-of-the-art sorting [systems] goes straight to the bottom line. The investments we have made in this area have had extremely high returns and very short paybacks.

Along with the improvements in technology, we place a big emphasis on our continuous improvement program,which is focused on improving operating efficiencies in areas such as shredder availability, downstream efficiencies, throughput, shiploading and procurement. We began this initiative early in the fiscal year on the theory that good markets tend to hide inefficiencies. We think this focus is a key differentiator which will serve us well in both strong and soft markets.

Looking at the sales prices on our next slide, you can see the impact in 2008 of the strong demand for raw materials by steelmaking countries around the world as the average net price for ferrous scrap in the fourth quarter rose to $622 a ton -- an increase of $342 from the first quarter. The average net price of $442 per ton for the year was more than double what we saw in 2007.

While the markets look significantly different heading into fiscal 2009, we think that there are a couple of key factors that contributed to the prices we obtained during the year which are worth noting.

First, with six deep water ports located on both coasts of the US and in Hawaii, we are able to opportunistically meet demand around the world, reducing our alliance on any particular region. During 2008, we sold to customers in 15 different countries and added to our customer base.

The fourth quarter was a striking example of the advantage provided by our export platform. During the quarter, the average price for our export sales was more than $50 a ton higher than what we achieved in our domestic sales. That is after factoring in the cost of shipping to the export customer.

Let's turn to freight. The cost of ocean going freight has a direct influence on our scrap margin. As you may remember, in the first quarter of fiscal 2008, freight costs rose to unprecedented levels and it took a couple of months for scrap prices to adjust. From the second quarter on, as scrap prices headed upwards, the freight market flattened out which meant we were able to widen margins on our export sales.

When the freight market tightened earlier in the year however, we took action to manage the risks associated with price increases and availability by securing contracts with large ship owners for a portion of our expected shipments. That helped us to ensure that we had the shipping capacity to meet our planned sales volume and it is a strategy that we will continue to utilize.

Toward the end of the summer, the shipping market started to soften and as you can see in this slide, the Baltic Shipping Index has experienced a dramatic decline. Since its peak in May, it has dropped about 90% with over half of that occurring since September. As we look forward, the anticipated continued lower freight costs will help the relative attractiveness of accessing the export market.

So the factors we discussed, namely our diversified customer base, our investments in technology, and our focus on continuous operating improvement allowed us to take advantage of historically strong markets and significantly improve our per ton operating margins. These same factors should continue to support us as we work through these less favorable markets. One point to note, the $123 per ton margin achieved in the fourth quarter was after absorbing the impact of the $49 million write-down of our year-end inventory.

Let's turn now to the outlook for the first quarter which, as both John and Rob pointed out, is still subject to the impact of an uncertain number. The fall in demand due to the current worldwide economic and credit crises, and their resulting impact on pricing, has been unprecedented in terms of both severity and the speed with which it occurred.

We have lowered output at each of our facilities in order to match production with customer demand. This means reduced raw material purchases, significantly lower purchase prices, and fewer operating hours.

Our focus on our continuous improvement program remains paramount and we have undertaken actions to reduce non-essential expenses and to defer nonessential capital expenditures. It should be noted, however, that we have retained our flexibility to react quickly and opportunistically when the markets ultimately improve.

At our Metals Recycling business, our game plan is focused on three principles. Managing our inventories; reducing our purchase prices; and containing our costs in a way that does not prevent us from succeeding when the markets rebound.

Let's talk for a minute about the first quarter. As you have heard from others in the industry, visibility into market conditions at this point is limited. However given the short period of time remaining into the end of our first quarter, we have some ability to provide qualitative near-term guidance.

As we said at the beginning of the call, there remains a great deal of uncertainty regarding the market and there is a risk that things may change further. However, based on what we see today, we are anticipating the following.

Average ferrous prices during the first quarter should be somewhere in the $300 to $375 range on a net basis. That's a wider than normal range because there is still some uncertainty regarding November sales. It is also an average of the three months in the quarter with sales completed in September being materially higher-than-expected sales in November. Nonetheless, the average for the quarter should be higher than what was achieved in the first quarter of 2008.

On the nonferrous side, prices are expected to be down roughly 20 to 25% from the levels prevalent in most of fiscal 2008. Ferrous volumes should be down 10 to 25% from the one million tons shipped in the first fiscal quarter of last year. The actual volumes are highly dependent upon currently contracted shipments occurring as scheduled. Nonferrous volumes should be up about 10 to 25 -- sorry 10 to 20% from the first quarter of last year.

On the margin side, based on what has already been delivered and what is under contract, we anticipate results similar to the first quarter of last year. We have reacted aggressively to reduce our purchase prices and we are maintaining good metal spreads on a cash basis.

But our average cost inventory method results in inventory values lagging cash purchase cost.

Finally in the first quarter, we are also anticipating closing the purchase of a Metals Recycling business in Puerto Rico, which has four locations and a shredder, and also the purchase of affairs and nonferrous business in Washington near our facility in Tacoma.

Moving to our Auto Parts business, this business just completed a strong fourth quarter and a record year for both revenues and operating income. On a quarterly basis, the business continued its three-year trend of consistent year-over-year increases in both metrics. On an annual basis revenues increased 33% while operating income increased 62%, reflecting significantly improved margins.

Let's talk about what has been driving this improved performance.

First, our Auto Parts business achieved significant improvements in safety. Year-over-year, the division improved its total incident a rate by 37%, it's recordables by 33% and its lost time incident by 35%. Both the self-service and full service buying models focus on optimizing volumes with respect to parts, as well as with respect to [cores and] scrap.

The self-service business also benefited from increased and more efficient extraction of those cores. This focus was a material contributor to higher margins as these revenues significantly exceeded the incremental labor costs associated with the extraction.

In 2008, overall car purchases increased 18%, primarily driven by growth in the self-service platform. This increase throughput, together with the increased revenues from core yields and higher prices for recycled metals, drove the division's record financial performance for the last quarter and for the year.

In August, the Company closed on the acquisition of three self-service stores in Arkansas in Texas. The integration of these facilities into the Pick-n-Pull platform is well under way.

It appears that the economic downturn could have a positive impact on self-service parts sales as demand for [ware] parts is expected to increase as people hold on to their older cars longer. Offsetting this trend, however, are higher energy prices which have resulted in fewer miles being driven, leading to fewer accidents.

For the full service business the economic downturn appears to be impacting the decision to repair autobody damage which will have a negative impact on full service parts sales. As a result, the Auto Parts business is undertaking the following actions. With the expected slowdown in demand for recycled metals, APB is reducing its purchases and lowering purchase prices to manage its inventory. It is reducing the incremental labor added in 2008 to increase capacity utilization; and it is reducing non-essential expenses and deferring all but necessary capital expenditures.

Looking at the outlook for the Auto Parts business, the same uncertainties that's for our Q1 forecast is in our other division. At this time, it appears that higher self-service parts sales are expected to be more than offset by lower prices for scrap vehicles and cores, lower volumes of vehicles purchased and processed, and a weakening economic environment leading to lower collision repairs.

As a result we expect revenues to be flat on a year-over-year basis, but to decline 20 to 30% from the record revenues achieved in the fourth quarter.

With respect to margins, the division's actions to reduce operating costs and to lower purchase prices per vehicle are currently expected to help maintain a positive cash spread between core and scrap selling prices and cost of scrap vehicle. However the impact of average inventory costing combined primarily with weaker full service parts sales is expected to more than offset the higher self-service parts sales and result in negative operating margins.

Let's turn now to the Steel Manufacturing business, which just completed another very good year. The fourth quarter results included record quarterly revenues which increased 56% year-over-year and quarterly operating income, which was up 13% year-over-year. The quarterly operating income reflected the second best performance in the mill's history.

On an annual basis revenues increased 42% while operating income was up 12%.

Let's take a look at the factors that drove these results at our Steel Manufacturing business. First of all, it is important to note that our Steel Manufacturing business's safety performance this year reflected significant improvement. Year-over-year, the steel mill improved its total incident rate by 27%, its recordables by 24% and its lost time incident rate by 55%, achieving all of this while significantly increasing output and improving operating efficiency.

Over the last couple of years, we have made capital investments at the steel mill to increase capacity. The greater capacity has resulted in the 10% increase in sales of finished goods to 776,000 tons this year.

Improvements made in the melt shop have increased the capacity there to over 800,000 tons. This capacity supports increased output in the rolling mill and gives us the ability to sell billet when demand is there.

These capital investments have also improved our operating efficiency, resulting in improved cost competitiveness as we go through this period of softening demand.

Looking at selling prices, the fourth quarter average net selling price of $962 per ton was 56% higher than during the same period of fiscal 2007. For the full year, prices averaged 27% higher than in 2007. The higher volumes and prices led to the record revenues for the year. Offsetting the higher prices were higher costs for raw material including scraps.

With our vertically integrated business model, all of SMB scrap is purchased from our Metals Recycling business. So the higher scrap prices are reflected in our consolidated results.

The market for steel products on the West Coast began to soften fairly significantly toward the end of the fourth quarter, driven first by a continued downturn in construction demand and then even further by uncertainties related to the global financial crisis. We have implemented the following actions as a result of the current market downturn.

We are reducing output at the mill by about 40% to match our production with expected near-term demand. We are accelerating plant maintenance shutdowns to enable us to manage our inventory down to lower levels. We are also reducing non-essential expenses and deferring non-essential capital expenditures. These actions are being undertaken in a manner that will allow increases in production when demand improves.

There are a couple of features of the mill which have served AS well during this period of lower demand. First, our product diversity gives us some flexibility to reach out to different markets as demand dictates. We are the only West Coast producer of wire rod, for example, which allows us to ship production for this product when the demand for rebar declines.

Second, the investments we have made have helped us become leaner and more productive, and have resulted in a variable cost structure that allows us to operate efficiently at lower volumes while maintaining good margins. Looking at the first quarter outlook for the steel business based on what we can see today, prices appear to be holding up although demand is down fairly sharply.

Again with the caveat that visibility in to November demand is not clear, prices for the quarter should remain about 30% to 40% higher than what was received during the first quarter a year ago, but down from the record prices in the fourth quarter. It appears that the domestic steel industry has collectively done a pretty good job of reducing production and reaction to the lower demand, which is helping price levels.

At this point the wild card appears to be import and an increase in foreign produced steel coming into the country could put further downward pressure on prices. Based on our current order book and product delivered to date, we expect that sales volumes will be between 105,000 and 115,000 tons for the quarter.

One positive note is that with scrap costs coming down more than sales prices, the mill will eventually see improvement in its margin, once the impact of higher cost scrap works its way through the average costing equation.

Now to me turn the call over to Richard Peach, our Chief Financial Officer. Richard.

Thank you, Tamara. Let me first spend some time providing a little more color on the fourth quarter inventory adjustment and then talk about our uses of cash, our balance sheet and our liquidity position.

As explained earlier, our fourth quarter results include a $49 million pretax net realizable value adjustment to write down year end inventory to the lower of cost of our markets. The adjustment represents 10.3% of our total inventory balance on hand at August 31, 2008, and was triggered by the decline in selling prices which began at the end of July for deliveries following the year-end date.

Although we reduced purchase costs for scrap when selling prices begin to ball, average inventory costs at year-end reflected higher cost scrap still on hand. Our net realizable value review considered estimated future selling prices over inventory, including completed shipments since year-end; cost to completion such as [free]; the current status of our order book; and other relevant market information available to us.

Reviewing that realizable volume is a normal part of our quarterly process and depends on the facts and circumstances available at that time including current and forward market conditions and the status of our contractual commitments for future shipments.

Turning now to our uses of cash, in 2008, we continued our multiyear program to invest in modern equipment by spending $84 million to improve the efficiency and capability of our businesses including nonferrous back-end sorting technology; production improvements to our electric arc furnace and rolling mills; and enhancement to our enterprise wide information systems. In 2008, we also spent $47 million on more bolt-on acquisitions to strengthen our footprint in the regions in which we operate.

And in addition we returned $45 million more cash to shareholders through the repurchase of 695,000 shares including 250,000 shares in the fourth quarter. Since the beginning of fiscal 2007, we have now repurchased 4.5 million shares, leaving 1.5 million shares available for repurchase under the current authority from our Board. And total reinvesting activity in 2008 added to $176 million while in the same period our net debt only increased by some $39 million.

Our operating cash flow for 2008 was $142 million. Although net income in 2008 significantly exceeded the prior year, operating cash flow while still strong and positive was less than 2007 due to the impact in working capital of the higher 2008 scrap and steel prices, in particular, on accounts receivable and inventory.

Collection of year-end receivables and lower market prices should benefit working capital in the first quarter. As an indicator that we continue to spend our cash wisely, our return on capital employ rose to 25% in fiscal 2008.

Now a quick look at our working capital. Our working capital at year-end was $435 million, which consisted primarily of $315 million in accounts receivable, and $429 million of inventory, offset by $345 million in current liabilities, primarily accounts payable and payroll liabilities.

The inventory levels are up $170 million year-over-year and receivables are up $145 million, with increases driven by higher prices for both sales and raw materials and higher volumes particularly in the fourth quarter.

As mentioned earlier, the recent drop in prices should result in a benefit to working capital during the first quarter. I should point out that our export sales of ferrous metals are typically backed by letters of credit and we have no -- to date, have any significant issues with the collectibility of our receivables on either domestic or international sales.

Finally, our capital structure remains conservative with a leverage ratio of just under 15% at the end of the year with net debt setting at $169 million. We have access to additional borrowing capacity through a committed $450 million revolving credit agreement made by the Bank of America.

As of year end, $300 million remained available to draw on the (inaudible). The Company also had a $25 million uncommitted short-term liquidity line which is fully drawn at year-end. And in the event it needed to be repeat, the availability under the revolver would be more than adequate.

There are no significant debt repayments scheduled during 2009. And we are in full compliance with our debt covenants.

Now let me turn the call back to John.

Thank you, Richard. Before we take your questions, let me leave you with a little historical perspective. Schnitzer is a company that is over 100 years old. During our history, we have weathered many storms including most recently the period from 2001 and 2002, when the Metals Recycling industry was rocked by the post 9/11 recession.

During this difficult time the Company remained profitable. It did so by managing its raw material prices, operating efficiently and concerting cash while continuing to make opportunistic investments.

Today, we continue with the same focus that has served the Company well in the past, yet we are in an even better position. We have taken advantage of the positive business conditions in our industry for the last three years that have allowed us to make significant reinvestments to improve technology and operating efficiency.

We have a broader geographic sales reach. Our customer base is more diversified and our balance sheet is stronger. We can't tell you how long the current environment will last. We believe we have the skills and resources required to be successful in all types of market and are prepared and ready to face the challenges in front of us.

Operator, we are now ready to open up the line for questions.

(Operator Instructions). John Rogers from D.A. Davidson.

Good morning. I'm interested in your comments, relative to the scrap business, and talking about the first quarter results in terms of your contracted shipments occurring as scheduled. There's been reports of shipments being canceled and pushed out. Have you seen that?

As you know, we sell forward and we work with our customers who in this environment have some credit issues because of the tight credit markets, but that's a common situation.

If you remember a year ago in the first quarter, the timing of shipments sales were affected by availability of shipping and the high cost of shipping and some -- I think it was five of those shipments moved forward into the second quarter.

So for those customers that are experiencing some issues on credit, we are working with them on both the timing and the delivery.

Okay. But you aren't seeing outright cancellations of orders?

We have not experienced that.

Okay. And then in terms of your current buying prices, where you've been able to drop them down, [too], on the scrap side. Is it, I think, Tamara, you mentioned that your matching prices well now. Is that a fair statement? If you excluded the inventory adjustments [so] the average cost inventory you are in a position where you can be profitable even at today's current scrap prices?

Yes.

Okay. Great. Thank you.

Eric Prouty with Canaccord.

In the Auto Parts business, maybe just a little more detail with the inventory adjustment. One, could you just give us a little bit of flavor from a loss standpoint? Is this a loss a little bit over breakeven? Is this a substantial loss?

And then, two, as you work through these inventories can we expect margins to be turning positive again in the next quarter and how long before they return to more historic normalized margin levels?

I will talk about the inventory item. In the Auto Parts business, we did not have a net realizable adjustment there, because the net realizable value is still higher than cost due to the benefit of part sales to the value of a scrap vehicle on top of the scrap and the cores.

However, as there's an overhang of more expensive vehicles within the average inventory cost at year-end, this will compress the gross margins in the first quarter as these costs flow through the income statement.

And, then, I think just to add to that, going forward we are seeing positive cash spreads in the Auto Parts business.

Great. And, again, any -- obviously you are a little guarded with the guidance giving -- that you're giving out, but just any indication of the level of loss that you're seeing in this current quarter? Is this right over the loss line or is this -- can we expect a substantial loss?

We can't give any further guidance than what we've done to date. I think we've given you a pretty good overall guidance for the quarter.

Okay. Great. Thank you.

Bob Richard.

Good morning. Your trading volume is down, pretty much nil. Previous conference calls discussed maybe exiting this business. Can you comment on that?

Our trading volumes are down, as we commented in our earlier calls. The amount of material coming out of Russia has been reduced dramatically as [Russians use] more of that material internally. For us it's a business that we had a keen interest in early on as it gave us more visibility, but it's a low margin business. So we only engage in that business where we think it's appropriate and profitable to do so. And right now the material availability is very low.

In the fourth quarter, that quarter-over-quarter ferrous realized price increase was pretty impressive and your comments talk about foreign realization outpacing domestic costs. How does that work on the downside? Are you seeing maybe that -- does that same relationship hold between foreign realizations and domestic costs and the decline in overseas is outpacing the decline in costs here or can you give some color to that?

For us the overseas markets still looked more attractive on a margin basis than the domestic markets do today. The obvious point of the degree of margins declining and expanding varies from time to time and sale to sale. But today is still stronger on an international front than it is on the domestic front.

That helps. Any positive impact we should expect on SG&A due to maybe -- can you quantify anything that we should maybe expect in the first quarter due to the reduction in operations?

I think what you might expect is SG&A to be less than what you saw in the fourth quarter, but higher than Q1 of fiscal year '08, just because the timing issue of implementing the cost-cutting measures.

That helps. Thanks very much.

Arnie Ursaner with CJS Securities.

Good afternoon. This is actually [Tore Eastburn] for Arnie.

My first question is about just demand you are seeing by region, specifically in scrap?

We really don't comment and break down our numbers by region. So I'm not sure we can provide any help or guidance on that.

Okay. And do you have any sense of what percentage of your export sales were guaranteed or financed with letters of credit?

Our export sales on the fair side have letters of credit when they are shipped. Those are in place for us on our export sales. We have on our nonferrous sales we have credit and advanced payments in place when those are shipped.

Okay and did you hear anything from customers in terms of their difficulty getting those letters?

I think I commented on that earlier. Our customers are not immune from what's happened in the credit markets. And that's the reason that we have been cautious about what we see going forward in November for this quarter and forward after that.

It will depend a great deal on what credit markets do. Obviously the earlier comment about cancellation in shipments and so forth in that question really relates to experience that customers have with their ability to fulfill contracts and obtain credit.

We work with our customers. And we have had a very good success rate in doing that.

Right. Then lastly -- I'm sorry if I missed it -- but have you quantified the capacity you've added from the Puerto Rican operation you bought?

We really haven't disclosed that. Sorry. I don't think we can't give you any guidance on that.

Timna Tanners from UBS.

Good morning. Thanks for the great detail.

Just a few quick questions, really. Given the distress domestically on some of the smaller scrap dealers, are you thinking any differently about acquisitions in general or uses of cash?

As we've said before, we think the fundamentals of this business long-term are very strong. And our view of that and the model under which we operate hasn't really changed, even though we certainly are addressing the short-term disruption as Tamara outlined in some detail.

Consequently, we think that opportunities for acquisitions will continue to be available and perhaps even enhanced as people face difficulties in the marketplace. And we will look to take advantage of them where we think it's an appropriate value.

So in order of preference, I mean, has it moved up in order? Is it something that you are more actively looking at but you might have like, say, in the summer when valuations were higher?

We are a growth company so it has always been very high in our list of priorities and continues to be so.

And then, just wondering if you could make any comment at all about mill inventory levels? It's been kind of surprising to see what some people have called a buyer's strike in scrap, not just domestically, but overseas.

Do you think -- do you have any thoughts on what those inventory levels look like or how close they might be to getting to a level where they'd need to start buying it in general?

If the comment is about our inventory levels --.

No. The mills of the minimills that you sell to.

I think the inventory levels in the mills are different, depending on where the mills are, and because of the fact that we have a very diverse customer base. It varies from region to region and we continue to make sales and move materials.

So from our perspective, those inventory levels are probably running down at different rates in different places. But specific inventory levels we don't have.

Okay. Thanks.

At this time I would now like to turn the call back over to Mr. John Carter for closing remarks.

Thank you very much for being with us today. We appreciate your participation on the call and the questions, and we look forward to talking with you again next quarter.

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