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Executives

Alexandra Deignan - Vice President of Investor Relations

Tamara Lundgren - President and Chief Executive Officer

Richard Peach - Senior Vice President and Chief Financial Officer

Analysts

Arun Viswanathan - Longbow Research

Brent Thielman - D.A. Davidson

Phil Gibbs - KeyBanc Capital Markets

Martin Engler - Jefferies & Company

Timna Tanners - Bank of America

Chris Olin - Cleveland Research

Tim Hayes - Davenport & Company

Sal Tharani - Goldman Sachs

Evan Kurtz - Morgan Stanley

Bridget Freas - Morningstar

Schnitzer Steel Industries, Inc. (SCHN) F1Q 2013 Earnings Call January 8, 2013 11:30 AM ET

Operator

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 host for today's conference call, Ms. Alexandra Deignan. You may begin ma'am.

Alexandra Deignan

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 a 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 two, which are also included in our press release of today and in the company's most recent Form 10-K and in the 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 happen.

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.

Tamara Lundgren

Thanks, Ally. 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 industry (Inaudible) growth in the U.S. and throughout the world led to muted demand. The fiscal cliff issue in the U.S., 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 fray in fiscal cliff would have disappeared from our horizon, it appears that we may lurch from partial resolution for at least the next several months. If however, the U.S. successfully navigates its fiscal challenges, and if Europe continues to stabilize and Chinese and emerging markets due to key growth reaccelerate, 2013 could be the beginning of a steadier environment and an upwards cycle in the metal 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 may drop its character and drive 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 level which should also reduce some of the price volatility that we have been seeing so much of this year.

In a scrap constrained environment, (inaudible) customers results insignificant peaks and drops in pricing. Putting it all together, demand and pricing for ferrous and non-ferrous scraps 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 four 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 have been able to significantly reduce our cost base through the cost reductions, efficiency and synergy initiatives we announced in August in connection with our restructuring as well as through the continued improvement programs we undertake in each of our businesses and functional areas.

In addition, we continue to (inaudible) our growth to inherit 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-n-Pull stores for franchise. If you look at our facility map, the green dots represent our new locations. We are increasing our APB stores by 20% and these new sites support the core markets in which our metals recycling business has existing operations or strengths in our APB presence in an existing region.

These new acquisitions include four stores in British Columbia which expands our presence in Western Canada near our metals recycling facility 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 footprint with the addition of two stores in the Kansas City area and we acquired a Greenfield location in Springfield, Missouri. 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 supply to our metals recycling business. We expect that it will take approximately 12 months for all of these sites to 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 half 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 five 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 outlook 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/or 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 compared to the fourth quarter. These volume declines were 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 six 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. We've done partially in November for December shipments.

It's worth mentioning that U.S. export ferrous shipments to China fell off dramatically from August to October. Over the summer, iron ore dropped between $40 and $50 a ton, but iron ore prices have recovered, the Chinese have become more active in the ferrous scrap export market.

Currently, we are seeing 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 seven to look at scrap supply trends in the U.S. The domestic supply of scrap continues to be constrained by low U.S. GDP growth and weak consumer activity. Although we are currently experiencing challenging market conditions for supply volume, we believe the cycle will turn as economic conditions improve.

As the top chart shows, the average U.S. 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 to 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 eight 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, U.S. scrap export 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 U.S. 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 inventory and the timing of shipments.

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

Richard Peach

Thank you, Tamara. I will begin on slide nine 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 first quarter were down only $20 per ton, because the early part of the quarter included shipments for higher price sales that we have made before the market declined.

Lower export prices had 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 will 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 tons which was a sequential decrease of 30% due to lower beginning inventories and the reduced flow of raw materials. Operating income from 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 results 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 (inaudible) of falling commodity prices and the limited availability of (inaudible) light vehicles. However, operating margins increase significantly to 9% due mainly to lower average inventory cost 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 second quarter, we expect to incur up to $2 million of startup cost 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 a $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 (inaudible) which had a curve in July and in the second quarter we expect utilization to be lower sequentially due to lower plant 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 a 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 from a cash outflow operations of $60 million and excluded a non-cash valuation of loans from 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 process and explore facility.

The combination of transition cost 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 will turn the call back over to Tamara to conclude our formal remarks on slide 14.

Tamara Lundgren

Thanks, Richard. The global economic outlook remains challenging but we are 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 interdivisional synergies and executing on growing 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 are successfully executing on new store openings through acquisition 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 improve the 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 of the company is directly attributable to the hard work and dedication of our employee. 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.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Arun Viswanathan with Longbow Research.

Arun Viswanathan - Longbow Research

Guys, thanks for taking my question. I guess, my first has to do really with feedstock outlook. I guess, how much of a difficulty have you faced in that market over the last year as attributable to GDP versus maybe some structural changes in consumption patterns and so on?

Tamara Lundgren

Good morning. We think that is really the low U.S. 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 are focusing on investing in new supply channels through APB, and we are 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 client sales which should 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.

Arun Viswanathan - Longbow Research

Okay. Thanks. I mean, I guess, what I am trying to get at is, if we do see an improvement in GDP. What kind of margin improvement would you expect? I mean, do you expect 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?

Tamara Lundgren

Well, if you take a look back at for example fiscal year '11, when we were in a year improving growth slowly, but recovering GDP and really on track, but we have $31 a ton operating margins in 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 the Chinese activity, so 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 is 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 U.S. remains to be seen but if the U.S. does start to enact pro-growth reforms, we can start to see recovery in the U.S. as well.

Arun Viswanathan - Longbow Research

Okay, and then just quickly lastly, given that you are more levered now to the export markets, do you think that precludes from, again, reaching that $31 a ton? Or how quickly can you switch back to domestic shipments if global markets remain weak assessing Europe? Thanks.

Tamara Lundgren

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

Operator

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

Brent Thielman - D.A. Davidson

Tamara, on the auto part initiative, you mentioned the new sites to 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?

Richard Peach

Brent, hi, it's Richard. As you all heard in my remarks, we do expect some startup cost and over the course of and during the fiscal '13 and then the second quarter will also have some transaction expenses related to the completion of these deals. So therefore, full-year, I am projecting certainly accretion but not until we get into fiscal '14 to the startup cost because we have to convert some of these stores to a sales-service module. A couple of them are Greenfield. So they need to be built up from scratch. So that is just part of the normal activity as we build the business in these 10 new locations.

Brent Thielman - D.A. Davidson

Understood. Is there anyway to handicap the startup cost transaction expenses?

Richard Peach

Well, I think what we said, we expect up to $2 million in the second quarter but I would then just remind you that what we have seen in the first quarter here is a significant increase in the APB core business result back up by 9% margin even in this weak market. So we are very positive about our auto parts business especially now having increased our metal applications by 20%.

Brent Thielman - D.A. Davidson

Sure. 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 level is sustainable in a steady pricing environment?

Tamara Lundgren

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 are beginning to see that in the private sector. So what we are seeing is a quick rebound which is what we had anticipated, what happened with the steel business, when the economy starts to show improvement on the West Coast.

Brent Thielman - D.A. Davidson

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

Tamara Lundgren

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.

Operator

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

Phil Gibbs - KeyBanc Capital Markets

I had a couple of 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.

Tamara Lundgren

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

Phil Gibbs - KeyBanc Capital Markets

Okay, any color you could give on CapEx for fiscal '13 and then secondarily, what should we be thinking about as far as purchase cost for these acquisitions you may had following the first quarter?

Tamara Lundgren

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

Richard Peach

Yes. On CapEx, Phil, we are expecting for the fiscal year as a whole up to $90 million in CapEx, so obviously that's subject to performance and we have the ability and so [vary] our projections any time, but currently its $90 million.

Around half of that is in 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.

Phil Gibbs - KeyBanc Capital Markets

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

Richard Peach

Yes. In terms of the acquisitions, the [acquisitions] as will be disclosed in our 10-Q came out to a total cost of $23 million. And, then on top of that, for the two Greenfields, the investment is up to around $5 million for them.

Phil Gibbs - KeyBanc Capital Markets

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

Tamara Lundgren

We have a good pipeline in both of our businesses and 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.

Phil Gibbs - KeyBanc Capital Markets

Thank you very much.

Tamara Lundgren

Thank you.

Operator

Our next question comes from Martin Engler with Jefferies & Company.

Tamara Lundgren

Good morning.

Martin Engler - Jefferies & Company

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 on the current quarter and then the two progressively throughout the year here for the Greenfield?

Richard Peach

Good question. These facilities will come through the second quarter and cash flow, and then the Greenfield, which are owned up to five and of course that comes through our CapEx. A significant portion of that will be in the second quarter, but there'll be some parts of it that will be in the remainder of the fiscal year.

Martin Engler - Jefferies & Company

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

Tamara Lundgren

We are anticipating, when they are 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.

Martin Engler - Jefferies & Company

For the most part, but due to the ramp up cost the accretion isn't going to hit until fiscal '14?

Richard Peach

That's correct.

Tamara Lundgren

Correct.

Martin Engler - Jefferies & Company

Okay, excellent. Thank you very much.

Tamara Lundgren

Thank you.

Operator

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

Tamara Lundgren

Good morning.

Timna Tanners - Bank of America

How are you? Good. Just wanted to dive in a little bit more on 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 had warned us but the amount of drop-offs. 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?

Tamara Lundgren

We sell forward anywhere between three and six weeks, and so our specific flows take that type of window. Now, overall for 2013, we do see that there is a potential for better market than in 2012, and that's primarily due to three significant macro trends. You see China coming up stronger.

You see their new administration having made these positive comments regarding the source of their growth, driving from urbanization and infrastructure investment. You see their PMI showing improvement. You see iron ore prices improving. They probably more than anyone arbitrage significantly iron ore and scrap.

You see Europe stabilizing, and that has knockout effects obviously throughout the world. The U.S., while it remains to be seen should be on a recovery path over the course of 2013, and all of that should lead to a rising price environment which is what we are beginning to see now, but that should lead to rising pricing environment in 2013 but these issues remain to be seen and the stability that could appear remains to be seen.

Timna Tanners - Bank of America

I don'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 it seems to us like the growth could be slower. It seems to us like the iron ore strength maybe somewhat temporary given some supply constraints globally and given the restocking that you mentioned in front of Chinese New Year.

That's why I was trying to get a sense of when you talk to your major customers is there anything else that you are 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 just what I was trying to get a better handle on. Anything out of Turkey? Anything out of your major trading customers?

Tamara Lundgren

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

Timna Tanners - Bank of America

No, fair enough, okay. Anything in line with the greater consumption of scrap in the furnaces that you are 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?

Tamara Lundgren

Well, we clearly do see that arbitrage taking place on the pricing. I mean you sell 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 costs. So, we are 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.

Operator

Our next question comes from Chris Olin with Cleveland Research.

Chris Olin - Cleveland Research

Most of my questions have been answered. I just had one question just 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 would like to be a part of?

Tamara Lundgren

When we look at Greenfield opportunities, the first thing that we will look at is right now whether or not we can be synergistic with our MRB franchise or if we can enhance an existing franchise division that APB has. Those are the two avenues we look at when we identify locations.

Then we obviously do the demographic studies and look at the demand profile. We do market research to assess where a Greenfield opportunity should be sited and how we anticipate it will perform.

Chris Olin - Cleveland Research

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

Tamara Lundgren

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.

Chris Olin - Cleveland Research

But anything beyond that?

Tamara Lundgren

We did not comment on anything beyond that.

Operator

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

Tim Hayes - Davenport & Company

Most of my questions have been asked. Just one. Are you seeing an increase in the flow of scrap volume in the North East following Sandy?

Tamara Lundgren

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

Tamara Lundgren

Next question, operator?

Operator

Our next question comes from Sal Tharani with Goldman Sachs.

Tamara Lundgren

Good morning, Sal.

Sal Tharani - Goldman Sachs

Good morning. How are you?

Tamara Lundgren

Fine. Thank you.

Sal Tharani - Goldman Sachs

I wanted to understand a little bit on the margins side from $6 to let's say your historical average of $35 you used to do. The path to it, I mean, there are two issues and I understand the cyclical issue, which is the lower weak economy and China's slowdown temporary or permanent.

We will see that, and that maybe in global GDP go back to sort of 3.5%, 4%, U.S. back to 3% and weakening of the color, 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 a port in the region 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, well, even with the cyclical issues are winding or gone down, you will never go back to those kind of margins.

Tamara Lundgren

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

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, enhancing synergies between our two MRB and APB businesses. You don't have to look too far back when you saw $30 margins, but the difference between that environment and this environment was a rising price situation and just stronger global growth, and those two things are the biggest difference.

We've had competitors in our region 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.

Sal Tharani - Goldman Sachs

Okay. Any view on what you think the DRI will impact this scrap market in the U.S. with 5 million tons from Nucor and others are talking about building more DRI plants in the U.S.?

Tamara Lundgren

Well, I think that's a really interesting question, Sal. In the narrow sense, DRI may impact the pricing of prime scrap by affecting the premium that prime scrap has historically received. But in a 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 of low and stable natural gas prices proves true, then there should be a big step up in the demand for steel generally.

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 in getting back to your first question and our margins.

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.

Sal Tharani - Goldman Sachs

Okay. Thank you very much.

Tamara Lundgren

Thank you.

Operator

Next question comes from Evan Kurtz from Morgan Stanley.

Richard Peach

Good morning.

Evan Kurtz - Morgan Stanley

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

Richard Peach

Sure, hi Evan, it's Richard. Well, first of all, you will see that in the first quarter, our SG&A was around $40 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, we have made an $8 million reduction which is about 14%.

So we are very much on this trend of reducing costs. Our cost reduction program as a whole as you mentioned this $25 million, that's well on track. We said we will reduce our work force 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 are continually reviewing our cost base given the market conditions but in summary, the program is very much on track.

Evan Kurtz - Morgan Stanley

I don't want to beat a dead horse here, but it certainly seems like one of the issues that's been a headwind for Schnitzer over the past year here is that, U.S. prices have been more in line with export prices. Generally, there's been a pretty nice premium between Asian and Turkish pricing versus U.S. pricing. That's really kind of collapsed.

You have 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 in the equation? Are you concerned that maybe over this kind of weaker period here, it actually seems that supply will start to catch up with demand in regions like China as their scrap reservoir grows?

Tamara Lundgren

No, I think it will be a very, very long time before we see export demand from the U.S. being significantly affected by scrap generated in the countries where we export to today. I usually talk about how long it took. We recognize only three exporting countries right now or regions, the U.S., Europe and Japan.

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, Korea with 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 contemporary of any build out of infrastructure, urbanization, development across the world, I think will sustain exports from the U.S. for decades to come. I think the drop off in demand is really due much more to macroeconomics than it is to an increasing supply in the emerging markets.

Operator

(Operator Instructions) Our next question comes from Bridget Freas with Morningstar.

Bridget Freas - Morningstar

On the 10 new auto part 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 that the auto parts business is becoming more critical as a supply channel in this environment?

Tamara Lundgren

Well, we are enhancing the synergies between APB and MRB from an operational perspective. So you can see that we are focused on developing that new supply channel in geographic proximity to metals recycling. But there are really few 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 breakdown in terms of number of locations for this, but we can follow up with you and give you that later.

Bridget Freas - Morningstar

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?

Tamara Lundgren

You answered the question.

Bridget Freas - Morningstar

All right. Thank you.

Tamara Lundgren

Thank you.

Operator

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

Tamara Lundgren

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.

Operator

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

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