Sims Metal Management Limited Management Discusses Q2 2013 Results - Earnings Call Transcript

Feb.22.13 | About: Sims Metal (SMSMY)

Sims Metal Management Limited (SMS) H1 2013 Earnings Call February 21, 2013 5:00 PM ET

Executives

Daniel W. Dienst - Group Chief Executive Officer, Chair of Combined North American Metals Recycling Business, Executive Director, Member of Nomination/Governance Committee, Member of Safety, Health, Environment & Community Committee and Member of Finance & Investment Committee

Robert C. Larry - Chief Financial Officer

Analysts

Michael Slifirski - Crédit Suisse AG, Research Division

Scott Hudson - CLSA Asia-Pacific Markets, Research Division

Brent Thielman - D.A. Davidson & Co., Research Division

Mike Harrowell - BBY Limited, Research Division

Emily Behncke - Deutsche Bank AG, Research Division

Ben Chan - BofA Merrill Lynch, Research Division

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Liam Farlow - Macquarie Research

Operator

Good morning, ladies and gentlemen, and welcome to the Fiscal Year 2013 Half Year Results Conference Call for Sims Metal Management Limited. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 21st of February, 2013 in United States and Europe; and Friday, 22nd of February, 2013, in Australia and Asia.

Today's presentation may contain forward-looking statements, including statements about the financial condition, results of operations, earnings outlook and prospects of Sims Metal Management Limited. Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those experienced or implied by these forward-looking statements. Those risk factors can also be found on the company's website, www.simsmm.com.

Investors are encouraged to review the filings made by Sims Metal Management Limited with the Securities and Exchange Commission, including its Form 20-F, which we filed with the SEC on October 12, 2012, which describes some of the factors that may cause actual results to differ from these forward-looking statements.

As a reminder, Sims Metal Management is domiciled in Australia and all references to currency are in Australian dollars unless otherwise noted.

I would now like you hand the conference over to your speaker today, Mr. Dan Dienst, Sims Metal Management Group Chief Executive Officer. Please go ahead, sir.

Daniel W. Dienst

Thank you, Kay. Good morning, good evening and welcome, everyone, to today's call. On behalf of myself and all of Sims Metal Management employees, I want to thank you for joining us for this review of our results for the half year ended December 31, 2012.

Our call this morning, for most of you who know us, will follow the usual format that we've used in the past. First, I'll provide some initial thoughts before turning the call over to Rob Larry, our group Chief Financial Officer, who will take you through the details on the financial results. Then he'll -- Rob will hand it back to me. I'll make some closing remarks on market conditions, before we take a few questions as time permits.

You should notice, when you have the chance and the time, our slides posted to our website this morning and filed with the ASX, offers a fair amount more detail than we have in the past and I probably won't have a lot of time to do -- go through those slides with you today, but I urge you to take some time after the call to go through them.

In those slides that I just referenced, we're building upon what we have started at the end of fiscal '12, explaining a little bit more about our strategy and how we will maintain a focus on various aspects of the business. There, we go into a more comprehensive look at some of our segment details, cost reductions, asset optimization, growth opportunities for our e-business and our entry into emerging markets, as well as a thesis and analytics relating to historical post-recession scrap generation recoveries. However, we're happy to take questions on any areas of interest, as always, during our Q&A session.

So let me get into the presentation. As always, we'd like to start by welcoming the best and the brightest in the metals and electronics recycling industry, all of the men and women of Sims Metal Management and partners at our joint ventures across the world, many of whom are listening to the call or the webcast today.

We'd like to thank our employees for their efforts in what can only be described as extraordinary conditions over the past 6 months. From Hurricane Sandy, or what is now referred to as Superstorm Sandy, in the U.S., snow in the United Kingdom and flooding and wildfires in Australia, our 6,600 strong men and women have shown incredible resilience and preparedness in the face of adversity. Our people have done an incredible job preparing our sites, securing our equipment, and most critically, keeping our people safe.

On the safety front, we achieved a promising reduction in our lost time incident frequency rate in the first half of fiscal '13 and are getting back on track with our journey, as we call it, to becoming the safest manufacturing company in the world. Also encouraging, our overall rates of incidents, lost time, medically treated incidents, minor incidents, all decreased. Improving safety performance also translates into improved efficiency and production, apart from the moral imperative. To our employees that may be listening, the trend is your friend. Keep up the good work on the safety front.

Further, we are proud to say that for the fifth year running, we've been named in the Global 100 Most Sustainable Corporations list presented at the World Economic Forum in Davos, Switzerland by Corporate Knights. Our #15 ranking among the truly exclusive global group of companies is an accomplishment that we are proud of, and one that highlights our mission, as you've heard us say before, of doing well by doing good. This is a recognition that takes into account a company's environmental record, human rights record, transparency, commercial integrity and many other factors just beyond the installation of solar panels and carbon tracking. The fact is, sustainability has real returns, both in terms of dollars and efficiencies for our shareholders, and in the form of a cleaner environment for the communities in which we live and work.

Before I turn the call over to Rob to go over the financials, allow me to make a few observations about the first half and then share some perspective on what we were seeing out there in the early stages of our second half. I'll also touch on 1 or 2 other matters of importance.

Despite emerging signals and improving economic activity in our key scrap generating market in the United States, the translation into stronger scrap volumes remains currently challenged, as scrap generation, as you may have heard me say before, typically lags the fundamentals. Subdued scrap generation, particularly within the consumer segment, negatively impacted sales and margins in the first half, which was compounded by weaker commodity prices and tepid ferrous demand.

These conditions led to a first half fiscal '13 earnings outcome of underlying EBITDA of $94 million. While underlying EBITDA before were significant items in the U.K. charge, we landed in the upper range of our revised guidance. And macro trading conditions unfortunately masked the significant accomplishments we've made on lowering controllable costs and optimizing our portfolio of assets.

We were extremely encouraged by the steps we have taken to reposition the business for solid returns on investment throughout the cycle, and the initial gains we've already begun to see. In our North American business, we've reduced controllable costs, excluding the impact of significant items, by $4.7 million per month, exceeding our previous guidance of $4 million per month and reducing underlying controllable expenses by $28 million in the first half, measured against the prior corresponding period. Further, the North American business also divested 3 underperforming businesses, and in all candor, loss-making businesses, for a total cash consideration of approximately $52 million.

In our U.K. Metals business, controllable costs were trimmed by about $800,000 per month or $5 million for the half, measured against the prior corresponding period, and are on track to reach a run rate of $1.5 million per month in the second half of fiscal '13.

On top of gains made in North America and the U.K., our Australasian operations reduced controllable costs by an additional $10 million in the first fiscal half, compared to the prior corresponding period. I applaud our local management teams and our frontline employees for attacking costs and identifying ways to make us more profitable going forward. And there are more cost reductions to come in the second fiscal half just started. We are leaner, more nimble, more aggressive than ever and have enhanced return characteristics of our suite of assets.

I'd now like to give you some brief thoughts on our regional businesses and how they fared in the first half of fiscal '13. In North America, while there were early signs of better times ahead in the shape of a more confident consumer, a rebound in the housing market and an uptick in industrial production, the North American Metals business continued to face headwinds in the first half of '13. Scrap intake and shipments were materially down from the prior corresponding period, as the business prudently applied selective buying behavior and chose not to chase marginal intake tonnages.

Despite the implementation of proactive source control, the continued challenging set of global economic conditions, weaker metal prices, tentative demand for the majority of the period and the impact of adverse significant items, resulted in a statutory loss. Our North American colleagues are not satisfied with this result and continue their efforts to streamline their business.

As I just mentioned, we aim to significantly reduce controllable costs. Excluding the impact of the significant items, we were able to achieve a reduction of $4.7 million per month from the prior corresponding period. Also, as I said earlier, this is in excess of management's previous forecast of $4 million per month.

Through a further reduction in controllable costs and the potential monetization of a few residual non-core and underperforming assets, we have now increased our targeted cost savings to $6 million per month beginning in the second half of fiscal '13, leading to a total annualized controllable cost reduction run rate of circa $70 million by the end of fiscal '13.

We did not allow headwinds or portfolio optimization to alter our growth strategy in the first half of fiscal '13. Within our Sims Recycling Solutions, our SRS business, we made 2 strategic acquisitions: 1 in British Columbia and the other in Maryland, expanding our network of locations across the continent. In Metals Recycling, we divested underperforming assets in Arizona and Colorado, as well as our 50% interest in a joint venture in Nashville, Tennessee. We recycled some of this capital into the acquisition of the business with a shredder around which we added feeder yards to support our Gulf Coast expansion.

Development of our expanded New England footprint continues to grow, with a new greenfield full-service facility and shredder under construction. This will complement our already open deep-sea dock and non-ferrous facility. The completion for the inland shredder is scheduled for September 2013.

These actions are part of our clear strategy to direct capital to the highest returning assets, with an emphasis towards water-based facilities on brown water and blue water, in scrap-rich regions where we can achieve a leadership position, source control and solid returns on investments throughout the business cycles.

In the Australasian market, we were hampered by slightly lower volumes and lower average selling prices in the first half of fiscal '13, particularly in the face of a quiet Asian Pacific ferrous trading market. Through the first half of fiscal 2013, we continued to selectively deploy capital, new capital, to this important region via acquisitions in the Western Australia and South Australian markets, and the successful implementation of downstream non-ferrous recovery technology behind our major shredders. Our pervasive focus on cost reduction globally is also extended, as I said earlier, to our Australasian Metals business, where our talented team there decreased controllable cost by $10 million compared to the previous corresponding period, while at the same time, we expanded our footprint. Underlying controllable cost reductions are expected to be reduced further in the second half of fiscal '13 and to be sustained at an annualized run rate of circa $20 million by the end of the fiscal year.

Our European business performance in the first half of 2013 was obviously, overall, a disappointment. While the investigation into the U.K. inventory matter revealed that conditions which allowed improper conduct to occur were unique to the 2 U.K. facilities, Long Marston and Newport, and principally a function of our SRS business outgrowing its control environment, the board and management continue to view the full resolution of this matter as its highest priority. We are working diligently to ensure that this situation will never ever be replicated. And I'll expand on that situation in just a moment.

Our traditional U.K. Metals operations, in particular, continues to struggle with weak scrap generation and tight margins, masking a reduction in underlying controllable costs of $800,000 per month and solid earnings contribution from SRS across Continental Europe. As we move through the second half of fiscal 2013, our efforts to reduce costs and tighten controls, obviously, will intensify. We anticipate reaching a controllable cost savings run rate of $1.5 million per month during the second half of fiscal '13, while rigorously examining further cost-saving opportunities in both metals and SRS.

Now let me give you a brief description of what happened at our 2 U.K. facilities, what Group Management, our internal audit team, and the special committee of the Board of Directors has uncovered and what we plan to do about it. I'll add one caveat, and I'm sure you can appreciate this. We still consider the matter open and pending while we finalize our plan for corrective actions and strengthening controls. So I'll be somewhat limited in what I say.

As many of you know, over the past years, against the backdrop of this global economic turmoil, 2 bright spots for our company apart from the remarkable progress on safety and sustainability, has been the rapid growth of our SRS business globally and our technology initiatives there as related to a capture of metallic content from our own waste streams and third-party waste streams. These 2 areas of recent success for us remarkably collided at these 2 SRS facilities in the U.K. And in all candor, got away from our managers and our otherwise good controls company-wide.

A couple of weeks into preparing our first half fiscal accounts, it became clear that processed materials that arose from our shredders and then would be processed at our dense media plant in Long Marston, as well as purchased e-waste material at Newport, was overvalued. The company then established, as you know, a special committee and an investigation commenced by a team consisting of non-U.K. Sims processing and commercial experts, together with members of our Continental European SRS team and our own internal audit staff.

This team aggressively tested and reconciled book assumptions on the metallic values to be recovered and tonnages to the physical inventories. As our announcements relative to the matter were highlighted, in a short period of time we were able to quantify the shortfall relative to book values, which, so you know, was split almost equally between valuation assumptions and the waste and tonnage values to be processed and the weights around those -- that material; so half on assumptions on metallic value and half on weight.

As I'm sure many of you have questions, let me address some of them upfront. First, the alleged conduct we discovered does not represent in any way, shape or form the way Sims Metal Management does business, or how we expect our employees to behave. Rest assured, while we have ring-fenced the value impact as the matter comes to a conclusion, we will continue to act decisively to hold responsible the employees, managers and any third parties that were directly and indirectly accountable for the wrongdoing and the failings. As I'm sure you'll appreciate, we do not and will not speak to human resource matters.

Further, because this happened at 2 isolated sites in our fast-growing SRS division in the U.K. to raise questions about our strategy as it relates to this relatively young e-business, let me take a moment to address that now. The isolated acts of a few reckless people and supervisory control failures should no way question the reputation of our broader SRS franchise scattered across 5 continents, 18 countries and more than 50 sites. Nor should it undercut the broader successes we've had in this fast-growing market.

It should also be stated -- and let me be very clear about this, that no customer, compliance scheme, or consumer was aggrieved by this conduct or lack of conduct. SRS remains an important part of the broader Sims Metal Management family and we will continue to look at ways to grow this business, allocate capital to it and drive returns. This is particularly the case as our control environment there has become tighter and will become tighter than it has ever been.

Our announcement of employee misconduct and potential fraud is something obviously that no CEO wants to make. It's extremely disappointing. It's embarrassing and it's a situation that should never have occurred in the first place. But it is how a company responds that will define us. For what it's worth, we have responded. Our people have stepped up and we will be even stronger for it. Tough medicine to swallow, but something to build upon as we enter a potentially less scary macroeconomic climate in the months and years ahead.

Beyond that, as you know and most companies have, a policy not to comment on pending contemplated litigation or internal human resource matters, such that further comment here, I think, the lawyers would strangle me. So I'll cut it off there.

And finally, before I turn it over to Rob, and speaking of human resource matters that we don't comment on, I'd be remiss if I didn't address the press release that we also released this morning alongside our earnings, relating to the close or the near-close of my long service and tenure with this company and its predecessors.

As many of you know, who follow us, I've been with the company quite a while. I've got a contract that matures at the end of June and at that point in time, at the ripe age of 47, I will be retiring. Normally, when you hear these kinds of announcements, people say they want to spend more time with their family. I will tell you upfront that my family does not want me to spend more time with them. So I urge you to take a look at that press release. And as always, give us a call with any questions, and many of you do, and any time we'd be happy to take that call.

Obviously, an understatement to say that we've toiled some rocky soil here. Many people used the term green shoots years ago. Those green shoots cannot take place without a fertile, properly tilled soil, and we've tilled it. And I really believe in earnest, as you know and as I've said in the media release, the best years of Sims Metal Management are ahead of it.

So, thank you, and in particular thanks to all my terrific employees, many of whom have become friends. So in any event, go ahead, Rob, follow that. I'll turn it over to you to go through the financial results.

Robert C. Larry

Thanks, Dan. Greetings, everyone, on the call today. As a reminder, our company is domiciled and has its primary listing in Australia, and as a result all the dollar figures that we'll speak to today are in Australian dollars, unless we note otherwise.

I'd like to share a brief overview of the financial results for Sims Metal Management from our first half of fiscal 2013 just ended 31 December. The first half of fiscal '13 proved to be a challenging half, as we saw ferrous prices decline, more than $50 per tonne, which in turn slowed intake, especially as determined not to chase marginal tonnes particularly in North America. Though economic fundamentals have begun to improve in North America, we continue to see a drag, or as Dan called it, a lag on scrap generation, vis-à-vis the economic data.

Revenue for our first half of fiscal '13 was $3.4 billion, and the net loss after tax on a statutory basis was circa $295 million, representing a loss of $1.445 per diluted share for the half year ended December 31, 2012. NPAT in the first half of fiscal 2013 on an underlying basis was $10 million, it represented a decrease of 76% in the prior corresponding period. First half fiscal '13 underlying EBIT was $31 million, a decrease of 58% on the prior corresponding period.

As previously announced and due to the difficult economic environment, changes in the company's operating results and forecasts, and a significant reduction in the company's market capitalization, the company was required to perform a goodwill impairment test at the half year, in accordance with AASB 136 Impairment of Assets. AASB 136 requires management to determine the value of the company's cash-generating units. Management assessed the recoverable amount on a value and use basis, utilizing discounted cash flows. As a consequence of this impairment review, in the first half of fiscal 2013, the company recorded against its results a pre-tax $291 million charge to write down the carrying value of goodwill and certain other identified intangible assets in North America.

During the first half of fiscal 2013, our intake in shipments decreased from the prior corresponding period to 6.0 million tonnes and 5.9 million tonnes, respectively. This represents a decrease of 18% and 17% respectively on the prior corresponding periods for both intake and shipments. Most of that decline was noted in North America.

Now let's turn to the results at the regional level. In North America, sales revenue was down 33% in the prior corresponding period to $2 billion, and statutory EBIT was a loss of $328 million for the first half, while EBIT on an underlying basis, was circa $2 million. Scrap intake in North America decreased by 22% in the prior corresponding period to 4.3 million tonnes, while shipments decreased by 23% to 4.2 million tonnes. Results for the first half of fiscal 2013 in North America were impacted by significant items that decreased EBIT by $330 million, $291 million of that related to the goodwill and other intangible asset impairment, $15 million related to fixed asset impairment, and circa $11 million related to losses on the sale of businesses.

Other adverse significant items in the first half included, among other items, provisions and cost related to Superstorm Sandy, redundancy provisions and net realizable inventory adjustments.

Australasian sales revenue for the region was down 10% in the prior corresponding period to $574 million. Statutory EBIT was $13 million in the first half, a decrease of 62% on the prior corresponding period. Underlying EBIT for Australasia was circa $17 million in the half. Results for the first half of fiscal 2013 in Australasia were also impacted by significant items, that decreased EBIT by $4 million. Those items included: loss on the completion of a sale of assets in a joint venture, reduction in fair value accounting related to revaluation of our derivatives at CTG, and redundancy provisions.

Scrap intake and shipments for the first half of 2013 in Australasia were 900,000 tonnes each, and represented a 5% decrease and a 5% increase, respectively, on the prior corresponding period. European sales revenue was down 10% in the prior corresponding period to $812 million. Statutory EBIT was a loss of $6 million. Underlying EBIT was circa $12 million. First half fiscal 2013 results in Europe were impacted by significant items that decreased EBIT by about $18 million. The significant items consisted primarily of inventory adjustments.

Scrap intake and shipments in the region declined by 4% and 2%, respectively. Intake and shipments were each circa 800,000 tonnes during the first half of fiscal 2012. As of December 31, 2012, the company had net debt balances of approximately $293 million, representing 13% of total capital. For the first half of fiscal 2013, the group's effective tax rate would've been approximately 34%, but for the effect of the unusual impact to the effective tax rate that related to goodwill impairment and some of the other significant items.

During the first half of fiscal 2013, the company completed its on-market buyback by repurchasing an additional 900,000 shares of stock, bringing the total number of shares repurchased in the program to 3.9 million shares for an aggregate cost of $47 million. CapEx in our first half was approximately $82 million. And for the full fiscal year, we continue to estimate CapEx to be in the range of $160 million, depending on project timing.

We closed 4 acquisitions in the half-year just ended, with 2 being in our Metals Recycling business and 2 for SRS. Total cash outflows for acquisitions in the half was $20 million. In the first half, we generated cash flow from operations of circa $76 million.

As investors are aware, the company's dividend policy is to distribute 45% to 55% of NPAT subject to the board's discretion. In the absence of statutory NPAT, even after looking through a goodwill impairment, the company has determined not to pay a dividend for the first half of fiscal 2013. The company's dividends policy remains unchanged.

We appreciate your interest in Sims Metal Management. And at this time, I'd like to turn the call back to Dan for his closing remarks today.

Daniel W. Dienst

Thank you, Rob. Let me give you a quick overview of the market conditions and then we'll jump into Q&A.

The majority of the first half period, as many of you know, we endured some very challenging conditions in which ferrous prices declined by circa $50 per tonne versus the prior corresponding period. Intake also slowed precipitously, particularly heading in from October into November, as our teams aggressively lowered our buy prices to reflect the realities of global trading conditions in the face of those ferrous price declines, which at the time dropped from circa $415 per tonne, to about circa $360, $365 per tonne, intra-period.

We maintained a steady position with sales against inventories, but profits were obviously squeezed as ferrous prices fell abruptly versus average inventory costs. In mid-to-late November, the ferrous market to find a floor and firm somewhat through the end of the calendar year and have recently, since that period in time, increased significantly from the second fiscal quarter bottom.

There's currently adequate trading liquidity in the deep-sea ferrous markets, and we expect the same in the coming weeks. Intake currently remains challenged versus normally functioning historical economic activity. Although January and February, traditionally quiet months, weather in the Northern Hemisphere and a quiet period down under, have shown some resiliency on volumes and some margin improvement is also noted, as the market has found and held its discipline in the purchasing environment. Nonferrous markets, while trading at lower levels at period end, have been and remain liquid, and we expect an acceleration, potentially, of activity, particularly as Lunar New Year festivities in the People's Republic of China draw to a close.

We've now endured over 4 years of volatility and extremely challenging times in our markets. We believe slamming close the door, the books, if you will, on the first half of fiscal 2013, is also a potential closing of the doors on this difficult chapter for our company. Moving forward, we see a business which is repositioned to be a leader in the markets in which it operates and is on track to have reduced its fixed cost base on an annualized run rate in excess of $100 million before additional savings are to be realized in global SRS, as we head towards the end of fiscal 2013.

We are driving ahead with a clear strategy, to generate strong returns on capital deployed in existing markets and establishing beach heads in the emerging scrap-generating markets of the future. Backed by a confident, hungry, and safe working global team of more than 6,600 men and women ready to capitalize on improving market conditions, now more than ever, as I've said earlier, we are confident that Sims Metal Management's best days are ahead of us.

Consistent with prior reports and as you know as well, we're not going to give quantitative guidance at this time.

Now, Kay, we'll turn the call back to you for some Q&A as time permits.

Question-and-Answer Session

Operator

[Operator Instructions] We will now move to our first question from the line of Michael Slifirski from Crédit Suisse.

Michael Slifirski - Crédit Suisse AG, Research Division

I've got 3 pretty straightforward questions, I think. First of all, the margin decimation in the SRS business, how much of that was due to what happened to copper in the period? And given that copper is a little stronger than that, is the outlook better? Or has the precipitous fall in the gold price made the current quarter look continually tough, please?

Daniel W. Dienst

Good first question. We've always said that the SRS business, we are recycling waste to get commodities. And those commodities -- those headline commodity prices, good or bad, significantly impact the performance of the business. Clearly a big piece of that degradation in period-versus-period decline is commodity-related impact. But we also noted in the past, particularly in the pieces of the business that are, what I call B2C, waste-oriented, consumer-generated material on the continent and elsewhere in the franchise, that is a maturing business and competition continues to grow in that arena and it's incumbent upon our team to continue to put some technology to work and be smart commercially and pay attention to cost to make sure we retain a strong earnings profile for that business. So it's -- a big piece of it is commodity pricing, Michael, but there's also, as you'd note -- as we've noted in the past for you and others, that business, particularly in the waste segment, the B2C piece of the business, continues to experience competition, as you would expect from a business that matures.

Michael Slifirski - Crédit Suisse AG, Research Division

But specifically, Dan, with what we've seen in gold in the last week or so, if you bought inventory with an expectation of a higher gold price than what might be contained in that stream now, does that give you a challenging current quarter?

Daniel W. Dienst

It certainly does, but it is less challenging than it has in the past. That business has matured, particularly over the past few months. We have migrated that business to a hedging program and a strategy that they haven't embarked on before. So we've taken the discipline in our core nonferrous -- when I say core, I should say traditional retail nonferrous business and begun to hedge big pieces of that exposure. So we'll try to mitigate and call some of that volatility. So I wouldn't say it's as linear as gold has fallen x percent, expect that same degradation in realizing the prices were trying to hedge against that -- in that business.

Michael Slifirski - Crédit Suisse AG, Research Division

Secondly, the North American comment, choosing not to buy marginal intake -- surely marginal is good if you're spreading fixed cost across more tonnes, even if you're not making a lot from it. Is marginal the right word, or were there loss-making terms that you've avoided?

Daniel W. Dienst

Well, they're tied together, Michael, because in our business, it's -- just think from a mining business per se, where you may have harder to reach, say, reserve basis that may be more expensive to grab but you are filling capacity. In our business, if you think about it, if we go out and attack the market, we want to drag in another 5% to 10% of tonnes and you've put an extra $20 out on the street, what you do is you begin to erode the base tonnes that you're grabbing and you're pushing up the prices of a lot of that material because the material is finite. So it's one and the same, if you will. But our commercial deal will make -- we're out there testing the market every day. If we make a determination that we'd throw another $10 and $20 out in the street to buy some more scrap, we're not going to get it, or if you get it, you've then eradicated the margin on the base business that you're able to buy and procure successfully.

Operator

Your next question comes from the line of Scott Hudson from CLSA.

Scott Hudson - CLSA Asia-Pacific Markets, Research Division

I was just trying to get some sort of insight as to the quality of the scrap reservoir out there? I mean, I guess you've had a number of years of pretty challenging conditions. Is it -- are we sort of scraping the bottom of the barrel at the moment, in terms of quality of scrap coming in, into the system?

Daniel W. Dienst

You are. And what we've done is -- and it's a good question, it's -- I don't want to get into a thesis or dissertation. But in some of the slides that we put up this morning, I know you guys and gals haven't had a chance to look at them yet, but we do -- I think it's in one of our appendices, it might be Appendix D or C, where we went through in great detail, historical recessions. And we looked at what happens to scrap generation heading into a recession, while it's in a recession, and then coming out, what is the long-term growth or regeneration material that comes through. And as we've noted, it lags. But if you spend some time with those slides, it starts to tell a story, particularly in a reservoir like the U.S., where you have a U.S.-centric event, say, a recession of '80 to '82, or '91, '92, or the late '90s, or the one we've just gone through, you see what happens to scrap generation relative to population. You see it in the appliances. You see it in the vehicles, what happens when a consumer is on its back and when confidence and that consumer gets off its back, what happens over the next 4 to 9 years in terms of generation of units. And that's, again, prior performance is no -- historical performance is no indication of future performance, but it is a very interesting set of analytics. So we are scraping the bottom, chasing scrap. We continue to chase scrap. But as you start to see the fundamentals improve, auto sales, consumer confidence, appliance replacements, you'll start to see material come back into the system. There's been a lot written about, in particular in the U.S., our freeways are essentially rolling junkyards at this point. So our backlog of material is out there and as the consumer gets more confident and you see it in the headline auto sales numbers, you'll start to see, by way of example, in the vehicle space, the scrappage rates start to tick up in both percentages and actual units.

Scott Hudson - CLSA Asia-Pacific Markets, Research Division

Is there an element of -- I guess of the -- I guess low quality of scrap available now, is it, I guess, a result of potentially the excesses of prior to the GFC?

Daniel W. Dienst

There are different -- in the reservoir reserve base, if you will, of scrap generation, there are obviously different life cycles of material that comes to be recycled. Right? So you have autos that may take anywhere from historically 8 years to where we are, 12 years today, coming to market over that life cycle. You will have building material that may come over 20 or 30 years pursuant to demolition projects. You may have large infrastructure plants that have been around for many, many decades that then come to market as they are demolished and the like. So what you see -- and I know we -- I think we've teased this out a bit on a prior earnings call, where you actually look at total scrap generation, let's say, out of the United States reservoir. And it seems to be sort of right at its 5-year historical average, but behind that data is -- what you can't see and is very hard to tease out from data, say from the U.S. Geological Survey or anywhere else, is the quality or type or mix of that scrap generation. So you will have lower yielding, lower value tonnages coming out until the consumer material, which is nonferrous-rich, and the like comes back into the market.

Scott Hudson - CLSA Asia-Pacific Markets, Research Division

Great. Just lastly, in terms of obviously the technology that you've invested in over the last number of years, do you still feel that you're leading the markets? And I guess a best place coming out of, I guess, this downturn to, I guess, outpace the market in terms of nonferrous recovery?

Daniel W. Dienst

Yes, we really do. And we know what the IRRs on those investments have been. We measure it. We constantly look and I look, even in my lofty perch, the nonferrous pounds per shredded tonne into each of our shredders, what the recoveries look like, and very pleased. You actually probably see that in one of the slides as well, where you see this precipitous drop in FE tonnage in, but the commensurate yields of nonferrous material and recovered material through that technology is outpacing and outperforming the degradation in the total tonnes in. If you spend some time again on those materials, you'll see that in there.

Operator

Your next question comes from the line of Brent Thielman from D. A. Davidson.

Brent Thielman - D.A. Davidson & Co., Research Division

Guys, I appreciated the appendix on the scrap generation and economic recovery. It's definitely interesting. And one of the things you and others in the industry have talked about, is with this recovering U.S. economy, healthier consumer, we should begin to see reduced pressure on buy-in costs at the yards and obviously increasing spreads. Obviously, this isn't happening yet on a broader scale. But is there any evidence in specific regions where you operate, where you're actually seeing this occurring and sort of supports this expectation?

Daniel W. Dienst

Yes, I mean you see it -- you'll see it in the portfolio, if you will, in places, let's say, like Detroit. Now Detroit, a business that, without giving you specifics, really struggled for a while. Auto plants have kicked up, so some scraps coming out. People are back at work in some of those plants, so there's some material, post-consumer material being generated. You start to see evidence of that. We've seen it kick up a bit even in an increasingly competitive environment in the E&P space in the southern part of the U.S. But it's still, obviously, not enough yet to really tell an exciting story quite yet. But you do see the correlation over a period of time to economic activity. You're starting to see some pipe scrap come out of nat gas plays and things like that from fabricators and the like from certain plants. And you're starting to see these ties into more normally functioning pockets of certain economies correlating to scrap generation.

Brent Thielman - D.A. Davidson & Co., Research Division

And then just a second question, was just curious, maybe a little bit more detail on the performance of your interest in China. And maybe any comments whether you're prepared yet to expand upon what you started over there?

Daniel W. Dienst

Yes, obviously, we made a move into China after many years of consideration through an investment in Chiho-Tiande Group. No surprise that anybody in the secondary recycled materials, or secondary smelting business, all are experiencing the same sort of dynamics of margin squeeze on input. So as our partners and friends at Chiho come out to the Western world, currently, principally, to buy into their recycling assets and their downstream businesses, the relative underpinning of price of the material they're paying for, go figure, very analogous to the same woes that we're feeling. They have to pay too much -- my traders are killing me because we still do business with them, but pay too much for those input costs relative to what they're selling prices in. And a period of very strange, obviously, demand with the regime change in the PRC as the market there, for many months, has taken a very tentative, cautious approach to inventory stocks and building. And they've done a great job, obviously, staying break even or positive at this point. We continue to do a lot of work with them on helping them enhance their business, looking at other opportunities with them in the traditional space as well as the e-space. Very collaborative and most importantly, good people. So, so far so good. Their stock has bounced of late, although, probably over the past few days, relative to copper, highly copper-intensive or correlative -- haven't really followed it, but very proud of what they've accomplished so far. They're working real hard and they're very interactive with us.

Operator

Your next question comes from the line of Mike Harrowell from BBY Limited.

Mike Harrowell - BBY Limited, Research Division

I've got 3 questions. The first is just on margins out of the Northeast of the U.S. following Superstorm Sandy, has that created a bigger scrap reservoir for you? And also is everything back operating at the full tilt? The second question is could you just sort of highlight, or describe, what happened to the revised numbers for ferrous EBITDA in 2012, particularly the first half? It just looks like it has changed a bit. And finally, just on cost reductions, could you just confirm you still have a capacity to process in the order of 14 million tonnes in total? And to what extent of the cost reductions sort of core business sustainable-type reductions versus just these lower freight rates at the moment, or whatever? And sort of could you characterize just what part of the process those cost reductions have, by and large, been achieved in?

Daniel W. Dienst

Okay. We'll handle these in sequence. I'll handle the first one. Rob will take the second one. I'll come back to the third one. In the Northeast, obviously a pretty dramatic storm hit the East Coast of the U.S. literally as you probably all watched on TV if you weren't living through it. Storm came up the coast, made a hard left turn, literally, right into the epicenter of our operations in New Jersey. On a human note, many of our employees were dislocated, remain dislocated, and the fact that they show up for work every day and stay safe is truly remarkable, just on a human observation basis. Operations were back almost at full tilt within 1 week or 2. I believe we had the scales open within 3 days. I spent some time down there with our people, dirty, tired and just an extraordinary effort to get everything back up. Our suppliers of equipment, generators, all coming in from, perhaps the inland, supporting us and our gratitude extends wide in that regard. Not just to our people, but people we do business with who came in and trucked material in from Pennsylvania, Ohio. Truly, we always say this is a relationship business and people really stepped up on our behalf and did an extraordinary job. So our team there got everything back up and going, couldn't commend them more. It's remarkable to see. So everything was back up and running within a few weeks at full tilt, as you say. The interesting thing we did see is we did start to see some material coming in, as related to storm debris and cleanup. You started to see some destroyed vehicles. As you know, it was a briny mix of saltwater and the like that came in and took cars that were already titled and out on the street, as well as new production vehicles. And so we got a couple of those and then some. And you did see actually a kick in the nonferrous units recovered through our technology spike up a bit, as you've had better quality -- unfortunately for the former owners of those vehicles, better quality feedstock into the shredders. So you definitely saw some more material coming in. If you'd come to visit us, you'd see it clearly looked like storm debris and some material continues to come in. Now obviously, just in the New Jersey flows, it's not going to move the needle enough for the whole company, but it has been somewhat significant in the post-storm period, particularly on nonferrous pounds recovered per shredded tonne in. So that's #1. Rob, you want to take the revised FE number for '12?

Robert C. Larry

Sure. Yes, Mike, the impact of the $78 million write-down of inventories in the U.K., $15 million of that $78 million related to the way we report our ferrous trading business. That $15 million -- the impact of that $15 million was $3 million in the current year period, meaning Half 1 '13. The remaining $12 million hit fiscal -- was restated back to fiscal '12. And it was about a little more than $6 million in Half 1 and a little more than $5 million in Half 2.

Daniel W. Dienst

And then on your cost outset, what we really are trying to do is speak to, what I call, sticky costs, stuff that really comes out, what we call controllable. And not engage in a fantasy exercise, the freight rates pull in, this and that, none of that variable. Stuff that really, really sticks and are truly controllable within our control. And obviously there's a human piece of that. There's an equipment piece of that. There's some rationalization of how we process transport, not fuel-related to transport or freight rates per se, but optimization. And we're tracking this every week, every month and these are real numbers. Is that good Mike?

Operator

Your next question comes from the line of Emily Behncke from Deutsche Bank.

Emily Behncke - Deutsche Bank AG, Research Division

I've got 3 questions. Firstly, just wondering, Dan, if the strategy to get closer to the feeder yards, if you're continuing that strategy sort of going more downstream? And secondly, on the cost reductions, $100 million run rate by the end of this fiscal year, I'm just wondering how much of that you think might need to be reinvested given the competitive nature of the industry? And just finally, you mentioned in your closing comments that volumes are improving a little bit in the U.S. Does that mean that we should expect volumes in the second half to be flat versus year-on-year? Or up versus year-on-year? How should we rate that comment?

Daniel W. Dienst

Let's go in reverse order. Let's read -- and thank you for the questions. Let's go in reverse order. I look at the flows often. The flows that I'm seeing in what would be an abnormally -- or normal, quiet period -- and you think about weather in the Northern Hemisphere, which you're not blessed with, where you're sitting. You normally see a constrained flows. I've seen the flows tail off significantly, and part of that is conscious price adjustments we made in the market in November and December in particular and some of the bounce-back to, say, a more normal inbound level for January and continuing through the first half of February. So again, don't get -- I don't want to get anybody excited that this is the makings of rock 'n' roll again. It's still sort of squeaky jazz, if you will. But the volumes that I've seen, at least for the first 6 weeks of the calendar year, are a little bit better than how we closed out, let's say November and December. So I'll leave it at that. And you know we don't project out a great deal forward and probably be very difficult yet to see really if that reservoir is going to stick in terms of improved inbound. I guess your other questions, related source control. Yes, if you see some of our activity, particularly in the Deep South were the shredder, the busted shredder we bought, a turnaround play, if you will, for ourselves in the Deep South as we bought some assets there. Filled in some feeder yards around it. New England, while it's pretty significant in terms of scale, is also a source control place. So don't forget that our footprint comes out of Connecticut. It's always been a battleground fertile area for scrap that either swings north and east of Boston or down into Connecticut. That in and of itself is almost a very large feeder strategy. So yes, we're still committed to source control and being smart about where markets are ripe for that. You also see some of our expansion activity in Texas and Oklahoma, which fits part of that model as well. So, yes, selective. We're continuing to tap into places where we think scrap is or will be. And we can try and get it without 2 or 3 people in the middle of it. And what -- was there another question there?

Emily Behncke - Deutsche Bank AG, Research Division

Yes, the other question was, of the $100 million of costs -- or controllable costs that you're taking out of the business, I'm just wondering how much of that you think will need to be reinvested?

Daniel W. Dienst

Reinvested...

Robert C. Larry

Purchase price.

Daniel W. Dienst

Purchase price. Yes, right now as you see it, the mission is -- if I wasn't articulate in my opening was, if you look at our portfolio of assets, pro forma for the work done to date through the end of the half year. Essentially you have, in North America in particular, in the traditional metals business, you have a portfolio that largely has higher return characteristics in the current economic climate than you'd had before. There is headroom in there for incremental tonnes that come through. You're going to see that in variables. The costs that we speak to are out of the business. If we ever get back to a -- as I said earlier, a rock 'n roll environment and we wanted to bring people back, bring assets back, that's a conscious decision made relative to something really firm and, again, sticky, that we see in the market conditions that underlie it. But these costs are out and they stayed out.

Emily Behncke - Deutsche Bank AG, Research Division

And maybe just one final question. On Slide 26, you have a map of your North American Metals asset portfolio. I'm just wondering, of the shredders that you have in the U.S. now, how has that footprint changed in the last few years?

Robert C. Larry

Where are we...

Daniel W. Dienst

Yes, if you look at that footprint, obviously, let's say the Northeast region where you've got a -- shredders for us operating today in North Haven, Connecticut, Jersey City, and down at Fairless or Trenton, you used to have another mega-shredder wedged into Newark, New Jersey in that footprint. And while we replaced that shredder with another shredder down in Roanoke in Newark as well. So you're missing 1 big mega-shredder versus a few years ago in the Northeast region as we consolidated. Let's see, Sims Hugo Neu, Metal Management and Fairless Iron, so 3 mega shredders have gone to 2 and then our very highly efficient machine in Connecticut, which will be complemented by a new machine up in Rhode Island. Where else can we look to? The Central region probably ran many, many years ago, 3 shredders, particularly in the greater Chicago-land area. One is down, probably will never come back; one is on very cold idol, if you will; and one is running highly efficiently now as we move and centralize feedstock and improve that machine downstream recovery, air separation, cleaner scrap, more efficient shredding box. So investment into that 1 machine, where you used to have 3 less efficient machines, which had plenty of scrap many, many years ago. We've now sort of rationalized that market. In the Western region, obviously California -- in the wholly-owned business, California, Salt Lake City. A few months ago you would've seen Denver in there, which had a shredder. And Arizona would've had 2 shredders: 1 in Tucson and 1 in Phoenix. Where else can we look? Generally, directionally where you've seen the changes as well. Nashville was a joint venture. Those tonnes never came through per se, but it's -- that divestment of that 50-50 or 50% interest in the joint venture, Nashville, and what you would see in the mid-South, or I guess what's on here is Gulf Coast on that slide, that would've been there as well. So that's gone now.

Emily Behncke - Deutsche Bank AG, Research Division

So of the 11 shredders you have now, you probably had closer to, what, 18 or something before? Something like that?

Daniel W. Dienst

Perfect. Sounds about right. That's right.

Operator

Your next question comes from the line of Ben Chan from Merrill Lynch.

Ben Chan - BofA Merrill Lynch, Research Division

Just 3 questions, if I could. Just shredded price is higher than HMS and presumably higher margin. It looks like your shredded volumes are down greater than your overall mix, if I've done my math correctly. Should we think of shredded as a derivative of the quality of the scrap coming in, or demand by your customers?

Daniel W. Dienst

I'd think about it as an input, quality of scrap available. I think that's absolutely the right way to look at it. So if you look at our business today, and it's been this way for a while. If you're out chasing cars, cars are not being scrapped. We've all talked about how old the fleet is, particularly in the States and in the U.K.. If those vehicles are coming in, we're paying too much for them. The good news is we've got technology to capture what non-ferrous is in it that hasn't been picked. But think of it as an input phenomenon, as opposed to a demand phenomenon.

Ben Chan - BofA Merrill Lynch, Research Division

Just through to gas and North American volumes being down 18%, given your selective volume behavior, have you got a sense of what the overall market was down in that time?

Daniel W. Dienst

Good question. I don't have a sense. I would probably say that in the face of -- I would say probably the overall market was not down as much as that, and that ended up with people buying material speculatively that got -- I was going to say their ass handed to them, but that would be inappropriate. They got hurt by aggregating that material. So again, kudos to our guys and gals for being real prudent in the face of the very choppy market, to just sort of sidestep some of that volatility.

Ben Chan - BofA Merrill Lynch, Research Division

And just lastly, just since November it looks like -- just reading your outlook comments on what you said today, Dan, that things are stabilizing sort of late November. But it was over, I mean, from November to December in that month, you significantly downgraded your outlook for the year. I'm just trying to reconcile that. That was just too short a time period to see any improvement there? Or I'm just trying to reconcile those 2 -- both data points.

Daniel W. Dienst

It's a fair question. Look, if you watch -- if you go back and look at the market, it's starting to tail off a bit really October into November and then sort of firming into year end and then moving up since then, based on the flows we were seeing at the time, the margin available on those tonnes, the quality of the tonnes, we just thought it was prudent, okay? We came in on an underlying basis, sort of at the high-end of that range of the guidance, but it's sort of what we were seeing. The market is very whippy. The flows have been even month-to-month a little bit lumpy here and there, not always correlated to prices, as we noted earlier. So it was our best stab at the time. Very difficult for us to go way out, but based as what we were seeing, coming into that period as we clawed our way towards the end of H1, that was our guidance.

Operator

Your next question comes from the line of Andrew Gibson from Goldman Sachs.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

A few questions for me as well. Just following up on Emily's question. Where would you say your scrap capacity is now at? I mean, you've historically referred to sort of 16 million to maybe 17 million tonnes at a stretch. And where do you think that is now?

Daniel W. Dienst

Well if you think about the assets that had been monetized, and capacity as you know is a funny name for it, but just think about Denver circa capacity, not necessarily what we were doing there, at around 10,000 tonnes a month. The combined Arizona portfolio at circa 20,000 tonnes a month. Nashville...

Robert C. Larry

Nashville never came into our volumes.

Daniel W. Dienst

Never came into the volumes, it just came in through bottom line there, in JV accounting. But you take those out, you take some of the mega-shredder, let's say, in Newark down, which had significant capacity. Yes, so you're circa 14 million tonnes. We have added some capacity backup in the Gulf in New England when it gets -- hits its trajectory and is operating, we'll claw back some of that capacity as well. So circa -- if you flash forward to, say, September, October when we're done with New England nameplate capacity could be around 14.5 million, 15 million tonnes.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

That's U.S.?

Daniel W. Dienst

That's global. You've got -- well call it 1.5 million to 1.75 tonnes in Oz capacity. Call it 1.5 million -- call it 1.75 million tonnes in the U.K. and Europe, and yes, call it 11 million -- 10 million, 11 million tonnes in the States.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Just a couple of other questions. Just back on the run rate on costs, so you're saying that your annualized run rate by the end of this financial year will be $100 million? Can you just talk to -- in absolute terms what the cost-out benefit will be this year versus last year? And then as you hit that annualized run rate -- well, actually don't worry, that'll answer the second question. If you could just provide a bit of a feel as to what the incremental benefit is this year versus last year?

Robert C. Larry

The $100 million, as we said in the release and as you prefaced the question, is a run rate. We had -- we said Australia would be realized at $20 million in the year. We said that U.K. would be realized at around $18 million for the year, of which $5 million came in the first half. So let's say that's -- let's say $14 million will come from the U.K.. North America saved $28 million in the first half. It should save $28 million on that again in this half. And let's say that the $2 million a month additional that Dan was talking about that will begin to be realized in the second half, that were ideas that began to be identified December, January. Let's say that maybe brings us $6 million -- $6 million or $8 million additional. So $56 million, $8 million, $20 million, $14 million -- year-on-year, we'll probably be somewhere around $100 million. $90 million to $100 million, I'd guess, at the end of the full year relative to '12.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Okay. And just on scrap arisings, I mean, you've loosely touched on the lags in the system. Can you sort of step through where the lags are greatest? So is it sort of auto, housing, manufacturing non-res et cetera?

Daniel W. Dienst

I would say probably in that order. I think you will see, if history is any judge, that you'll start to see some vehicles coming out through here, through the system, if you will, and appliances. I don't know if you had a chance to look at some of the data about where we are on appliance sales relative to new home sales, the correlation therein. So you see the vehicle sale correlation to scrappage rates as well, the decimation, the signs of an early recovery. You'll see that coming through. Non-res, probably less dispositive to us as opposed to res. We'll have some correlation to the housing market as it kicks up on existing sales and new home sales. And you have essentially that consumer piece, which I think ties to an earlier question. You're at 30-year lows in terms of the amount of -- at least as our data and our ability to get into this data, you're at about a 30-year low in terms of shreddable material available. Some of that data, I'm pretty sure we've put into the analytics in that appendix.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

One final question, if I may, I mean I ask this question all the time, but do you -- where -- what's your mind for that [indiscernible] where you think margins, group margins, you'd be able to get back to, on a per tonne basis, once the cycle sort of kicks through?

Daniel W. Dienst

I think if the cycle kicks through and you get a normal functioning economy, growing normal -- normalized historical growth rates in our big scrap operating markets, we'll stick to our mid-cycle pieces. The famous Rob Larry mid-cycle EBIT per tonne that we have in the past, we have not seen the makings of that market yet, obviously, but certainly still subscribe to that thesis.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Are you still thinking $30 a tonne?

Daniel W. Dienst

Yes.

Robert C. Larry

Yes.

Operator

We will now move to our final question from the line of Liam Farlow from Macquarie.

Liam Farlow - Macquarie Research

Just a quick question on Slide 26. You've obviously broken out your geographic spread of shredders. Are you able to give any color as to whether there is different -- differing levels of profitability across the U.S.? Some making money, some losing money, just some general guidance at this stage.

Daniel W. Dienst

Different levels of, you said, profitability or hostility?

Liam Farlow - Macquarie Research

Profitability. Hostility fine as well, if you like, but profitability would be preferred

Daniel W. Dienst

Well it's all hostile at this point. So, yes, I mean if you look at -- again, I don't want to give a roadmap for potential new entrants into the market. But logic would dictate, if you put the West Coast aside for a minute, because it has that peculiar phenomenon that we've talked about for many, many years now. The structural change in the West Coast business, particularly for our joint venture partners relates to container-ization of ferrous scrap. You look at the rest of the portfolio, call it, from Texas moving east on this map, your proximity to deep water does provide us with an advantage, which will, and certainly does from time to time, because we have an extremely talented ferrous global trading team to get us to the right markets at the right prices, and a fair amount of penetration into these markets in terms of procurement, or buying of material. So you sort of start to feel that the return characteristics of your coastal assets, moving from New England down through the Southeast through the Gulf into Houston, Texas, have higher return characteristics than when you start to move inland, even if you're on groundwater. As you move up off the coasts following this map, up the Mississippi and its tributaries, you start to see lower general return characteristics on an invested capital basis than you might see on some of the coastal assets. And that differs from region to region. Because you may have -- apart from access to global markets as opposed to local markets, you'd know most of these assets do, you may have different leadership qualities in terms of buying material from market to market. So we may -- you may have, even though on the map, let's say, Oklahoma looks very land-locked, it does have access to brown water, but so does our Memphis facility. And there may be different -- we may be more of a leader, say, in the Oklahoma market than we are in the Memphis, in terms of procurement. But generally speaking, you'd say that your coastal assets have higher return characteristics than your inland-locked assets.

Liam Farlow - Macquarie Research

And just a follow-on from that, what are the current impacts of container-ization on that Western region and where is that trending at the moment?

Daniel W. Dienst

It remains a part of the business. It's not a new phenomenon. We'll continue to speak to it. Our talented partners at the SA joint venture have done a number of things. Obviously, responded to the threat, rationalized their cost base as well, positioned themselves well. It hasn't been easy. It's been brutal on them as well. And they are probably the largest shipper of FE material by container now in that market themselves. So reoriented, we've talked about it in the past what that has done to their business, meaning great news in their feeder yard systems and their smaller procurement yard systems. Isolating that business, they'll compete with anybody and have decent returns. But some of that material used to migrate to the big shredders and their big docks, which are underutilized now and continue to drag on them a bit. But they've done a very good job responding to that market. Overall, flows and availability of material are down. Always been a highly competitive market in Southern California. But they're fighting the fight, and really have made some remarkable progress over the past few months in rationalizing their cost base relative to available material and how they process material and ship material. So that's how I'd answer it.

Operator

I would now like to hand back to Mr. Dan Dienst for additional or closing remarks.

Daniel W. Dienst

Okay, Kay. Thank you. Appreciate it. We'll conclude right here with this earnings briefing for the first half of 2013. We really look forward to our next update, which will come close of June 30, but we'll report in August. And I look forward to speaking to you then. Be safe, everybody, and have a great day. Thank you.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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