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Executives

Daniel W. Dienst - Group Chief Executive Officer, Executive Director

Robert C. Larry - Group Chief Financial Officer

Analysts

Benjamin Wilson - JP Morgan

Michael Slifirski - Credit Suisse

Emily Behnke - Deutsche Bank

Andrew Gibson - Goldman Sachs

Eric Prouty - Canaccord Adams

Brent Thielman - DA Davidson

[Ethline Peach – CBA]

[Pam Stread - Stread Investments[

Scott Hudson - CLSA

Michael Evans -Quest Asset Partners

Todd Scott – RBS

Michelle Applebaum - SMI

Sims Metal Management Ltd (SGM) F3Q10 Earnings Call May 6, 2010 8:45 AM ET

Daniel W. Dienst

Good morning, good evening and welcome everyone to today’s call. We are dialing in from the UK and as we near the midnight hour here, we appreciate you joining us for this review of our results for the 9 month period ended 31 March 2010.

Joining me as usual is our Chief Financial Officer, Rob Larry. Our call today will follow the same accelerated format that we used for prior interim market update calls. First, I will provide some initial thoughts before returning the call over to Rob, who will provide some details on our financial results, including some highlights of the third quarter.

Then I will make some closing remarks on market condition before we take a few questions and time permits. As always, we would like to start by welcoming all 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 webcast today. We would like to thank our employees for another hard fought 9 months in what can only be described as trying times. Your hard work and perseverance during these times is an inspiration. We thank you.

While we spent a great deal of time speaking to this internally, we will never miss an opportunity to remind our Sims Metal Management teammates that our first priority is safety. We cannot be satisfied with the designation of safest in our industry. We must strive to be one of the biggest companies in all manufacturing and all industry. We must stand shoulder-to-shoulder with the safest companies in the world. So far this year the trend is our friend and let’s keep it that way.

Before turning the call over to Rob, let me make a few observations about the quarter just finished and what we are seeing out there now. Against the backdrop of the severe winter in the northern hemisphere, volcanic ash cloud, human made natural disasters in the Gulf of Mexico that may or may not disrupt shipping routes, 52-foot cresting rivers in Tennessee, human made natural disasters in the form of pigs, botched terrorist attacks, fears of a Chinese cooling, which we have all mulled for the better part of the last ten years, continued extreme volatility in the underlying commodities that we make and sell, and anemic to modest economic recoveries in important markets in which we operate. We are nonetheless starting to feel more optimistic about our business.

While a statement of the obvious that all bets are off because a cataclysmic external event happened, let me quickly point to some of the reasons for this guarded optimism. While scrap intakes increased only sequentially in Q3 by 3% versus the second quarter as the coldest winter on record in the UK for two decades and one of the snowiest in the US abated, we began to see improved flows toward a late part of the quarter just completed.

As we have noted in prior calls, volume challenges were acute through and post the global financial crisis in those two important markets for us. Whether the improved flows that we are currently seeing are a function of seasonality and/or sustainable trends in consumer and industrial behavior and in what relative percentage, it is too early to tell.

Related to that first observation, we are somewhat encouraged by the data emerging from developed parts of the world in which most of our facilities sit; be it you GDP growth, IP growth, housing starts, photo production and sales, all seem to be pointing towards recovering economic activity. Of course all the data is compared to the dismal gray recession prior period.

The reported data is backed up however, by anecdotal data, which come from my peers and consumers; melters, steel mills, traders, public and private, and from our boxes sitting at the manufacturing plants that we service. Our consumers have picked up scrap around the world. They have been successful in pushing up finished and semi-finished steel prices as a result by some better demand and discipline in passing through input costs.

Experience tells us that its steel and metal making recoveries are far from linear and are often lumpy and bumpy and this one should certainly be no different. Our technology, the investments in non-ferrous recovery continue a pace and there is nothing further to report today since the last update call in late February.

Initial installations are being fine tuned in North America, metal is being generated and engineering for additional locations is underway. Since growth has been and will continue to be the hallmark of our company, and in all likelihood we will be asked the question in Q & A regarding the same, the only update we will provide in that regard is that we are seeing some more deal flow, to use investor parlance.

As vendor expectation begins to move towards more realistic valuations in both the traditional business and the recycling solutions business. Finally, growing optimism is also rooted in the dedication of talented people, our most important assets. With two months left in fiscal 10, and looking forward to fiscal ’11, the men and women of Sims Metal Management remain focused on what is within our control and will continue to position our company for long-term success and the creation of shareholder value.

Now Rob Larry will take you through the financials for our 9 months. I will give it over to Rob.

Robert C. Larry

Thanks Dan and greetings to everyone on the call today. I would like to provide a brief overview of our financial results for the 9 month of our fiscal year 2010 that just ended 31 March 2010. As a reminder, our company is domiciled and it has its primary listing in Australia and all dollar figures that I will speak to today are Australian dollars, unless we otherwise note.

Sales revenue for the 9 month ended 31 March 2010 was $5.0 billion, down 31% on the prior corresponding 9 month period. In fiscal 2010 to date, after 9 months we have generated a net profit after tax of $70.4 million. EBITDA was $214.0 million, down 23% on the corresponding 9 month period. EBIT was $105.2 million.

Basic earnings per share for the 9 month ended 31 March 2010 were $0.37 per share. Revenue for the third fiscal quarter ending 31 March was approximately $1.6 billion and the company recorded net profit, after tax, of $30.4 million. Basic earnings per share totaled $0.16 per share in the third fiscal quarter.

EBITDA for the third quarter was $78.0 million and EBIT was $43.1 million. Scrap intake and shipments were 3.1 million tons and 2.6 million tons, respectively in the third quarter. The company’s scrap intake and shipments for the 9 month ended 31 March were $9.7 million tons and $9.2 million tons, respectively. This is compared to 9.8 million tons purchased and 10.2 million tons shipped in the prior corresponding period in fiscal 2009.

Now let’s look at our results at our regional level. Sales revenue was done 40% on the prior corresponding 9 month period to $3.3 billion in North America. On a US dollar equivalent basis, our sales revenue was down 29% on a prior corresponding period to US $2.9 billion. EBIT was $30 million in the 9 months ended 31 March 2010. It is important to note here though that the carryover of tons from the third fiscal quarter, which will ship early in our fourth fiscal quarter, primarily relates to the North American metal business.

During the 9 months ended 31 March 2010, scrap intake in North America was 7.3 million tons, a decrease of 4% as compared to the prior corresponding period. Scrap intake and shipments in North America for the 3 months ended 31 March 2010 were 2.3 million tons and approximately 1.9 million tons, respectively.

Now moving to our Australasia financial results, sales revenue in the 9 months ending 31 March 2010 was $895 million up by about 1% from the prior corresponding 9 month period. EBIT in Australasia was $28.7 million. During the nine months ended 31 March 2010, our intake in Australasia was 1.3 million tons, an increase of 13% as compared to the prior corresponding 9 month period. Scrap intake and shipments for the three months ended 31 March 2010 were 420,000 tons and 386,000 tons, respectively.

In Europe our sales revenue in the nine months ended 31 March 2010 was $873 million, down by 2% on the prior corresponding 9 month period. Our EBIT was $46.5 million. Scrap intake in the nine months ended 31 March in Europe was approximately 1.1 million tons, an increase of 3% as compared to the prior corresponding 9 month period. Scrap intake and shipments for the three months ended 31 March 2010 in Europe were 373,000 tons and 310,000 tons, respectively.

As of 31 March 2010, the Company had net debt balances, meaning net of cash, of approximately $0.6 million, against shareholder equity of $3 billion. The balance sheet is strong. In our third quarter we increased our investment working capital by roughly that same amount as we saw the change in cash balances, since the half-year results were posted as of 31 December 2009.

With that and those observations, I would like to turn the call back to Dan for his closing remarks; especially with respect to market conditions.

Daniel W. Dienst

Thanks Rob. I will take a minute or two and give you a quick overview of market conditions and then we will go to Q & A.

Notwithstanding recent volatility and commodity price declines, global trading conditions for both ferrous and non-ferrous commodities generally improved from the end of the second quarter of fiscal 2010 through April; albeit with continued anemic scrap loads.

Towards the end of April and heading into May, ferrous market began showing signs of fatigue against the backdrop of a quiet, holiday-laden market and non-ferrous market became as volatile as we had seen in recent months against the backdrop of strong moves with the US dollar, a weakening Euro and fears of sovereign debt crisis. That being said, non-ferrous markets remained relatively and remarkable liquid. We remain unremarkably disciplined and diligent.

As noted in my opening comments, scrap flows have improved across all regions at the outset of this current quarter and in the Northern Hemisphere in particular, following the winter thaw and some better economic activity.

The Company was a judicious seller of ferrous scrap in our third quarter, as evidenced by the 500,000 ton difference between intake and shipments that Rob just referenced and as you see in the media release. This should come as no surprise as we have previously indicated that we would not be slaves to artificially quarterly milestones when conditions otherwise dictate patience. In this case, patience was a virtue.

Absence of material and sustained adverse change and commodity prices for our third quarter or adverse global economic development, we expect sequential earnings growth and potentially meaningful earnings growth in our fourth fiscal quarter.

Now I will turn the call back to Melanie and we will take some questions as time allows.

Question-and-Answer

Operator

We will now begin the Question and Answer session. (Operator Instructions) Your first question comes from the line of Benjamin Wilson - JP Morgan.

Benjamin Wilson - JP Morgan

Just a quick question that I wanted to clarify something that you mentioned. Over the first 3 months of this calendar year, you mentioned the decrease in the net cash position of; I think it was something like $220 million pretty much to capital build. You also noted that you commenced and in some part completed the deployment of the third generation shredder rollout.

If I could ask how that CapEx is reflected in that cash balance? I think a lot of it is related to capital build.

Daniel W. Dienst

I guess in particular, I guess to get to your question. CapEx fiscal year-to-date is roughly about $80 million after 9 months. I think we are roughly in the range of $25 million to $30 million in Q3.

Benjamin Wilson - JP Morgan

A related question regarding the relative intake volume, valve volume and what generated that capital build. We have heard comments from some of your competitors that obviously there is some aggressive behavior in some of the key geography around the world in terms of particular competitive such as scrap about seeming to remit to the margins consideration.

Is that very common regarding your activities? Are you still continuing to purchase scrap for the purpose of, I guess, headed to the wolves for lack of a better term?

Robert C. Larry

Ben, I will handle that one. You know I don’t think that’s a fair assessment. When we do, as you know, make judgment calls and our orientation around those judgment calls obviously relates to our ability to procure scrap and our ability to sell scrap. When we see a pronounced trend we will take a stand, and that stand has recently been bolstered by the lack of scraps, and it orients your risk, or culls some of your theoretical downside risk, because you know, generally, there's not enough material out there to feed mouths.

Now, when you have external global events - you know, we watched people rioting in the streets of Greece - and the psychology becomes more fragile, we'll obviously exercise judgment in a different way. But we're doing the best we can to make money for our shareholders, and we're certainly not going to lay down for anyone, so we're not intentionally out there trying to put competitors to the mat, or the wall, or however you characterize it. We're trying to run a business. We've got some infrastructure to feed. We've got some machines to feed, and we're going to feed them.

So you've seen prior quarters where a lack of material really stresses the tension point of operating profit if you don't get that material. The good news is that some addition material coming out, after the northern hemisphere winter, and some better consumer behavior, and... We have the ability to feed these aspects right now.

So I don't want to say I take exception to the comment that we're out being aggressive for the sake of trying to hurt people. We're not that, and as a matter of fact, many of our competitors out there view us often as the market, and when they need liquidity, and can't find it elsewhere, they call SIMS Metal Management.

Operator

Your next question comes from Michael Slifirski - Credit Suisse.

Michael Slifirski - Credit Suisse

I'm interested, I guess, in your judicious withholding of sales to carry over into the June quarter. I can understand that with the assistance you got from iron ore and coking coal, that you could say that scrap prices could rise strongly during the March quarter, and I could see a basis for perhaps delaying sales until late into the quarter to get that uplift. But the judicious carrying over into the June quarter, what motivated that decision?

Daniel W. Dienst

What we were seeing in the market, Michael. We thought that billet prices and rebar prices in parts of the world were rising, there's old inventory we can work through, discipline at work by our consumers, and... We're not big speculators, but there are times when we see pronounced movements, and we see people coming back to the market, or need to come back to the market, for material, and we may wait. We may actually take the opposite approach as we did when the market crashed in June '08, and begin selling forward if we really see something very thick out there.

So these are the judgment calls. We're not going to deviate from trying to buy scrap as cheap as possible, process it as efficiently as possible, and then sell and repent, but there are periods of time, for a week, two, or three, where you see a trend developing, and we'd be remiss not to capitalize on it.

Michael Slifirski - Credit Suisse

So in terms of the margins you achieved for the quarter, how much of that incremental expansion would you attribute to what the pricing did, so, effectively, a profit in stock, and how sustainable is that in that you're indicating a better performance for the June quarter? Is the view that the underlying margin will be better or that there's further profit in stock to achieve on the way up?

Daniel W. Dienst

Let's answer it this way. We've taken significant operating costs out of this business. We've talked, Michael, on prior calls, with you and others, about finding that tension point, about what the volume feed is. We did get some margin lift in the quarter just finished, and I obviously made some decision to sell and then ship material very recently. So it's a combination of things working there, because obviously the Q3 volumes were nothing to write home about.

Michael Slifirski - Credit Suisse

Finally, in the discussion, when scrap volumes normalized, how do you model or attempt to model that trajectory? What economic data points do you need to see to be able to call a normalization of scrap flows?

Daniel W. Dienst

We need to see, in the markets in which we operate, economic behavior not dissimilar to what we see in Australia. So you have an economy that remains on a growth trajectory, yet consumers that are spending and doing things out there (be it cars, white goods, industry is running)... we need to see that in other parts of our footprint, particularly in the US and North America and the U.K. But we look at all the stuff that you guys look at as well.

Michael Slifirski - Credit Suisse

Do you have an unemployment target that you think is the level that has to be achieved before we get a normalization, a return of that 20% of scrap that is currently missing?

Daniel W. Dienst

We don't, but it's certainly based upon current growth predictions for, say, the US, which still struggles with extremely high unemployment, even on a reported basis. We don't believe the current growth trajectory, based on what we see and read, is going to significantly yet knock down that unemployment number, but it may happen down the road.

But we're starting to see some better level of activity. You see it, as we noted in our opening commentary, from quarterly sales, from the large, big box retailers who served as the home improvement market, the quarter over quarter gains, and big ticket items $500 or more. So all of those things we're watching, and we're cautiously optimistic about the trajectory.

Operator

Your next question comes from Emily Behnke - Deutsche Bank.

Emily Behnke - Deutsche Bank

We've heard reports lately of China and Tokyo coming back into the market and purchasing a lot more scrap. Just wondering if you could make a comment around what you're seeing in the different regions at the moment in terms of demand?

Daniel W. Dienst

We did see China come back to the deep sea ferrous scrap market after a notable absence. Now, as we've talked about, on prior calls with you, Emily, China, broadly defined, coming back to the deep sea ferrous market is a mixed message at times for us.

One, we appreciate the liquidity of the people we do business with. We value the relationships. But they are very astute buyers and good market timers, at least historically, and continue to be so. So as you see something break down elsewhere in the global trade of ferrous scrap, you sometimes and often see the Chinese come in very opportunistically and smartly buy scrap when others are not prepared to fill that void.

So before the Golden Week Holidays, there was a flurry of activity into China and the deep sea market. I'm not going to comment on price levels or number of transactions. A lot has been written about it or speculated. But it was good to see them back, and we welcome their participation.

The Turks had been back. Things right now, as you can imagine, are quiet, although we continue to do business in there, including over the past night or two.

Emily Behnke - Deutsche Bank

Just looking at the EBITDA per ton in the quarter, I think it was around $30, and looking into the fourth quarter and beyond, clearly the markets have been a lot more volatile in the last 18 months. I think your historical EBITDA per ton is around $53 a ton. Just wondering how long you think it will take before we get back to that average, or if that average is even an appropriate one looking forward?

Daniel W. Dienst

Someday it should be, Emily. I don't know when we'll get back to that. We're obviously coming out of an extraordinary period for all of us. We continue to claw our way back in. You see the relatively in-line volumes, intake volumes, quarter of a quarter sequentially, and you start seeing some margin improvement in certain regions of our business, and we're going to continue to slug it out, and hopefully someday we will be back there. In the interim, we're going to continue to fight it out and grab the tons as profitably as we can.

Operator

Your next question comes from Andrew Gibson - Goldman Sachs.

Andrew Gibson - Goldman Sachs

First of all, just on volumes. Before the downturn I remember you doing about 4.25 million, 4.5 million ton shipments in a quarter. Where do you think that can get back to once things normalize? Do you think that will get back to those levels, or do you think that now you're possibly in a position to do a bit better than that? Did we never see the peak of the combined business before we went into the downturn?

Daniel W. Dienst

We saw September of '08, as my memory serves, when we did about 4.2 million tons total group intake, if you will. That was as the dust barrow of commodities were upon us, and as I noted to one of the prior questions, as we talk about these judgment calls, at that point in time we were very well positioned, and put up, I think, significant earnings despite the dust barrow and customers beginning to renegotiate and break trades and the like. But the intake tons at that time were about 4.2 million, in that September '08 period.

Then, very quickly, as the world seized up - and we all remember that - in December '08 we dropped about 2.5 million or 2.4 million total intake tons. We started to find, as we were undertaking or cost cutting, an asset rationalization that you saw in March of '09, about 3.3 million tons. June of '09, just shy of 3 million tons. September was about 3.5 million, 3.6 million tons. Then December '09 we dropped to about 3 million tons, and that's where we just were directionally for the quarter just finished.

We found that tension in a very tight scrap market, where everybody's chasing scrap. There's not a lot of material. Onset of winter, that last half million tons really made the difference. Now, obviously, we didn't get it in the March quarter because of the winter we talked about. We're not weather CEOs and CFOs, but there was an extraordinary winter in the northern hemisphere, and January tends to be a little bit quiet in the Australian market, as you know. So that 3 million, 3.1 million tons... We did have a better margin, and we're pretty well positioned for that.

We could get back to the 4 million, 4.5 million tons a quarter. Don't forget there are a couple acquisitions in there, notably the one we call Fairless in mid-New Jersey and on the Pennsylvania line. So certainly with some of the growth that we've been able to achieve modestly over the past 18 months, we certainly have the operating leverage in the business to get there.

Andrew Gibson - Goldman Sachs

Obviously we've seen a lot of upward volatility in the last few months, but more recently, it looks like it's starting to come off a touch. Have you seen a widening in the gap in the price realization in Asia vs. US? Because it looks like US has come off a bit, whereas Asia hasn't come off as much?

Daniel W. Dienst

Yes, and we will have these dislocations, if you will, in freight adjusted (FOB) prices. That's our business, to find the best market. The market is off, and it's probably off more than a touch right now, in early May, albeit firming. So some of the last trades done, even within the first few days of this month, are off, and retracing some of the first downward push. Now, it's too early to tell whether this makes a trend that will run through June and beyond, but certainly people are starting to view this as a buy opportunity, even against the backdrop of noise from around the world and everything, all the craziness that's going on.

Andrew Gibson - Goldman Sachs

My last question if I may, just on margins and this is similar to a previous one asked, but the margin uplift you've seen is obviously largely to do with pricing, but do you think you're starting to see some margin relief in this quarter due to the increased flow that's coming through into the market?

Daniel W. Dienst

Yes and no. There’s a number of [errors]. I think we’ve talked about some of the discipline that the volatility and the challenges of this market has imposed not only on us but certainly our competitors. We noticed container availability which was obviously a threat to parts of our business. Containers are tougher to find for ferrous, particularly as equipment is pulled off the market. We’re trying to return some of our loyal customers back to us. I think there’s a combination of things going on here. I think the beauty and [inaudible] of our business is it’s very hard to replicate identical markets but we’re starting to see a bit of easing on the margin side.

Operator

Your next question comes from Eric Prouty - Canaccord Adams.

Eric Prouty - Canaccord Adams

Maybe you could just go into a little bit more detail about what you're seeing out there, what the recent pricing pullback in scrap with your spreads, I mean you guys have always been good buyers but have you been able to drop the buy price as quickly as the sale price has dropped in the market? Maybe just talk about what you're seeing for difference in spread from domestic bought and sold and then the spread with the domestic bought, or domestic in the US bought and then into the export markets, if those spreads have changed at all.

Daniel W. Dienst

We appreciate the observation that we’re good buyers. We can always do better but our guys and gals are doing a great job. We talk about leadership a lot and it sounds fancy but I think our people, I know our people are doing a great job in leadership and as I said earlier, we are often a source of liquidity for people who trade in the market and we’re certainly there to support them when others are not. Being a domestic US mils buyer, we’re certainly viewed as a mill.

The liquidity in the market flexes depending on what’s happening. We have seen pronounced move downward in early May but that is as I noted earlier stabilizing. So the market is in flux right now. You’re starting to see as I said in domestic US business some re-tracing up of some hard down numbers early and some business continues to be done in the [med] and Asia and we’ll see how this pans out over the next week or so.

We believe that people will come back to the market and need to come back to the market so long as their business remains relatively intact and right now I’d say more challenged domestically US on margins than export per se but that is tightening up very quickly.

Eric Prouty - Canaccord Adams

Would you say that even with the price drop your spread has remained fairly constant from the previous months or have you seen an erosion in the spread recently?

Daniel W. Dienst

It is rapidly falling [inaudible] and we’re always adjusting to the market and we’re fearless in doing so without disrupting our flows so I’ll say it this way. I think our people have done, our buyers have shown some tremendous leadership in getting ahead of this and in matching it.

Eric Prouty - Canaccord Adams

Then a follow up to a comment you made about containers. Maybe just looking specifically at Sims Adams, I mean is that now returning to more of a normalized market down there? I mean obviously still being impacted by a shortage of material but at least the issue with folks bypassing by containerizing ferrous, is that now abating a bit with the containers being harder to come by?

Daniel W. Dienst

That’s fair.

Operator

Your next question comes from Brent Thielman - DA Davidson.

Brent Thielman - DA Davidson

Just, I guess, a question on the e-Recycling business. Can you just kind of talk about sequential trends you saw Q2 to Q3 there and then I guess with some volatility in the non-ferrous markets more recently? Any sort of thoughts or commentary as we head into the fourth quarter with that business?

Daniel W. Dienst

I’ll take them in reverse order if I may. Non-ferrous for us is a core competency. Our terrific team in Hong Kong, our buyers around the world, the communication that is fluid between them is extraordinary and I’ll say it this way, we really don’t mess around with non-ferrous. For us a quick turning, very liquid product and if we bought it right and loaded right or found the right market.

China is an important market but we’re not a one trick pony. We sell ferrous all over the world and we’re always trying to find the right home for that material. Non-ferrous certainly there’s been massive volatility over the past couple of weeks certainly, talking about nickel, copper, any of the metals that we touch. But we’re doing a great job on getting out of the market and getting out of the way of the market. So [inaudible] is the motto and we do a great job at it and our people do a great job at it.

SRS continues to be the little engine that could. Not so little, it chugs around, the volumes relatively hanging in there, continue to work on efficiencies in that business and look at other growth opportunities and we are looking at it. It’s a neat little business and not so little and people there are doing a great job as well.

Operator

Your next question comes from [Ethline Peach – CBA].

[Ethline Peach – CBA]

Firstly, I'm just wondering if I'm reading this right but it looks like a major pick up on a regional basis for your margins was actually in the European business. I'm looking at America, in fact I think your margins have actually decreased. Can you maybe just give me a bit of color? I mean is it effectively the recycling solutions platform that's been supporting that European business?

Daniel W. Dienst

Yes and no. The European business, having spent some time here the last few days with our guys and gals, SRS gets a lot of attention over here and it does a great job and there is a lot of true synergy [where I don’t love] between a traditional metals business and the electronics platform that we have particularly here in the UK but they’re doing a very good job and we’re seeing a pronounced, not too dramatic a word, improvement in the traditional metals business as well of late. So it’s a bit of both.

[Ethline Peach – CBA]

So the big uplift was a combination of both, and the European business was a combination of both your recycling and your traditional scrap businesses?

Daniel W. Dienst

Correct.

[Ethline Peach – CBA]

I know you gave a bit of color on the call around the M&A environment, but I'm just wondering now that we're starting to see improving pricing and some of the intake issues alleviating, are you actually finding that there are less opportunities out there? ¬

Daniel W. Dienst

No, I think people have come out of their caves and have started to realize that higher pricing is a double edged sword as you certainly see. It stops up some working capital and does provide some stress points for those who are undercapitalized, we’re not as well capitalized, and those who have made it through the deep, deep dark days have come out and realized that they have a business, it’s certainly not pre-GFC kind of performance businesses, but they have some value in there.

In our business, while we’re 90+ years old in our route, we’re still a relatively immature business I like to call it. We’re in our gangly teenage years and there are people who will seek an exit by virtue of life circumstances, life desires, and we certainly have the liquidity and we think the DNA that attracts people like that who want to exit.

Operator

Your next question comes from [Pam Stread - Stread Investments[.

[Pam Stread - Stread Investments[

Could you talk about the timing and the impact of the newly proposed mining resources tax on your revenue? Would you expect raw material prices to rise under the new tax?

Daniel W. Dienst

We haven’t spent a lot of time on it other than what we have probably all read, looking forward to perhaps a May 11 implementation. I think there’s a lot of uncertainty. We’re not a big fan of taxes for any business but certainly if you add taxes and essentially production costs to material, it will create a higher priced material. Whether it also then serves over the longer term to provide a incentive to investment, I think that’s above my pay grade, but certainly that lack of investment to government taxation would then further contribute to perhaps scarcity of material and rising prices.

I think a couple of strands of thought there and we’ll have to see as and when the final regs are put in place.

Operator

Your next question comes from Scott Hudson – CLSA.

Scott Hudson - CLSA

Just a quick question on the 500,000 tons that you carried over into the fourth quarter. Has that all been sort of shipped now and all your intake volumes more aligned with your sales volumes at this stage?

Daniel W. Dienst

Yes., sir. It’s gone.

Scott Hudson - CLSA

It's gone, yes, fair enough. Then just in terms of, obviously you made a few comments about how important volume is at this stage of the cycle. How much more volume do you need or how much volume uptick do you need before price becomes I guess the critical factor as opposed to getting volume through the shredders?

Daniel W. Dienst

It’s still about margin and buying right. We continue to create these new and interesting market scenarios for ourselves and others. Historically it was always about when the market was there and liquidity in scrap was there. It was turn, turn, turn, and we continue to turn at a high rate. It’s the lack of volume, it’s 180 degrees from where we had been culturally and forced us into making some very strong moves and decisions at points in time as I noted earlier when we deem appropriate.

So the case in point for these 500,000 tons which obviously jump out at you when you look at intake and shipments and the disparity therein and then I answer your question that whether the material has been loaded and gone, you see how quickly, within a few weeks, what that decision leads to in terms of profitability and you may see more as we head into Q4.

Operator

Your next question comes from Michael Evans -Quest Asset Partners.

Michael Evans -Quest Asset Partners

My question is just to confirm what you said about working capital. There's obviously statements in your result about the 500,000 tons. Was the statement you made that the working capital since December is currently only 0.6 million difference, so the number is still around 400 million despite the scrap intake and the reduction of inventory and ferrous?

Robert C. Larry

No, I’m sorry, let me clarify this to be sure that we’re seeing it the same way. The 0.6 million that was referenced was not the change in working capital. It’s the net debt position as of 31 March. That’s what that was referencing, the change in the cash balances from 31 December which I indicated were circa 225 million to a net debt balance of 0.6 million at the end of March. The point that I was trying to reference was the change in that net cash balance if you will is comprised of investments into working capital being utilized to fund the strategy that Dan talked about relative to purchases in shipment.

Michael Evans -Quest Asset Partners

So the net working capital is therefore up about 225 million?

Robert C. Larry

Correct.

Operator

Your next question comes from Todd Scott – RBS.

Todd Scott - RBS

I think I wanted to talk around the same issue, but just to say one more time, obviously your net cash position has disappeared in this quarter and probably because of the increase in working capital so I guess my question is twofold. Firstly, do you still believe you have the same fire power to pursue acquisitions planned post the equity raising and, secondly, how much of that cash do you expect to win back in the June quarter? I guess something of that inventories you built up in the March quarter is going to help that a lot.

Daniel W. Dienst

Disappears is kind of a funny word. It obviously went into material and for certain unforeseeable but will now come back in, will continue to.. Scrap prices are still attractive on a relative historical aggregate basis so there will be certainly a working capital through the normal selling periods that we go through, however you define normal, and certainly we have the fire power with our undrawn bank facilities and we have a terrific group of banks that are very supportive so I think we have plenty of fire power to go do what we want to do.

Todd Scott - RBS

Okay, I guess in terms of that the inventory build that you had in this past quarter, now with that inventory being sold down, do you feel you may be able to win back some of that cash in this quarter?

Daniel W. Dienst

We do. Yes.

Operator

Your next question comes from Michelle Applebaum – SMI.

Michelle Applebaum - SMI

Nice It is indeed an unusually nice spring in the mid west so I presume that this is part of the reason for the pricing. Usually the snow is still on the ground. True. Two questions. First, I apologize if I sound cynical, but you talk a lot about safety on these calls. Can you give me some clarification why that's important to you?

Daniel W. Dienst

Absolutely. Let’s say you didn’t have a moral imperative to take care of your people. We do. If you were to spread out our assets as a portfolio, you’d find a very easy correlation between my safest assets which are also my highest returners on capital. They are also the assets that have the fewest environmental problems if we ever had them. The lowest level of community issues.

So as you spread out these assets, you begin to draw a very clear, direct correlation between your highest and best performers, businesses that have had a lost time injury in 11 years, and high returns on invested capital. So putting aside which we don’t the moral imperative to take care of not just our employees and taking care of each other but also visitors to our site, contractors, even if you didn’t care about that stuff, and I had a question at the last annual meeting of shareholders that I let slip past and I’m haunted by it where a guy said, “I don’t care about safety, tell me about profits.” In my mind they’re directly linked.

Michelle Applebaum - SMI

When you're doing an acquisition, is that something that is part of your due diligence in terms of looking property by property and you find that also with your charter companies, a correlation?

Daniel W. Dienst

Absolutely and there are things… Culture is a very hard thing to change. I know you know that in many of the companies you followed over time, so certainly culture is a box we check. Environmental is certainly a box we check. Apart from the easy stuff, geography and volumes and synergies and all that stuff, we certainly look at safety.

Often times not to sound arrogant, we think we can help and we think that translates into upside, not just for the family they go home to at night but also on a financial basis.

Michelle Applebaum - SMI

I've heard some people over time say that employees know you care when you focus on safety and that's where the improvement comes from but then I've heard others say that the reason they are safety focused and the margin correlates is that it forces communication that isn't there. Can you address your thoughts philosophically on what that link is about?

Daniel W. Dienst

If you look at any manufacturing business and you walk into a plant, you’ve been through many of them, whether it’s a steel service center, a steel mill. You don’t have to be an industrial engineer to walk into a plant and feel it right away and know whether they’re efficient and safe.

So when you go down a pickling line or a melt shop or a scrap yard or an electronics facility, you know right away when you walk in there instinctually whether they’re doing things the right way. You’ll find a high correlation perhaps in the businesses you follow between how they take care of their customer, on time delivery, and they’re in the high 90s if they’re a service center or a mill. So I think it all rolls up into the same package.

Michelle Applebaum - SMI

I was surprised to hear US Steel on their call last week I guess it was, John Surma said that they were putting a [pig] machine into Gary and I was kind of stunned by that and they said that there would be lots of customers in Indiana and I guess probably Kentucky for pig iron. That was kind of a wild moment.

Then today, [inaudible] did a little event and they talked about restarting a blast furnace that hasn't been used for 10 years at Dofasco to produce ultimately 600,000 tons a year of hot metal to feed into the EAS they've got going there. That's kind of fascinating to me. What do you think? Do you think this is kind of the bubble of the beginning of a new trend where, in the United States, in the Midwest, and does that do good things for your business or does that do bad things for your business or what do you think of that?

Daniel W. Dienst

Similar questions were asked around the same time as [Newport] was thinking and speaking to their Louisiana project and at the time --

Michelle Applebaum - SMI

Which you know is not off the table. They’re waiting for a permit.

Daniel W. Dienst

Understood, and so people immediately I think jumped at the time to, “Oh is that a scrap killer? Are they doing that because they’ve lost control theoretically of their scrap resources?” But when you start drilling down to the applications in which those materials known certain chemistry type material would be used, it’s really to supplement the degradation in the amount of prime industrial scrap, the higher grade scrap that’s generating in the US and manufactured in the US generally has been on the decline for the better part of a decade. I view these projects as holes to fill in available amount of high grade scrap in that domestic market.

Michelle Applebaum - SMI

I agree. I'm glad to hear your answer because I look at it as something that's a supplement and is potentially a steadier supply as compared to imports where it would be more volatile. So I actually think it's healthy for your business, is my personal view.

Operator

Your next question comes from Andrew Gibson - Goldman Sachs.

Andrew Gibson - Goldman Sachs

I missed that little comment about working capital. I know it's been touched on a few times now, but just to clarify, you say you’re in a 225 million spend in this quarter, in the quarter just past?

Daniel W. Dienst

Invested into working capital, correct.

Andrew Gibson - Goldman Sachs

Okay, and then finally just your CapEx expectations for the full year?

Daniel W. Dienst

What we said in the past is we thought we’d finish the fiscal year around 120 million and we’ll probably be I guess somewhere around that number, we’re at 80 million with three months to go.

Andrew Gibson - Goldman Sachs

Okay, so that's obviously both maintenance and growth?

Daniel W. Dienst

Correct.

Andrew Gibson - Goldman Sachs

It's about 120?

Daniel W. Dienst

Correct.

Operator

Your next question comes from Michael Slifirski - Credit Suisse.

Michael Slifirski - Credit Suisse

Just thinking about the volume growth you've achieved. If you've got your share of the market that's the supply growth, when you look at demand growth, so steel mill capacity utilization increase, steel make increase, it would seem that demand growth has exceeded supply growth. In that context I really struggle to see why margins rise apart from the gain in the scrap price that allows you to keep a bigger proportion of that delta. How should I think about those dynamics?

Daniel W. Dienst

Your thesis is that steel capacity utilization outstrips the availability of scrap?

Michael Slifirski - Credit Suisse

Yes.

Daniel W. Dienst

So that would lead to mills coming in and attempting to procure units and competing for those units. Some mills compete directly with us in certain markets so you would have some feed stock compression in certain markets but if they are coming from a remote market or if they don’t have their own processing capability in a market head to head with us, then we would have margin expansion. Does that makes sense?

Michael Slifirski - Credit Suisse

Yes, I think it does. I guess it's really in the context of prior quarters where it's all been about supply and demand and the constraint on supply being the compression of margins and I would have thought that the demand growth had exceeded the supply growth and so that pressure would have actually increased relative to prior periods.

Daniel W. Dienst

I understand how you’re looking at it. I look at it a little bit differently which is as you remember, we were struggling to get volume into our plans up until recently. We said that at some point you would start seeing a return come back to our business and it would come back in the form of either increased volumes and/or price lifts which would give us a chance to capture additional margin. I think that’s probably certainly with the weather and everything else, when you see the volumes in the quarter just finished it’s really been about price lift on the tons that we’re able to procure and some margin expansion and then as we get more volume, that will help as well.

Okay Operator, I guess we’ll close it up here. We want to thank everyone for joining us today or tonight as the case may be. We look forward to speaking to you as we close up our fiscal year. Good night, good day.

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Source: Sims Metal Management Ltd F3Q10 (Qtr End 03/31/10) Earnings Call Transcript
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