Schnitzer Steel Industries Inc. F3Q10 (Qtr End 05/31/2010) Earnings Call Transcript

Jul. 1.10 | About: Schnitzer Steel (SCHN)

Schnitzer Steel Industries Inc. (NASDAQ:SCHN)

F3Q10 (Qtr End 05/31/2010) Earnings Call

June 30, 2010 5:00 PM ET

Executives

Rob Stone – Treasurer and Primary Investor Relations

Tamara Lundgren – Chief Executive Officer

Richard Peach – Chief Financial Officer

Analysts

Eric Glover – Canaccord

Brent Thielman – D.A. Davidson

Torin Eastburn – CJS Securities

Luke Folta – Longbow Research

Tim Hayes – Davenport

Timna Tanners – UBS

Evan Kurtz – Morgan Stanley

Operator

Good day, ladies and gentlemen and thank you for standing by. And welcome to the Schnitzer Steel Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference may be recorded. And now, I’d like to turn the conference over to our host, Rob Stone. Sir, please go ahead.

Rob Stone

Thank you, Operator. Good afternoon. I’m Rob Stone, the company’s Treasurer and Primary Investor Relations contact. I would like to take a -- thank everyone for taking the time to join us today. In addition to today’s audio comments, we have prepared a set of slides, which were made available concurrently with our earnings press release about an hour ago. You can access the slides at -- through our website at www.schnitzersteel.com if you haven’t already done so.

Before we get on to business, let me call your attention to the detailed Safe Harbor statements that are included in our press release of today in the slides accompanying this presentation and the company’s Form 10-K for the fiscal year ended August 31, 2009, and the quarterly report on Form 10-Q, which will be filed this afternoon.

These statements, in summary, say that in spite of management’s good faith, current opinions on various forward-looking matters circumstances can change and not everything we think will happen always happens. In addition, we have guidance regarding our outlook for the fourth quarter of 2010 in our press release and in this presentation, and subsequent to this call we will not be under any obligation to update our outlook.

With that, let me turn the call over now to Tamara Lundgren, our Chief Executive Officer. Tamara’s joined on the call today by Richard Peach, our CFO.

Tamara Lundgren

Thanks, Rob, and good afternoon, everyone. I’m sure that all of you on this call today appreciate what a special opportunity it is to announce record results into one of the worst stock markets we’ve seen in a while. So we’ll try to put some perspective into our discussion today to counter all this short-term emotion that we see.

We are pleased to report our strongest quarter since the downturn began in the fall of 2008. We recorded significant improvements in sales volumes, in prices and in margins, in each of our three businesses. And importantly, our results reflect the continued hard work, focus and team work of all of our employees and to each of you I want to extend my congratulations and my thanks for your contributions to delivering such great results.

And now on to some details, our Metals Recycling Business grew its operating income by 85%, compared to the second quarter. Our Auto Parts Business set a quarterly record for operating income and our Steel Manufacturing Business was profitable, reflecting both increased utilization rates and benefits from its continuous improvement and cost containment programs.

Let me summarize two of the larger forces that shaped our results and our outlook, volumes and prices. First, our process ferrous sales volume reached a record level for the third quarter, export sales volumes have rebounded from the downturn and our fiscal 2010 levels are on a run rate equal to the boom year of our fiscal 2008. From our perspective, the developing world’s demand for recycled metals appears to be on a steadily increasing trend, irrespective of the economic shakes, rattles and rolls of the developed world.

Second, we saw sharp price movements in the third quarter. One of the drivers of these sharp moves was the lower level of inventories being held by many companies around the world. With the low inventories movements in demand have a greater impact on prices. We expect this price volatility to reduce when greater confidence and steadier growth returns to the world market.

So with that as a preamble, let’s turn to the results, starting with slide five, which looks at our Metals Recycling Business. Now as most of you know Metals Recycling is our largest business. It delivered its best quarterly performance since the fourth quarter of our fiscal 2008.

During the first part of the quarter we were seeing steadily rising demand in prices. We were also seeing seasonal improvements in raw material flows after a harsh winter. These conditions changed in the latter part of April and the beginning part of May, driven by strengthening of demand from U.S. steel mills, coupled with continuing strong demand from the export markets. As export prices began to rise more sharply, new supplies of raw materials came into the market and we took this opportunity to maximize our sales.

In the latter part of May prices fell sharply as U.S. demand was met, as the European crisis took hold and as worldwide finished steel prices decreased. We immediately dropped our purchase prices to match this sharp fall in forward sales prices and this enabled us to optimize our margins in the third quarter.

If you turn to the next slide, you can see the numbers in perspective. On slide six, we set forth the pricing and volume movements over the last 15 quarters. You can see in the top two charts if you look at the green lines, ferrous scrap profits sales volumes were at record third quarter levels and nonferrous scrap volumes -- our nonferrous scrap volumes were at near record levels for any quarter.

You can also see in the bottom left chart, average ferrous sales prices have been as high in only two of the last 15 quarters. Net ferrous prices for export shipments during the third quarter averaged $382 per ton, but inside the quarter they fluctuated significantly. The spread in selling prices between the high and the low was $120. Nonferrous average prices also rose and that was consistent with the higher volume.

Now if you turn to slide seven, you can see our global reach. Over the last few years we’ve expanded our deep-water export platform and with it our ability and agility to access and serve global demand. During the third quarter we shipped to 10 countries. Our largest export markets were South Korea, Malaysia and Egypt. Our sales to China represented only 7% of our export shipments.

As you can see on this slide in the bottom chart, our freight costs remain at low levels, compared with the prices we’ve seen in the past. Bulk shipping costs were essentially unchanged from Q2 and continuing the trend that we’ve noted in the past, container prices rose and container availability remained tight. This further increased the competitive advantage of being able to access the export markets by bulk shipment.

Slide eight puts into perspective our top and bottom line results. You can see that in the third quarter, again looking at the green line, our Metals Recycling revenues and operating profits were up substantially on both the quarter-over-quarter and a year-over-year basis. As slide eight illustrates, since the downturn began in the fall of 2008, we’ve been seeing steady improvement in both our top and our bottom lines.

Turning to slide nine, slide nine shows the trend in our margins. In the third quarter, we saw continued improvement in operating margins, which rose to $45 per ferrous ton, $45 per ferrous ton was obviously a substantial increase over the second quarter’s margin of $24 per ton and over last year’s $6 per ton in the third quarter.

The higher margins really reflect five factors, rising sales prices, increased scrap flows, our ability to react quickly to the market movement, our geographic platform which allows us to ship where demand is strongest and the productivity gains we’ve made which have enabled us among other things to process volumes equivalent to those we saw in the boom year of 2008 with a smaller labor base.

One perspective that’s particularly relevant is the importance of looking at results over several quarters. As can you see in this chart, over the last five years operating income per ton has varied from quarter-to-quarter. When we evaluate our results and when we develop plans for our business, we look at performance over multiple periods. And so stepping back you can clearly see an upward trend in our margins over the last seven quarters.

From that perspective and even though we expect our fourth quarter margins to be weaker than our strong third quarter margins, our average margins for the second half of the fiscal year should be moderately higher than the margins we saw in the second quarter.

So now let’s turn to more on the fourth quarter outlook. On slide 10 we summarize our outlook for the Metals Recycling Business. For the fourth quarter we expect ferrous sales volumes to remain at or slightly above the strong levels we saw in Q3. Nonferrous volume should also be near our Q3 levels.

Regarding prices, we expect average fourth quarter ferrous prices to be between the average prices we achieved in Q2 and Q3. Average nonferrous scrap prices are expected to approximate the levels we saw in Q2.

And now let me provide a little bit more color with respect to margins. Although we’re currently seeing steadily increasing export prices, we expect our fourth quarter to feel the effect of the severe drop in prices for forward deliveries that occurred in May and early June. While both our sales prices and our purchase prices dropped significantly, which allowed us to maintain good cash metal spreads our average inventory costs won’t reflect the same decline, consequently we expect our margins to decline but as I said before, for the second half of the year we expect our average margins to be moderately higher than the margins achieved in the second quarter.

So now on slide 12, we can turn to our Auto Parts Business. Our Auto Parts Business delivered its sixth consecutive quarterly increase in sales and achieved record operating income. This strong performance was driven by higher vehicle purchases and a further improvement in margins. The improving margins reflected higher part sales, improved extraction of valuable metals from each vehicle and rising commodity prices.

As you can see on slide 13, revenues and operating income showed healthy increases on both a quarter-over-quarter and a year-over-year basis. This reflected improvement in all major components of revenue, core revenue, parts revenue, scrap revenue, as well as, the strong performance of the six stores that we acquired earlier this fiscal year.

As you look out at the bottom chart on this slide, the one attracts the volume of cars purchased. You can see that our purchases in Q3 were at approximately the levels of our first quarter. You may recall that in the first quarter we benefited from the federal Cash for Clunkers program. But this quarter, we achieved similar levels of cars purchased, similar levels without the benefit of that program due to the continued strong performance by our vehicle purchaser team.

Now let’s turn to the outlook on slide 14. As we look to the fourth quarter of our fiscal 2010, we expect both revenues and margins to be below our very strong Q3 levels. We expect revenues to decline slightly from our third quarter levels due to lower prices for core and scrap, as well as, normal seasonal declines in admissions and part sales.

And turning to margins, the rapid drop in commodity prices is expected to have a fairly significant impact on margins. We expect fourth quarter margins to fall below the levels achieved in the first three quarters of the year. But and again, I’d point out to multiple periods here, for the second half of the year we expect margins to be consistent with the strong margins we delivered in the first half of the fiscal year.

So now let’s turn to the Steel Manufacturing Business on slide 16. Our Steel Manufacturing Business reported higher sales volumes and its best quarterly earnings performance since the first quarter of fiscal 2009. With higher sales the mill pushed its capacity utilization rate to 64% from 51% in the second quarter. Operating income raised to $4 million after a second quarter loss of $2 million and this demonstrates the sensitivity of our mill’s results to changes in production volume and capacity utilization.

Slide 17 shows the increase in selling prices in Q3. The higher prices reflect the pass through of higher raw material costs. As a result of these higher prices and our ability to adjust product mix our average net sales price increased $79 per ton, compared to the second quarter.

On slide 18, you can see that as a result of the higher sales volumes and sales prices, revenues increased 54% over the prior quarter. Operating income for the quarter improved as well, driven primarily by three factors, the higher capacity utilization, our ability to pass through higher costs for scrap and the full benefit from the cost containment initiatives put in place during Q2.

And on slide 19, which summarizes our outlook for our Steel Manufacturing Business. The slight improvement in the business environment that we experienced in the early part of Q3 appears to have moderated and as a result, we expect sales volumes to decline slightly and we expect average prices to approximate or decline slightly from the levels achieved in the third quarter. As a result of the lower volumes, we expect the margins in the Steel Manufacturing Business to approximate or be slightly below breakeven in the fourth quarter.

And now, I’ll turn the call over to Richard to review our financials.

Richard Peach

Thank you, Tamara, and good afternoon, everybody. I will cover the financial highlights, including performance trends and our financial position.

Starting on slide 22. In the third quarter we delivered $1.43 of earnings per share. This represented our best quarter since the fourth quarter of fiscal ‘08 and operating income of $64 million was more than double the second quarter.

Our third quarter operating margin of 9.1% was well above the 5.1% we achieved in quarter two. Over the next two slides, I will review the trends and drivers of our results.

As shown on slide 23, each of our businesses has an improving financial trend. This track record demonstrates our strong focus on operational performance. In Metals Recycling, the third quarter operating profit was $53 million, a sequential improvement of $24 million.

In Auto Parts, the third quarter operating profit of $18 million represented a sequential improvement of $5 million. And in Steel Manufacturing, we made an operating profit of $4 million, a sequential improvement of $6 million.

Moving to slide 24, I’ll review our margins in more detail. In Metals Recycling, our third quarter operating profit per ton reached $45. This represented an 88% improvement sequentially and continued the positive trend. Several factors drove the improvement.

Export demand continued to be high and more than 70% of ferrous sales went overseas. We also benefited from our rising market. Domestic and export markets were both strong. This led to selling prices for ferrous shipments in the second half of the quarter being $50 higher than the quarterly average.

On the supply side, we saw seasonal improvements coming out of the winter. Higher flows of material also came from improved market conditions. These factors bolstered our intake and meant that purchase costs did not rise at the same rate as selling prices for export sales.

Our operating margins then expanded late in the quarter, when purchase costs fell as forward prices for sales began to drop. Increased production efficiency is also benefiting our results. We’ve improved our use of technology, equipment, logistics and supply relationships. The result is higher productivity from our labor force.

Now, moving to Auto Parts on slide 25, in Auto Parts, our third quarter operating margins reached 27%. As Tamara said, this was the sixth consecutive quarter of margin improvement. Car purchase volumes were higher, part sales increased, commodity part markets were up and we had more contribution from two new stores we bought in quarter two.

Operational efficiency has also increased. We’ve improved procurement, car yields, sales and marketing. And the Auto Parts Business is now well-positioned for the future as we continue to expand.

Moving on now to Steel Manufacturing on slide 26. As Tamara mentioned Steel Manufacturing achieved a quarterly operating profit for the first time since the fourth quarter of fiscal ‘09. West Coast demand slightly improved and together with our versatile product mix, this drove an increased volume of sales.

Selling prices also increased, which allowed pass-through of higher costs of raw materials. The increased demand led to higher production. Capacity utilization reached 64%. This was the highest we’ve achieved since the start of fiscal 2009. The third quarter result shows how increased demand and utilization can quickly provide improved returns.

Now, turning to slide 27, our operating cash flow is now $40 million for the year-to-date. This includes a positive of $24 million in the third quarter. Increased net income was partly offset by higher working capital from more inventory. Free cash flow is still positive for the year-to-date.

Turning to capital expenditure on slide 28, we’ve spent $35 million of CapEx in the year to date. As you can see on the right, in the fourth quarter we expect to spend between $25 million and $40 million more. Actual amounts will depend on the timing of procure-to-pay activity.

The higher expected spend in the fourth quarter reflects the progress of our growth CapEx program. We’re implementing more sorting equipment at our major yards. The objective is to increase separation and recovery of nonferrous material. We expect this new technology to come online in the next fiscal year.

Our strong cash flow supports these investments while we still maintain a low leverage position. We cover capital structure on slide 29. This slide shows date and leverage, calculated gross and mean of $32 million of cash at quarter end.

The third quarter cash flow capped net debt flat at $69 million, leverage net of cash was 7%. We have a credit facility of $450 million. This does not expire until 2012. If required we can draw on current head room of some $360 million. This strong financial position supports our ability to invest in growing the business. Now with that, back to Tamara.

Tamara Lundgren

Thanks, Richard. As we head into the last two months of our fiscal year, we’re pleased with what we’ve accomplished this past quarter and with our overall performance in these challenging markets. In the last three quarters, we’ve increased our volumes and improved our margins and our profitability.

We have been able to obtain a steady supply of raw materials. We’ve become more productive and we have further solidified our leadership position in the industry. Our cash flow has remained strong and our balance sheet has become even stronger. This has enabled us to grow organically by investing in technology and to continue our program of external growth through acquisitions.

Our business continues to be driven by demand that is global and is supported by macroeconomic fundamentals that are likely to remain in place for many years to come.

Now, we’ll open up the questions or open up the mic to take questions. Operator?

Question-and-Answer Session

Operator

Thank you, Ms. Lundgren. (Operator Instructions) Our first question in queue comes from Eric Glover with Canaccord. Your line is open.

Eric Glover – Canaccord

Hi. Good afternoon.

Tamara Lundgren

Hi, Eric.

Eric Glover – Canaccord

Just wondering, if you had any shipments that were held over in Q3 that you expect in Q4? I’m just curious about the fourth quarter shipment volume guidance, which seems pretty strong, considering what’s going on in the global export market.

Tamara Lundgren

Well, we have two shipments that moved from Q3 into Q4, which is well within what the normal shift is, so nothing out of the ordinary.

Eric Glover – Canaccord

And then secondly, on SG&A, I’m wondering if we can expect the usual step-up in SG&A dollars, even though revenue is expected to decline in the fourth quarter?

Richard Peach

Hi there, Eric, actually it’s Richard here. I think, as you know you’ll have seen in Q3 we spent $43 million on SG&A so for the year to date we’re at $117 million. I think you can expect some where in the range of $40 million to $50 million in the last quarter and that will bring us in line for the full year with what we spent on SG&A last year, less the amount of SG&A related to Greenleaf, which we sold.

Operator

Thank you. It looks like our next question in queue comes from Brent Thielman with D.A. Davidson. Your line is open.

Brent Thielman – D.A. Davidson

Hi, good afternoon.

Tamara Lundgren

Good afternoon.

Brent Thielman – D.A. Davidson

Yeah, Tamara. Just related to your commentary you mentioned the market tone has begun to improve, I guess, more recently. Can you just provide any more commentary surrounding that what the turn we’ve seen in the scrap market?

Tamara Lundgren

Sure. The overall tone in the market has improved in the last couple of weeks and we’ve seen export prices rising. We’ve seen Turkey return to the market, which is their normal buying pattern. China has shown more interest at lower prices, but that also reflects their normal buying pattern.

Demand in Southeast Asia remains steady. And the domestic market is likely to experience a near-term downward trend due to the softening in the U.S. steel market. So in a nutshell, we’ve seen demand return from a slow late May and early June. We’ve seen prices -- export prices steadily improving. I think if you took a snapshot today, domestic and export would be in parity but export is not declining and domestic prices will come forward in the next couple of the days it will be announced.

Brent Thielman – D.A. Davidson

Okay. And do you expect to work through most or all this, I guess, higher-cost inventory in the scrap business within the current quarter?

Richard Peach

Yeah. We would.

Brent Thielman – D.A. Davidson

Okay. Thank you very much.

Operator

Thank you. Our next question in queue comes from Torin Eastburn with CJS Securities. Your question, please.

Torin Eastburn – CJS Securities

Hi, good evening., I just have a couple of quick ones. First, could you update us on the availability of raw scrap right now?

Tamara Lundgren

Well, the supplies are actually -- the supplies are steady. We’re on a run rate, as I mentioned before -- that’s equivalent to our ‘08 levels. I think what’s important though, to talk about is supplies versus prices. So that if you look back in Q3, we saw steady prices coming through along with higher sales prices and towards the end of the quarter or towards the end of April and early May, we really saw the supplies accelerate.

When prices dropped, our purchase prices dropped as well and consequently supply reduces accordingly. Anybody -- I’m sure everybody on the call’s probably taken Psych 101 and knows about primacy and recency, so that when you see sharp drops in purchase prices you see some holding back of supplies.

So if you looked right now you’d see some holding back of supplies in light of the lower purchase prices. But if you take the broader view of looking out at the last quarter and looking forward with respect to the volumes that we’ve indicated, we see supplies as steady.

Torin Eastburn – CJS Securities

Okay. Another question, with the liquidity and banking issues in Europe have you seen or heard anything suggesting any of your customers are having trouble getting letters of credit or anything like that?

Tamara Lundgren

No.

Torin Eastburn – CJS Securities

Okay. And last one, I’m sorry if you discussed this and I missed it. You showed you spent $41 million in acquisitions this quarter was that all the Golden Metals acquisition or was there others in there?

Richard Peach

No. That figure’s year to date, so that figure includes the acquisition of the new self-service stores we acquired from Greenleaf -- sorry, we acquired from LKQ over the course of quarter one and quarter two and in addition, it also includes the Golden recycling acquisition.

Torin Eastburn – CJS Securities

Okay. Thank you.

Tamara Lundgren

Thank you.

Operator

Thank you. Our next question in queue comes from Luke Folta with Longbow Research. Your line is now open.

Luke Folta – Longbow Research

Hi. Good afternoon, guys.

Tamara Lundgren

Good afternoon.

Luke Folta – Longbow Research

I just wanted to dig in a bit on the margins [side of] Metals Recycling Business. If you try to iron out some of the volatility that we’ve seen in the back half, just looking at operating profit on a total shipment basis, it looks like you guys are going to do -- you did 20 to 23 bucks a ton in the first half. It looks like that’s going up to somewhere between $25 and $30, if you take the average of the second half. How does that compare with current metal spreads as you see them today on a cash basis? Should we expect -- looking forward should we expect subtle improvements there going forward? Is that the way to look at it?

Richard Peach

Good question, Luke. I think what we’ve been emphasizing here as you picked up, is we have to look at Q3 and Q4 together. And as we said in our press release, our outreach cash metal spread in Q4 are near to where we were in Q3 and that’s because we immediately reduced our purchase prices when sales prices drop to protect our cash position. What’s really affecting us is that in the fourth quarter average inventory costs cannot fall as fast as cash purchase costs and that’s really offsetting any benefit we got in Q3 that worked in the opposite direction, which is why we’re saying look at the two quarters together.

Luke Folta – Longbow Research

Right. So in taking all of that into consideration, when I think of cash metal spread, should I think of that being corresponding to as, kind of, $30-ish (inaudible) per ton?

Richard Peach

We don’t publish our cash metal spread and that’s because it’s a non-GAAP measure.

Luke Folta – Longbow Research

Okay. Fair enough. And secondly, I just wanted to ask you guys, what are you hearing out of your -- from your customers in China regarding what the second half could look like from a scrap acquisition standpoint?

Tamara Lundgren

Well, let me comment on that. In terms of China, we don’t believe the long-term trends have changed. The demand for scrap and steel is driven by infrastructure needs there as well as elsewhere in the developing world. So we’re not seeing anything out of the normal going on in China, not withstanding all of the market destruction that appears to be occurring generally because of their pull-back in growth.

From our perspective, their pull-back from growth is pulling back from 9% or 10% GDP to 8% or 9% GDP and that’s not really going to change their demand for scrap supplies to continue the infrastructure projects that they have underway.

Luke Folta – Longbow Research

Okay. And then just lastly, just thinking about the acquisition environment, can you just talk about whether or not you’re seeing more opportunities available. And maybe, if you could, give us a very broad sense of what you’re budgeting for acquisitions or total CapEx for 2011? Thank a lot, guys.

Tamara Lundgren

Okay. Well, those are different questions. In terms of the M&A, our pipeline is active and we’ve said and we’ve shown the results from it that we have an active M&A focus. So as you know, we’ve done 16 acquisitions in the last five years and we’ve done seven acquisitions this year, the six facilities that we bought in ATB and the one in MRB. So we don’t disclose a budget for that, but we did see the activity continuing. With respect to CapEx, Richard, why don’t you comment on that?

Richard Peach

Well, CapEx, I think one way to look at it is maintenance CapEx should be broadly in line with our annual depreciation, which runs around -- between $50 million and $60 million, around $55 million. On top of that, we may have growth, some growth CapEx where we see short payback and volume from that. We’re actively pursuing that this year, as you can see from the CapEx while we discussed that earlier.

Luke Folta – Longbow Research

Thanks.

Operator

Thank you. Our next question in queue comes from Tim Hayes with Davenport. Your line is now open.

Tim Hayes – Davenport

Hello, everyone.

Tamara Lundgren

Hello.

Richard Peach

Hi.

Tim Hayes – Davenport

My question is in regards to currencies. Could you remind us or remind me the impact of the weaker Euro on your business? And then second, if China is -- or restarted -- assuming that they restarted a gradual appreciation of the yen, how does that impact Schnitzer?

Tamara Lundgren

Okay. Let me address both of those in turn. With respect to the Euro and as I’m sure you’re alluding to the scrap market is a dollar market and a global dollar market, but on the margin, when the Euro weakened significantly as it did, it does make European scrap less expensive for eastern Mediterranean buyers, but the demand. It may impact the order in which sales occur, but not at the end of the day the actual volume of sales.

With respect to the de-pegging of the Chinese currency, probably a modest positive impact, it may make raw material import slightly less expensive for the Chinese and probably even more importantly, it may curb the pricing advantage of finished steel products or finished steel exports from China, which will benefit all other steel manufacturers and particularly those other ones in the Pacific

Tim Hayes – Davenport

Okay. Thank you.

Tamara Lundgren

Thanks.

Operator

Thank you. Our next question in queue comes from Timna Tanners with UBS. Your line is now open.

Timna Tanners – UBS

Thank you. Good afternoon.

Tamara Lundgren

Hi, Timna.

Timna Tanners – UBS

Hello. I have a couple of questions. I think I want to revisit what Luke was saying and taking a step back and I know you tried to blend over the year your different results but simply with the profit per ton that you talk about in the scrap business for Q3 versus what it sounds like you’re guiding to in Q4. Is it fair to say that Q3 would be an outlier on the positive side with what you would tend to think as normal and Q4 may be an outlier on the down side? How would you characterize them versus what you think is more of a normal for you?

Tamara Lundgren

Well, let’s define normal. In today’s normal…

Timna Tanners – UBS

Yeah.

Tamara Lundgren

… in the current environment, I think that’s a fair assessment. If you look at historical normals, then historical normals, this quarter is sort of in the middle of historical normals. But in the new normal that we’re experienced -- experiencing today, which is relatively sluggish U.S. growth and a strong export growth but a low confidence global market, I think that your assessment is right on point.

Timna Tanners – UBS

Okay. Fair enough. Wanted to ask about your guidance for May quarter had been for export volumes to improve slightly and actually fell, kind of, sharply and it’s kind of -- I would like to understand a little better about your visibility. Can you talk to us about what might have happened from when you forecast that to the reality?

Tamara Lundgren

Yeah, absolutely. When we did our earnings call in April, so it was the first week in April. What we were seeing then was steady demand coupled with tight but seasonally improving supplies of raw materials. And we saw increasing domestic demand, which reflected the higher capacity utilization and that started to put pressure on prices. And it increased the prices overseas that our customers had to pay for raw materials. And we were seeing strong demand from Asia, which was contributing to further price increases.

With all of that price strengthening, higher prices led to an increased flow of raw material. So that is what our outlook was at the time that we gave the call in September. Then the Euro crisis appeared, China’s over production became extremely apparent to the finished steel market and China’s decision to slow growth led to a real change in market tone.

And so the higher -- that change in tone, the falling global steel prices and the higher material flows that had come out because of the higher prices created a temporary surplus in supply and put further pressure on prices. So you had a really sharp movement within the quarter, both in -- just in terms of the prices that we showed you, the movement of scrap prices within the quarter, the movement of finished steel prices within the quarter.

But now what we’re seeing are a lot of factors that are leading to Q4 stability and improvement. We’ve got demand overseas which remains, our customers are still producing. They still need raw material. The excess scrap that I alluded to has been absorbed by the market and the drop in prices has put some pressure on supplies. But sales volumes for us remain strong and overall margin trends, while they may not be linear, overall margin trends are positive for the business, when you look at the business as a whole over multiple periods.

Timna Tanners – UBS

Okay. All right. And the last thing I really wanted to drill down on a little bit more, if we could, is this confidence of the better technology procurement and I know that Rich talked about -- Richard talked about more of it that’s coming along in next fiscal year. But I know you also mentioned and I think is one of the five components that drove better margins in the third quarter. So can you talk about really what kind of profit per ton improvement you might expect or how to think of this greater procurement of metal from your existing operations?

Tamara Lundgren

Sure. When I alluded to it in terms of the impact that it made in the last quarter, we are continually investing in technology and have been doing so for the last five years. But the significant CapEx investment spend that we’ve been making this year is a spend, where we expect to see the significant benefits of it in our fiscal 2011, which starts September 1.

And our installation schedule should result in the new systems being on line at our four major shredding facilities starting in the fall of 2010 and continuing through early calendar 2011. We haven’t disclosed the impact on margins but we wouldn’t be making the investments if we didn’t think they weren’t meaningful.

Timna Tanners – UBS

And it’s mostly nonferrous or what exactly are you drawing out that you weren’t before, maybe?

Tamara Lundgren

Well, it is an increased extraction of nonferrous material. And so we expect it to -- we expect for it to increase profitability both through a combination of higher purchase volumes, as well as higher margins.

Timna Tanners – UBS

Okay. Thanks a lot.

Tamara Lundgren

You’re welcome.

Operator

Thank you. Our next question in queue comes from Evan Kurtz with Morgan Stanley. Your question, please.

Evan Kurtz – Morgan Stanley

Hi. Good afternoon. So most of my questions have been asked already but just one quick one, you mentioned that you had sold some scrap forward in the fourth quarter. What is the typical lag between when you actually receive a purchase order to when you actually recognize revenue?

Richard Peach

Well, it’s changed over time, Evan, but currently it’s about three to six weeks.

Evan Kurtz – Morgan Stanley

Okay. Three to six weeks. Okay. That’s it. Thanks.

Tamara Lundgren

Thank you.

Operator

And currently, I’m showing no other questions in the queue at this time. I’d like to turn the program back over to CEO, Tamara Lundgren, for any closing remarks.

Tamara Lundgren

Thank you and thank everyone for joining our call today. We look forward to speaking with you in October, when we’ll be reporting our fiscal year 2010 results.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s program. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect at this time.

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