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Sims Metal Management Limited (NYSE:SGM)

F4Q2010 Earnings Call Transcript

August 26, 2010 7:00 pm ET

Executives

Dan Dienst – Group CEO

Rob Larry – Group CFO

Analysts

Andrew Gibson – Goldman Sachs

Ben Wilson – JP Morgan

Todd Scott – RBS

Scott Hudson – CLSA

Michael Slifirski – Credit Suisse

Emily Behncke – Deutsche Bank

Sophie Spartalis – Macquarie

Brent Thielman – D.A. Davidson

Tony Mitchell – Ord Minnett

Eric Prouty – Canaccord

Operator

Good morning ladies and gentlemen, and welcome to the fiscal year 2010 full-year results conference call for Sims Metal Management. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator instructions) I must advise you that this conference is being recorded today, Thursday, 26th of August, 2010 in United States and Friday, 27th of August, 2010 in Australia, Asia and Europe.

Today’s presentation may contain forward-looking statements, including statements about Sims Metal Management Limited’s financial condition, results of operations, earnings outlook and prospects. 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.

Investors are encouraged to review the filings made by Sims Metal Management Limited with the Securities and Exchange Commission including its Form 20-F/A, which we filed with the SEC on the 14th of April, 2010, which describes some of the factors that may cause actual results to differ from these forward-looking statements.

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

Dan Dienst

Thank you Joel. Good morning, good evening and welcome everyone to today’s call. It’s great to be here in beautiful but chilly Sydney and we appreciate you joining us for this preview of our results for the fiscal year ended 30th June, 2010. Joining me as usual would be Rob Larry, our Group Chief Financial Officer.

Our call this morning will follow the usual format that we have used in the past. First, I will provide some initial thoughts before turning the call over to Rob who will provide some details on our financial results. Then I will make some closing remarks on market conditions before we take some Q&A as time permits.

As always, we would 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 that are joint ventures across the world, many of whom are listening to today’s call and webcast. We would like to thank our employees for another hard-fought year in what again were trying times. Your hard work and perseverance is an inspiration and we thank you.

I spent most of August travelling to some of our facilities around the world on a safety tour. And of all of our accomplishments in fiscal ’10, which included significantly higher statutory earnings as evidenced by a 36% increase in EBITDA and a AUS$277 million year-on-year increase in net profit after-tax, we are perhaps most proud of our progress on safety. We worked safer in fiscal ’10 than fiscal ’09, evidenced by fewer workplace injuries and reduced severity and are continuing on the journey of not just creating the safest company in recycling business, but a company that can stand shoulder-to-shoulder with the safest manufacturing companies in the world. We are safer and best in the business, but I must remind our employees that we have ways to go. We must and can and will be better. Do not let up.

Before I turn the call over to Rob to go over the financials, allow me to make a few observations about fiscal ’10, now that it has been put in the books and then share a little bit about what we are seeing out there. We noted improvement in many of our markets in fiscal ’10, especially when considered in the context of the extraordinary carnage encountered in fiscal 2009. While the GFC abated, we nonetheless faced significant challenges as major western economies attempted to navigate from crisis to recession to recovery. Our non-ferrous metals business achieved healthy margins and strong year-on-year growth, confirmation of a core competency as we buy locally and market globally these metals.

Ferrous margins and scrap flows outside Australia continued to be disappointing relative to longer-term expectations, particularly in North America where the U.S. economy struggled and continues to struggle to find its footing. As you look back across fiscal 2010, ferrous markets improved in our first fiscal quarter and again in March and April, but the uncertainty surrounding European sovereign debt and other perceived threats to global economic growth and recovery resulted in weak and, in some cases, non-existent demand for ferrous scrap in our fourth fiscal quarter. Notwithstanding these challenges, our Australian and European businesses performed well.

Our electronics recycling business, SRS, bounced back from fiscal 2009 and outperformed our own lofty expectations in fiscal ’10. For a little historical context, fiscal 2008 was a ferrous story, fiscal 2009 was a GFC-induced story of misery and pain and fiscal 2010 was a non-ferrous and SRS story. Despite the macroeconomic challenges in fiscal 2010, Sims Metal Management finished the year operationally and financially stronger. Our strong financial foundation allows the continued investment in technology, while simultaneously pursuing external growth opportunities.

We are confident that our commitment to operational excellence, especially as it concerns the safety and well-being of our valued employees, will allow us to continue to improve our efficiency and profitability, further solidify our leadership position in the industry and maintain and enhance our sustainable competitive advantage.

In fiscal 2010, we continued to grow organically and via acquisitions, further strengthening our unrivaled global footprint by acquiring businesses in each of our regions. Most notably, we expanded our presence in North America early in fiscal 2010 by acquiring Fairless Iron & Metal, which included a mega shredder along with access to another deepwater port and by acquiring the remaining 50% interest in Port Albany Ventures, also with access to deepwater via the Hudson River in north of our port operations in New York and New Jersey. We completed a tuck-in acquisition for our Australian metals business and consummated an acquisition that strengthened the processing capabilities of our electronics business.

Fiscal 2010 saw the development of a new trading platform called North American Trade that we expect will expand our penetration of that market, supplementary yard activities and enhance our ability to market and trade third-party generated scrap in North America. We remain prudent and disciplined with our balance sheet and in November of 2009, completed an equity raising up AUS$440 million and have allocated this capital to among other things, enhancing metal recovery from our shredding downstream systems. We have completed construction of three of these systems in North America, and plan to deploy the same or similar advanced technology elsewhere in the United States, and in our U.K., and Australian metals businesses during fiscal ‘11.

Apart from non-ferrous recovery investment, perhaps my personal favorite technology investment remains concrete. We are using current market conditions to furnish and refurbish our yards with an eye towards the days of normalized operating conditions. As evidenced by the recent SRS acquisition of Wincanton PLC’s electronics recycling assets, we continue to see more deal flow as we head further into fiscal 2011. This is particularly true with vendor expectations that began to move towards more realistic evaluation in both the traditional scrap business and the electronics business.

As mentioned earlier, scrap intakes overall were understandable in context, but disappointing nonetheless particularly in North America. For the Group, scrap intakes increased in Q4 by 17% sequentially from the third quarter to 3.6 million tons, but remain at lower levels of intakes relative to historic norm. As many recall, fears around the European sovereign debt prices were exacerbated in the fourth fiscal quarter, resulting in weak or as I said earlier sometimes non-existent demand for ferrous metal, a stark reminder that capital and liquidity are still perhaps the world’s most precious commodities.

Given Sims Metal Management's unique global metals and electronic recycling platform and the best assets in our industry, our people, we are optimistic for our future prospects. We have taken steps to enhance our infrastructure and trading capabilities and we are confident that our operations will demonstrate tremendous operating leverage, particularly in North America as and when macroeconomic trends demonstrate more meaningful economic recovery and growth characteristics and scrap flows and margins normalize.

I would like to once again recognize the hard work and efforts of our more than 5,500 employees across the globe. It is their dedication, zeal and discipline that has allowed this company to take head-on two very challenging fiscal years in a row. Thank you once again for all that you do for Sims Metal Management.

Now, I will turn the call over to Rob Larry, our CFO, and he will take you through the financial results for the full year of fiscal ’10. Rob?

Rob Larry

Thanks Dan, greetings to everyone in the call today. I would like to share with you a brief overview of our financial results from our fiscal 2010 ended 30th of June, 2010. Fiscal 2010 once again provided many challenges mostly related to tough markets, the compressed scrap flows and margins that impacted our business and our results.

Our release today tries to capture and segregate some of the atypical items for investor consideration. While fiscal 2009 was certainly the year of the GFC, we continue to encounter its lingering effects in fiscal 2010 as economies in the west attempted to move from recession towards sustainable growth.

As a reminder, Sims Metal Management is domiciled and has its primary listing in Australia and all dollar figures that will speak to today are in Australian dollars unless we otherwise note so. Revenue for fiscal 2010 was approximately AUS$7.5 billion, which also included an adverse effect from foreign exchange, and we recorded a net profit after-tax on a statutory basis of AUS$126.7 million for the year ended 30th of June, 2010.

Earnings per share was AUS$0.64 per diluted share in fiscal 2010. Net profit after-tax in fiscal 2010, on an underlying basis, was AUS$146.7 million. Statutory net profit after-tax includes AUS$20 million of atypical items related to adjustments that reflect the net realizable value of inventories, fixed assets and certain other impairments, redundancy provisions among other adjustments. By way of comparison, net profit after-tax before non-cash goodwill impairment in fiscal 2009 was AUS$40.8 million.

It’s important to note that fiscal 2009 included strong results related to the three-month period that ended 30th of September, 2008 which preceded the full impact of the Global Financial Crisis, a three-month period in which the company generated AUS$285 million of EBITDA. As a result of volatility in markets, including significant changes in FX, comparability between fiscal 2009 and fiscal 2010 is quite difficult. EBITDA, including intangible asset impairment charges in fiscal 2010 of approximately AUS$1 million, was AUS$352.9 million in the year ended 30th of June, 2010. It was a 36% increase on the prior corresponding period EBITDA.

Sales revenue decreased 14% to AUS$7.5 billion due to declines in shipments and average selling prices which again included an adverse impact from foreign exchange. In fiscal 2010, the company’s total scrap intake in shipments were 13.3 million tons and 12.9 million tons respectively. Scrap intake increased almost 6% and scrap shipments decreased 2% in fiscal 2010 on the prior corresponding period.

Now, let’s look at our results at our regional level. Sales revenue in North America was down 21% to AUS$5 billion on the prior corresponding period. On a U.S. dollar equivalent basis, our sales revenue was down 7% to $4.4 billion as compared to fiscal 2009. EBIT, earnings before interest and tax, was AUS$80 million in fiscal 2010 in North America. Sims Metal Management’s fiscal 2009 scrap – scrap intake increased in fiscal 2010 by approximately 4% as compared to the prior corresponding period to 10.2 million tons.

Australasian sales revenue for the region was up 5% on the prior corresponding period to AUS$1.2 billion. EBIT was up 227% to AUS$61 million. Scrap intake in this region increased by 14% during fiscal 2010 to 1.7 million tons.

European sales revenue was up 7% on the prior corresponding period to AUS$1.2 billion. EBIT was AUS$67 million. Scrap intake in this region increased by about 4% to 1.4 million tons in this 2010 fiscal year. Sims Recycling Solutions or SRS continues to deliver strong performance in fiscal 2010 and has been an important driver of our European EBIT despite macroeconomic headwinds there.

As of 30th of June, 2010, the company had net cash balances of AUS$15 million, and we have largely undrawn lines of credit of approximately AUS$1.3 billion and shareholder equity of AUS$3.3 billion. The company believes that the strength of its balance sheet is without peer in its industry and we note that the credit facilities available to the company have recently been increased to AUS$1.5 billion. For the fiscal year, the Group’s effective tax rate adjusted to exclude the abnormal effects of the impairment charges and intangibles, was approximately 35% that was affected by some discrete items in fiscal 2010. Longer term, we expect our effective tax rate to be in the order of 33% and 34%.

CapEx in fiscal 2010 was AUS$120 million, and we expect new CapEx projects in fiscal 2011 in the order of AUS$160 million to AUS$180 million. In fiscal 2009, the company recorded AUS$191 million of non-cash goodwill impairment, and in fiscal 2010, the company evaluated the carrying value of its long-lived assets, including goodwill, during the fourth fiscal quarter and concluded that no additional impairment of goodwill existed at 30th June, 2010. In fiscal 2010, the company did, however, recognize impairment charges that related to fixed assets and other identified intangibles in the aggregate of AUS$17 million and also the impairment of an investment in a joint venture of approximately AUS$6 million.

The Board of Directors has determined a final dividend of AUS$0.23 per share, which will be 74% franked, will be paid on 22nd of October to shareholders on the company's register at the record date of 8th of October. The dividend for fiscal 2010 when combining the final dividend is AUS$0.23 per share with the interim dividend of AUS$0.10 per share, represents a payout ratio of 51% of net profit for the full year.

We thank you for your continued interest in Sims Metal Management. We have high expectations for our business to be able to generate attractive returns on capital again, after economic conditions, scrap flows and margins normalize. At this time, I would like to turn the call back to Dan for his closing remarks today.

Dan Dienst

Thank you Rob. Let me give you a quick overview of market conditions and then we will go quickly to Q&A. As noted in the media release, ferrous scrap flows remain weak in North America and Europe, due in part to uncertain economic conditions and oppressive heat that has persisted for the better part of their summer. Demand for ferrous scrap also remains what I would characterize as lukewarm, but at times streaky as steel mills attempt timely match raw material inventories closely with sales and production visibility.

I would characterize that ferrous market over the past few months as thinly traded on light volume in street. We believe that scrap levels at steel mills and in the dealer network are relatively low at this time. Sims Metal Management expects that ferrous scrap prices may further increase in the near-term due to the limited supply available in the market today particularly as U.S. mills return to the market in September and compete for relatively scarce material, and that eventually, as ferrous scrap prices increase further, intake may also improve.

Trading in non-ferrous scrap metal remains liquid with firm demand, although flows have somewhat been impacted by the previously mentioned seasonal factors in the Northern Hemisphere.

We are cautiously optimistic that conditions will improve as the Northern Hemisphere shakes its summer doldrums. Beyond the update on ferrous and non-ferrous market conditions that we have just given and with the lack of clarity regarding future economic conditions that could affect scrap flows and margins, we will not provide more specific guidance for fiscal ’11 at this time.

In the year ahead, we will continue to build on our foundation of safety, respect, integrity, teamwork, and an entrepreneurial spirit to serve our customers and create value for our shareholders. Against the backdrop of unrivaled geography and industry-leading technology and most talented employees in the industry, we remain optimistic on the long-term prospects for Sims Metal Management.

Now, we will turn the call back to Joel, our operator, and we will take some questions as time permits. Joel?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Andrew Gibson from Goldman Sachs. Please go ahead.

Andrew Gibson – Goldman Sachs

Hi guys.

Dan Dienst

Good morning Andrew.

Andrew Gibson – Goldman Sachs

I thought I would get in early this time before someone else starts asking my questions, a little bit of running gag there with someone else. Just regarding the margins, now I know you haven't provided much guidance around fiscal '11, but can you provide a little bit of a feel as to how margins have moved going into the first quarter of fiscal '11 versus the final quarter of fiscal '10?

Dan Dienst

Yes, I think Andrew, if you look at the business and you sort of read into my commentary about market conditions sort of alternating, particularly in ferrous between lukewarm and streaky, we will experience compression in the lukewarm environment and then have an opportunity to grab some margins in the streaky market. So, it is a bit lumpy. The GFC as you know, the sovereign debt growth really impacted the market in May/June, lacked liquidity as you see, while we finished with a decent Q4, you see some compression as you head into the beginning part of this fiscal year, and then as the market has whipped it recently and continues to have some momentum here, it will be an opportunity to grab back some margins. So, it’s very lumpy and streaky as I previously characterized.

Andrew Gibson – Goldman Sachs

Okay, just more a longer-term question, I guess. What's your assessment of where you think margins in your business can get back to? For simplicity's sake, let's talk to EBIT dollar per ton. Bearing in mind that you are extracting, well, you are arguably going to extract more value per ton process going forward with this new technology and no doubt those that sell you your feed, will become aware of that and maybe start to ask a higher price for the material they provide on that basis. And then also over the last few years, no doubt a lot of your suppliers have become a lot more sophisticated in how they measure what they sell and how they monitor it. So, with that in mind, I mean do you think that mid-cycle margins can get back to the levels that we have seen historically?

Dan Dienst

Yes, we do Andrew. If we could replicate a macro, be it the GDP story, an IP story, reasonable growth trajectories in the large reservoirs in which we operate, we would anticipate that we could once again achieve those kind of margins, particularly with the investments in technology that we have had. Note that your observations about supplier seems sophisticated and information being time converse in your business and our business, things move pretty quickly, you know, a trade that was quiet overnight into Korea or Turkey yesterday afternoon seems to find its way out pretty quickly even if you are on research. So, time compression, sophistication, suppliers relate to information has certainly contributed to us being as nimble as you can see, suppliers also comes with the flip side of that which is the carnage, chaos of these markets has put a fair amount of hurt on some competition, some competition that we had no longer exists, and then coupled with industry consolidation overtime should hopefully enhance and restore some of those margins that historically we would enjoy.

Andrew Gibson – Goldman Sachs

Just two final quick questions. The first one is where are you seeing the scrap price at the moment for say delivery into East Asia, how does that compare to what you are realizing in the U.S.? And finally, are you seeing any bright spots in the U.S. economy, like is manufacturing showing a glimmer of hope or is demolition activity starting to trickle up or is it still very flat?

Dan Dienst

I will take that in reverse order. As you know, important trading markets, consumption markets if you will, or ferrous scrap include the US, the Med – the Mediterranean market, in particular Turkey and then Asia including Korea, China and then some of the second and third tier mills. We have seen a noticeable move-up as you know from your own research, July into August, momentum is there for continued trends into September. (inaudible) business that was out there, pre-Ramadan in the Med is probably 395, 398 basis HMS. Turkey over the past, directionally 24 to 48 hours, the market has moved higher than that and now has a solid fore handle on it. China has done some business, although they have been absent in size from the market for a period of time. The tertiary, second and third-tier mills are buying scrap in APAC at anywhere from 415 to 425, trying to get ahead of this market, and business is being done in Korea, north of 400, we leave at that.

U.S. has been – mills in the US that melt scrap and buy scrap has been basically very quiet for 60 days. Some of the fear factor that you read about in installing questionable recovery in the U.S. and a lack of visibility into their own production and sales, the steel prices have remained firm and/or trending higher and certainly are up into August when those price hike held. So, the anticipation is that the U.S. mills will come back in September. There is a holiday there that comes in around 6th, I believe of Labor Day, and we will see whether activity breaks up before that or after that holiday as the mills will need to buy some scrap and desire to buy some scrap, and early talk in the market is that the U.S. will be up and they will compete for resources that post-Ramadan Turks and elsewhere in APAC may have the desire for that material as well. So, we are watching markets pretty closely, but the current trend is modestly positive.

Andrew Gibson – Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Ben Wilson from JP Morgan. Please go ahead.

Ben Wilson – JP Morgan

Good morning Dan and Rob. I have two quick questions. Firstly Dan, you commented that FY10 has been a non-ferrous and SRS story. On the non-ferrous side of it, are you able to quantify broadly speaking how much of that improvement or performance is related to improved base metal pricing versus improved recovery due to the deployment of your new recovery technology?

Rob Larry

Yes, Ben it’s Rob. The non-ferrous recovery that comes off the downstream comes in with the ferrous feedstock and the margin related to that recovery also comes in through the – is reported through the ferrous EBIT line item. So, the non-ferrous business commentary really relates to the retail non-ferrous or merchant non-ferrous business that we do without that recovery. We stay covered on that inventory very quickly on the non-ferrous side of the business. So, while the upward slope in pricing is always going to be good I guess for all of our commodities, this usually would be more helpful to the ferrous business than the non-ferrous business, because the turns in the cover on the non-ferrous inventory is much faster than ferrous.

Dan Dienst

Yes, our ability to look to the terminal market, as we run that business, really take some of the volatility if you will out as it relates to ups and downs in that product category. So, we are pretty careful. As you know, the markets move there minute to minute and there is a real discipline there to not get hurt and our guys in Hong Kong, our CME team, our trading team there, the buyers in the region do a terrific job communicating positions and just making sure we are real smart clip on margin and move on.

Ben Wilson – JP Morgan

I would assume that, Dan, your comment referred to non-ferrous as a product inclusive of the shredder recovery. Are we then to imply then that you are not seeing yet the benefits of the recovery technology deployment?

Dan Dienst

No, we are. You are not going to see it jump out. Again, I think what Rob’s point was if you look at some of the supplemental slides that we put on file, you will see that the non-ferrous shredder recovery metal are part and parcel to the shredding business, and so we capture that from an operational and commercial discipline. It’s part of what we buy for our shredders. So, it’s a part of the ferrous business albeit the market that production through our non-ferrous traders and to places like China.

Ben Wilson – JP Morgan

A second query, can I assume from your comments regarding your CapEx spend this year and that you are seeing perhaps improvements in the acquisition market, that a share buyback is not something you would consider presently or into the forward? And secondly, to clarify, what is your long term or mid-cycle target gearing range?

Dan Dienst

You know, buybacks, capital allocations of the kind of magnitude you might contemplate. It’s obviously within the purview of the Board of Directors. We certainly, the management make recommendations from time to time, but historically we have had policy of paying dividends, and important to many of our owners. I would never rule out a buyback per se, but as and when we make such decision, certainly we will make a public announcement related to that. Historically, as it relates to the second part of your second question, our gearing ratio, well now it’s zero essentially or below zero, Sims historically has run with between anywhere 15% to 35% debt to total capital, an area if properly deployed that capital, certainly something we would be comfortable with.

Ben Wilson – JP Morgan

Okay. Thanks guys.

Dan Dienst

Okay, thanks Ben.

Operator

Your next question comes from the line of Todd Scott from RBS. Please go ahead.

Todd Scott – RBS

Thanks, guys. I am just lining up your scrape intake versus shipment volumes for the year. It looks like you have had 400,000 tons of intake versus shipments. Is that somewhere you are happy to be, happy to hold those extra tonnages or is that something that you are going to be – really expect to be sold off in the first quarter of '11?

Dan Dienst

It’s a fair question. As we have said in the past, our desire is to be as liquid with our material as market will permit. But from time to time, we will make what we call judgment calls and again we try not to be speculative, but as I have said on prior calls, we have this tremendous information network, 230 locations, we have got 23 countries where we have employees or relationships and we are constantly filtering chat or an information back through and against a discipline of turning inventories, there will be times where there is either liquidity or pronounced trend that we are going to make some judgment calls around. We saw that in Q3. As we finish Q3, we also had a mismatch if you will of intake and outbound, that material went in the quarter. It’s a smart decision and we find ourselves in a position today, which is maybe less judgment as much as the illiquidity towards the end of Q4, but nonetheless we think it’s a smart decision.

Todd Scott – RBS

Okay. So I guess I can take from that that there will be – you will try to sell that 400,000 tons over the first quarter?

Dan Dienst

Indeed yes.

Todd Scott – RBS

Just a second question then, the SRS, your second business result was stronger, I think almost matched up with 2008. How much of this was driven by stronger non-ferrous prices and how much would be just better volumes?

Dan Dienst

It’s probably a combination of both, I will say, I would not discount the fact that take anything away from the operational excellence of the people who run that business, but certainly pricing and some of the reconfigurations and pain that we took through ’09, FY09, and repositioning that business certainly yield some fruit. They also continue to grab volume what we can pleasantly surprise, you know, at the volumes that continue to come into that business, and particularly as we grow and be aggressive in the markets in which we operate in. So, I think it would be a combination of both, actually enjoy a little less volatility on pricing in that business, gives in some visibility into how they price contracts and the like, but certainly pricing was a factor.

Todd Scott – RBS

Thanks, and just one last question. I think it's pretty well known that you are looking for more bolt-on and more acquisitions to accelerate that US ferrous scrap space. It sounds like it has been improving with valuations becoming more realistic, but assuming you can't find those transactions, does that mean you will be applying more capital into the non-ferrous recovery technology? I guess what or how much money could you put into that before you say that's enough, we don't need any more of these shredders?

Dan Dienst

I would not characterize those two avenues of growth, organic or expansionary as mutually exclusive. We certainly have all the firepower to do, a bunch of bolt-ons in that market as well as continue to invest. We have articulated to the market that now as we basically fine-tune the machines that are built now, one is our joint venture partner in California and two, on the East Coast of the U.S. The third one is getting started on the East Coast of the U.S., and we are going to evaluate from there. We are also running the engineering buildout in the UK and Australia a similar technology, and that’s plenty to chew on for right now as we look at bolt-ons as well.

Todd Scott – RBS

You don’t have a target per se of deploying a number of new non-ferrous shredders for the coming year?

Dan Dienst

We don’t have a target that we would put out there. There is a bunch of enhancement technology that we are looking at to our business and it doesn’t just include metallics. As you know, down the road, as I said in the past, we have a bunch of guys in lab coats and an army of R&D people, but we spend a lot of time looking at non-metallics as well, because we are touching increasingly more plastics, not just through New York City Recycling and through SRS, but also through the byproducts that were shredded. So, other stops that we are working on none of which bolt-on metallic recovery, non-metallic opportunities we squeezed out each other at this point in time.

Todd Scott – RBS

Okay, thanks for that.

Dan Dienst

Okay, thanks Todd.

Operator

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

Scott Hudson – CLSA

Yes, hi Dan, hi Rob. Just a question on flows – you obviously saw I think Rob said a 70% sequential increase in the fourth quarter. And Dan, you mentioned when we saw you in June that you were managing flows through price. Is that sort of the underlying trend in flows? Is that still more positive than it was say earlier in the year?

Dan Dienst

You know, look, to a certain extent, Scott, we are always managing flows through price. And so, if you sort of parking back, and Rob, correct me if I stray here, you sort of isolate the quarter in terms of flows. You are really talking about Q1, 3.6 million tons. We dropped to 3 million or 3.1 million in Q2. Very similar quarter in Q3 and popped back up in Q4 of about 3.6 million again. And when we speak to regulating flows through price, it can back up to the visibility and liquidity that we have in the market, again we want to be disciplined turners, we don’t want to lay materials down for extraordinary period of time, and they dig that. So, we are always regulating flows based upon what we see as an opportunity for selling and real thing is you buy against the market not your orders and we try to stay disciplined in that regard if that makes sense.

Scott Hudson – CLSA

Is the competition for flows as intense as it was sort of during previous calendar year?

Dan Dienst

I would say it is still intense and that’s really a function of lack of materials, particularly on ferrous as it relates to the North American markets and the UK, maybe not as pronounced as the U.S. market, but certainly a fair amount of competition for flows, and that tightness and we read about that many of you opine on in terms of the cost push of what’s happening with steel prices relative to scrap prices and that tightness, the lack of availability if the U.S. is the largest scrap reservoir in the planet attempts to grow and generate scrap again, we will obviously see some very structural limitations on that for a period of time. We are starting to see some signs of life in automotive and see some ancillary oilfield production up, but there is still a pronounced struggle as it relates in that market in the structural steel arena. So, really your question relates to tightness of material being generated and that while the market gets thinly traded and you can have people step out of the market for a while, lend some credence to the thought that prices should firm from here particularly if mills are still running.

Scott Hudson – CLSA

And then just one last question, how do you view, I guess the value of scrap versus other metallics in the market at this point of time?

Dan Dienst

We do spend a lot of time internally looking at other indicia – steel making raw materials, and if you look at delivered price, I think last trade, China maybe a week or two ago as a bonus in HMS cargo is probably around 436 [ph] and ironically or interestingly sort of lines up pretty closely to our estimates of what the total cost of blast furnace iron at an integrated mill in China sort of being put out today, it’s in the 440 to 450 range. So, a fair amount of correlation if you will between various FE inputs into the steel making process and also lines up – also interestingly with, say in China using that same analogy, price is being paid on the ground for the limited amount of ferrous scrap generated locally domestically including that in the Chinese market, which we probably peg again in that 445ish kind of range. So, highly correlative I guess would be a long-winded answer.

Scott Hudson – CLSA

Okay, great. Thanks very much.

Operator

Your next question comes from the line of Michael Slifirski from Credit Suisse. Please go ahead.

Michael Slifirski – Credit Suisse

Thanks very much. I would like to start by going back to Recycling Services please, Recycling Solutions I should say. Was there anything – could you describe the trajectory through the second half from the third quarter to the fourth quarter? And on that basis, was there anything that was abnormal that drove it so well? And if we had a Q4 number, would that be the right number to project on plus the additional volume or do you think you're getting an unfair proportion of the rent and might see now the risk of the fee for service come down again?

.

Dan Dienst

We are in that business to liberate value, all right. And the biggest list of value that’s liberated in that business are the metallics. There is some plastic and glass and other iron driver is the value of what we liberate in our cost of running that business. So, if you look at the trajectory of, let’s say copper prices through the fiscal year and probably I have this in front of you, I don’t, but that’s a copper basis coal met cash in the Q1 period was around 260 to 270, Q2 if I recall I lift it up around 3 bucks and Q3 had a pretty good run, and these are quarterly averages directionally, maybe 330ish, and then finishing Q4 with that volatility, it’s still fairly around 320, and these are directional. So, that lift in CU value that liberated from our processes certainly had a contribution. Steel prices as you know today are higher than the averages in Q4. So, you can make your own assumptions, but other than that, we are not going to really strain projecting out to you guys that business.

Michael Slifirski – Credit Suisse

But, specifically, do you think that there is now – are you getting a disproportionate share of the rent? Could there be an adjustment to fee for service or are you back to where you think it is fair for everybody involved?

Dan Dienst

I think we are in a good spot right here. I think we found some interesting tension points through ’09, FY09, and in the name of relationships and otherwise, I think the guys have done a great job positioning our business.

Michael Slifirski – Credit Suisse

Okay. Moving on, you commented about scrap and clearly indicating that you expect the ferrous in probably September. Beyond September, what's your projection? Is it just a spike that then sees a decline, and what do you need to see in the market for sustained high levels?

Dan Dienst

Obviously we are going to watch steel production levels around the world. We are going to watch order books at all the markets we operate in. If the market remains streaky where we get these ones for four to six a week and then quiet and then runs again, we could trade significantly materially higher from here over the next couple of weeks and then it’s a question mark. It’s a question mark. We are watching billet prices and prices like the met, watching steel prices around the world, hot metal prices and certainly there is a sense of, I would say stability in pricing on finished steel and as we come out of traditionally quite summer periods in the Northern Hemisphere with maintenance, outages and auto production switches over to the new year model, we will watch beyond September, October, it’s almost an eternity at this point.

Michael Slifirski – Credit Suisse

Okay. Finally, it's an irritating modeling question really. Historically you have talked about a corporate cost of running at sort of AUS$4 million to AUS$5 million a month. The currency is higher so I would have thought that would come but you seem to be running at a run rate of twice that. Has something changed there?

Dan Dienst

Irritating modeling question for Rob. Rob?

Rob Larry

Mike, so you are looking at the Group and regional?

Michael Slifirski – Credit Suisse

Yes.

Rob Larry

Yes, the Group costs, which is the head office costs is the AUS$2 million or AUS$3 million a month number that you have been accustomed to and looking for. What Group and regional represents is the Group head office costs and also the head office level costs of each of the regions. So, I guess it’s confusing the two, just Group versus Group and head office costs for all of the regions as well. So, the AUS$2 million or AUS$3 million a month is really just the head office costs. I think we ended up somewhere in that range or lower than that range in fiscal ’10 just for the Group head office costs.

Michael Slifirski – Credit Suisse

Thanks Rob.

Operator

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

Emily Behncke – Deutsche Bank

Good morning. Thank you very much. Just a couple of questions. Firstly, looking at further to Andrew's question on whether or not you will be able to achieve the margins that you have previously achieved, I am just wondering if we should look at that on a quarterly basis, I guess noting that the peak EBITDA per ton in the fourth quarter of '07 was around AUS$85 a ton? Just wondering if you think you can get back to that or you are thinking more than you can get back to your average EBITDA per ton, which is around AUS$40 a ton?

Rob Larry

Emily, I was just clarifying, you mean Q4 ‘08 or Q4 ‘07?

Emily Behncke – Deutsche Bank

I think it was Q4 '07. I am not sure if it was Q4 '08 or Q4 '07. I don't have it in front of me. But either way, the peak EBITDA per ton that you have delivered has been AUS$84?

Rob Larry

Yes, I think that probably was Q4 ’08. I am not positive, but that was the boom commodity market.

Emily Behncke – Deutsche Bank

Yes, exactly. So, I guess further to the comments earlier around the fact that you can achieve margins previously achieved, I am just wondering if you think you can get back to that level or you think it's more likely that you will get back to the average EBITDA per ton level, which is closer to AUS$40 a ton?

Dan Dienst

The last question I thought was related to mid-cycle, but let me take your question as given. If we could replicate a set of market circumstances that we enjoyed in that period, pre-GFC, the rock and roll, golden period of commodities if you will, theoretically we could eclipse that based upon the investments that we have made in being efficient and recovering more metallics from the material we buy. Over the longer term, somewhere between your AUS$40 and AUS$85 a ton sort of average cycle to peak per ton, we would think again that the trajectory could be higher than the average based upon the investments, again highly dependent as you know on the series of macro scrap generating scrap consumption assumptions.

Emily Behncke – Deutsche Bank

So to get back to mid-cycle, does that mean you need to be at sort of capacity utilizations in the U.S. at around 85%, or when do you think we get back to mid-cycle?

Dan Dienst

Capacity utilization in our business as you know is a funny thing. It’s always the battle of margin and volume. So directionally if you have a notional capacity utilization figure for the North American business, let's say let’s get back to 85%, might be directionally not a bad place to make an assumption.

Emily Behncke – Deutsche Bank

Thank you. And just looking at the e-recycling business, it was an excellent performance in the second half. Would you think that the performance in the second half is a peak type performance or it's sustainable?

Dan Dienst

No, I wouldn’t characterize that it’s peak. We continued to as you know grow and invest in that business and learn a lot from some of the working done in the metal business and vice versa in the e-business as it relates to recoveries, some technology we put on in terms of efficiency of things like glass disposal and automating to manual function. So, I wouldn’t say that look at this as a peak number, again noting however that there has been a pronounced trend through the financial year of underlying commodity prices, which certainly help.

Emily Behncke – Deutsche Bank

So, we should think that those margins will be sustained into the fiscal '11 year?

Dan Dienst

Replicating market conditions.

Emily Behncke – Deutsche Bank

And just finally a question for Rob, are you prepared to give us some guidance as to your CapEx spend for fiscal year '11?

Rob Larry

Emily, we today indicated earlier that CapEx for new projects to be approved in fiscal ’11 is currently estimated in the range of or in the order of AUS$160 million to AUS$180 million.

Emily Behncke – Deutsche Bank

Okay, great. Thank you very much.

Dan Dienst

Thanks Emily.

Operator

Your next question comes from the line of Sophie Spartalis from Macquarie. Please go ahead.

Sophie Spartalis – Macquarie

Good morning Dan and Rob. Just a quick question following on from Todd's earlier question on the inventory levels. I have noticed in the balance sheet the inventory item has increased from AUS$470 million to AUS$777 million. If you could just maybe go through the inventory levels around the three main regions of your business and talk about, I know you said earlier that you had 400,000 tons to be sold in the first quarter this year. Maybe if you could just go through sort of where they sit for the other businesses?

Dan Dienst

We are really not going to break out or positions if you will around that, I would just make an observation that the levels of inventory were fairly born relative to size and scale of the operating assets that generate the material. What was the second question? I am sorry.

Sophie Spartalis – Macquarie

That's fine. Then just in terms of then would you characterize the inventory levels as normal? Like I know you said they were normal versus the size of each of the operations, but would you say that you have got higher than normal inventory levels, say in the U.S. operations at the moment?

Dan Dienst

I would characterize them as healthy relative to lows but not extraordinary as it relates to the size of this business, and I would note that those inventories are reported as of June 30th.

Sophie Spartalis – Macquarie

Okay, all right. Great, thank you.

Operator

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

Brent Thielman – D.A. Davidson

Yes, hi Dan, hi Rob.

Dan Dienst

Hi Brent.

Brent Thielman – D.A. Davidson

I guess Dan, just a question on volatility in currencies that we obviously sort of saw then in the second half of the year, particularly the dollar. Is it having a material impact on who, or maybe more importantly where, the mills you traditionally export to look for new scrap?

Dan Dienst

Obviously, the commodities that we play in are dollar denominated and currency and lows are certainly, and I am glad you pointed that, you asked the question, because it relates to some of the data, obviously we look at and follow relating to currency. And as Euro strengthens, you may see material drag offshore, say U.S. and vice versa, give an opportunity conversely for domestic U.S. mills to capture units that did not leave, currency plays a big part in flows. I mean, if you see even the Malaysian Ringgit is, you know, I think at a 13-year high, which gives places like Malaysia an opportunity to be more aggressive in competition relative to scrap that may come out of or go to places like Korea or China where currency is a big driver.

Brent Thielman – D.A. Davidson

Sure. And I guess in terms of your sort of acquisition strategy going forward, obviously there's commentary or the idea that you will expand in the U.S. Did you think about other regions, maybe some of the developing market regions, as potentially a platform, be it China, Malaysia or so forth?

Dan Dienst

We do, we spend time in many different markets. We want to be as a miner of the cast-offs of societies. We want to be where the prep is, and as you know, we have got terrific market positions in our above-ground mine in Australia if you will, and we are not done there. There is some more work to do and growth overtime in that market for us. U.K. has opportunity as well and clearly a lot of questions and focus around consolidation and growth in North American mine if you will, a reservoir. So, as we said, (inaudible) and I think about where to allocate those dollars, we are going to allocate dollars to where the scrap is. Now, we are developing opportunities in developing parts of the world that we do evaluate and continue to evaluate, and as we would have set the fair amount of comfort about the amount of material, the returns on that capital and the security and the investment to the capital. So, long answer, but yes, we are looking in places ex our normal reservoirs if you will, but we continue to focus on wealthy, wasteful developed parts of the world.

Brent Thielman – D.A. Davidson

Okay. Very good. Thanks Dan.

Operator

Your next question comes from the line of Tony Mitchell from Ord Minnett. Please go ahead.

Tony Mitchell – Ord Minnett

Hi good morning. One of my questions was answered, but can you quantify what the currency impact was for the year?

Dan Dienst

Sure. Rob, you want to grab that?

Rob Larry

Sure. The currency impact which were referenced in the prepared comments as it pertains to sales was significant. We reported roughly AUS$7.5 billion of sales, if the FX rates that prevailed in ’09 prevailed in ’10, the reported sales would have been AUS$8.6 billion. So, it compressed our topline sales by as much as AUS$1.1 billion or AUS$1.2 billion.

Tony Mitchell – Ord Minnett

Okay, thank you.

Dan Dienst

All right. Joel, we will take one more and then call it a close for the morning.

Operator

Thank you. Your final question comes from the line of Eric Prouty from Canaccord. Please go ahead.

Eric Prouty – Canaccord

Great, thank you. Hi Dan and Rob. From the North American market, could you just give a little more detail geographically if we look at Sims Adams, if we look at the East Coast and then the Mid-West, maybe a little commentary on how those specific markets fared for you?

Dan Dienst

We don’t really isolate those markets probably, but you could use your own instincts if you will and data channels to make the assumption that coastal assets are outperforming inland assets. That’s an easy one. And then as you break down some of the flows, if you look at the recessionary or lingering recessionary impact of what the U.S. has gone through in places where housing where the bubble burst most pronouncedly Arizona, places like Southern California, parts of the south or what we would call mid-south where you have had historically population migration that is somewhat stalled at this point, you could probably essentially get to which of our regions are candidly performing and performing admirably and others that really haven’t a little bit of luck or time.

Eric Prouty – Canaccord

Sure, no, that's fair enough. And then a question on the electronic recycling side of the business, what is the acquisition strategy there? Is it to increase a geographic footprint into some of the emerging markets like your penetration into India? Is it to add additional services onto or value added services on? What are you primarily looking to do from an M&A?

Dan Dienst

The answer is yes. If you look at what we have gone through recently as we headed into FY11 and what we did in FY10, we did a mix there. You get a mix of enhancing value-added say in Europe, Germany. The recent deal was about capture of flow in the U.K. and existing markets and applying our recovery technology on to a very talented group of people in assets that were great logistics and capturing material and marrying up with our processing and recovery technology. So, it’s a mix of anything that will enhance the various strata of expertise in that business.

Eric Prouty – Canaccord

Great. And then just finally a quick question on the CapEx, could you just break that down or tell us what kind of you would consider to be a normalized maintenance CapEx level, so we can determine how much of that CapEx is kind of a growth or investment CapEx?

Dan Dienst

We have figured maintenance and as you know that there's real depreciation in our business. Our equipment tends to chew itself up. I would say that the depreciation is real in our business that you know, 100 to 110, maybe 115 million I would characterize as a purer maintenance number.

Eric Prouty – Canaccord

Okay. Perfect. Thanks a lot guys.

Dan Dienst

All right. Thank you for the interest. Okay, Joel, I think we will wrap up here. I just want to say before we drop off that we appreciate everybody’s interest and extend once again our Board and management’s gratitude to our 5,500 employees for every day, suiting up, working safely and working hard in the face of some interesting times. So, we look forward to seeing all of you in the future and updating you at the end of Q1 when we are ready. So, thank you again everybody. Good day.

Operator

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

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