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Schnitzer Steel Industries Inc. (NASDAQ:SCHN)

F4Q2010 Earnings Call Transcript

October 7, 2010 5:00 pm ET

Executives

Alexandra Deignan – VP, IR

Tamara Lundgren – President and CEO

Richard Peach – SVP and CFO

Analysts

Brent Thielman – D.A. Davidson

Eric Glover – Canaccord

Torin Eastburn – CJS Securities

Luke Folta – Longbow Research

Timna Tanners – UBS

Sal Tharani – Goldman Sachs

David Lerner [ph]

Operator

Good day, ladies and gentlemen, and welcome to the Schnitzer Steel’s fourth quarter 2010 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, today’s call is being recorded. At this time, I would now like to turn the conference over to your host, Ms. Alexandra Deignan. You may begin.

Alexandra Deignan

Thank you, Joe. Good afternoon, I’m Alexandra Deignan, the company’s Investor Relations contact. I’d like to 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. You can access the slides through our website at www.schnitzersteel.com or www.schn.com.

Before we get started, let me call your attention to the detailed Safe Harbor statements on slide two which were also included in our press release of today and in the company’s Form 10-K for the fiscal year ended August 31, 2010, 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 first quarter of 2011 in our press release and in this presentation, and subsequent to this call we will not be under any obligation to update our outlook.

Finally, please note, we will be discussing some non-GAAP measures during our presentation today. We have included a reconciliation of those metrics to GAAP in the appendix of this slide presentation.

Now, let me turn the call over to Tamara Lundgren, our Chief Executive Officer. She will host the call today with Richard Peach, our Chief Financial Officer.

Tamara Lundgren

Thanks, Alley [ph], and good afternoon everyone. For those of you on the call who haven’t yet met Alley, Alexandra Deignan, is our new Vice President of Investor Relations. She is transitioning into this role as Rob Stone has expanded his treasury responsibilities to become our new Chief Risk Officer in addition to holding his title of treasurer.

As Alley is in our Portland office today and tomorrow, for those of you who’ve follow-up questions after the call, she’ll be with Rob and they can be reached in Rob’s office.

Today, I’ll walk you through our fourth quarter and fiscal year 2010 performance. Richard will then discuss the fourth quarter performance of each of our segments and our year-end capital structure and then I’ll provide an outlook for our first quarter.

So let’s get started by turning to slide four. Our fourth quarter performance echoed our strong full-year performance. We delivered a healthy revenue increase year-over-year of 21% and an EBITDA improvement of 32%. As a result, we’re pleased to announce a robust fourth quarter year-over-year EPS improvement of 66% to $0.58.

As expected, the short-term market volatility that we benefited from in the third quarter reversed in the fourth quarter. However, our fourth quarter earnings still showed a healthy improvement from the lower levels of Q4 2009. Our strong cash flow enabled us to spend about $50 million in CapEx and in share repurchases without increasing our leverage during the quarter.

Now, I’d like to take a moment to highlight our fiscal year 2010 performance. So let’s turn to slide five. As we look at our fiscal year 2010 in aggregate, I’m pleased to report that it was another very successful year for our company. We shipped over 4.2 million long tons of ferrous scrap and nearly 480 million pounds of non-ferrous products achieving revenue growth of nearly 30%. All three of our businesses sold higher volumes and delivered increased operating income and significantly higher operating margin.

Like others in our industry we benefited from improving markets driven by rising global demand. Our financial performance however, is not just about better market. It’s also a clear reflection of the combination of our platform, our people, and our cutting edge processes and results from a capitally-crossed strategy in years of investment. We achieved 29% growth this year and $2.3 billion in revenues.

Starting with our bi-coastal export platforms, we have the flexibility to deliver our product to wherever demand is greatest at any point in time. In addition, we leveraged the full cycle of the reclamation process, sourcing products through a wide network at the earliest stages of disposals. Maximizing the value of scraps to our collection and shredding operations and producing finished steel products with our own recycled scraps.

But we never forget that our greatest resource is our people. The significant expertise and commitment to excellence demonstrated by our 3,200 employees enable us to deliver the high performance metrics that we measure and benchmark against on a daily basis. Finally, our innovative approach to processes both through our continuous improvement program and steady investment in state-of-the-art technologies, these processes allow us to enhance our yield and to generate new revenue sources from within the way strength.

Utilizing this core framework, we’re able to get more out of every ton of material we process. All of these factors contributed to our performance in fiscal 2010. The net result was another year of strong cash flows that enabled us to maintain a strong balance sheet, to continue investing, to strengthen our operations and our competitive positions, to continue looking for value creating acquisitions, and to opportunistically return capital to our shareholders.

So let’s now review the contributions from each of our operating segments that drove our performance, if you can turn to slide six.

As we discussed on the third quarter call, in our results and in our guidance, the significant commodity price volatility was occurred in the second half of the year, positively then negatively impacted margins. When selling prices rose sharply in the third quarter, we were able to expand margins. And as prices fell in the fourth quarter, we were able to reduce purchased prices to maintain cash metal spreads, but our reports – our reported results were impacted by lagging average inventory costs.

However looking at the fiscal year as a whole and as a half to half review, the second half trend was stronger than the first, particularly for our MRB and ABP segments.

So let’s turn to slide seven and take a look at the full-year highlights of our operating segments. Our largest business, Metals Recycling, delivered strong revenue growth and continued to improve margins and increase volume. During the year, we continue to benefit from the demand for scrap in the emerging markets. While sluggish US growth continues to put pressure on the availability and on the cost of domestic scrap supplies, our exposure to the export markets added significantly to our ability to maximize the value of the material we process.

During fiscal year 2010, we once again exported more than 70% of our overall volumes and we exported to 12 different countries around the world. MRB’s revenues for the year increased more than 30% driven by higher prices for both ferrous and non-ferrous metals as well as significantly non-ferrous volumes.

Importantly, we achieved a significant uptick in both operating income to $118 million from $13 million in 2009 and an uptick in operating income per ton to $28 versus $3 in 2009. The expansion of operating income and margins was the result our ability to capture increased raw material flows, the cumulative impact of the investments we’ve been making in non-ferrous extraction technologies and our focus on continuous improvements.

One indicator of the success of our operational improvements is the significant increase in our non-ferrous sales. We’ve expanded our non-ferrous collection network and we’re continuing to increase the quantity of higher value non-ferrous material we’re recovering from our shredding processes.

In 2010, non-ferrous represented 5% of our overall volumes, up from 4% in 2009. And more importantly, in 2010, non-ferrous accounted for 21% of MRB’s revenues versus 17% in 2009. In addition, during 2010 we continued to invest in technology that will further increase our non-ferrous recovery.

I’m very pleased to announce that we completed the installation of another major upgrade to our non-ferrous extraction systems in Portland this fall. Installation of similar upgrade at our three other major shredder locations in Everett, Oakland and Tacoma will occur in the coming months. We’ve also completed two acquisitions consistent with our strategy of continuing to get closer to the source of supply.

During 2011, we’ll continue to remain focused on investments and technology and on acquisition. We anticipate delivering an accelerating rate of growth in both volume and profits.

So let’s dig a little deeper into MRB’s performance and turn to slide eight. And on slide eight, you can see the full year-over-year look at our ferrous and non-ferrous pricing and volume. Due to an improved domestic demand and our ability to access the export markets, we realized a 24% uptick in average ferrous prices. Our ferrous volumes showed a slight increase and importantly the run rate for our last three quarters was just slightly below the record volumes we achieved in 2008.

On the non-ferrous side we benefited from a combination of price increases as well as higher volumes. The higher volumes were as a result of our increase yield from advantaged separation technologies and an increase in the number of non-ferrous collection facilities at our major yards.

So now let’s turn to slide nine and we can take a look at our Auto Parts Business. Our Auto Parts Business truly knocked out of the part this year, with a 57% increase in revenues, record operating income of $51 million and a 21% operating margins. The sale of our full service operations and the acquisition of six self-service stores enabled to focus on our core self-service and a retail strategy that’s providing significant value-added performance.

Like our Metals Recycling Business, our Auto Parts – our Auto Parts Business has seen the results of its dedication to continuous improvement in both its top line and bottom line results. As we look to grow the highly profitable business, we anticipate balanced contributions from acquisitions and organic growth in key regions. The recent acquisition of six source include this four in our core Portland region as well as two in the highly populated Dallas Fort Worth area where we had targeted expansion.

If you turn to slide 10, we can take a look at our results from our Steel Manufacturing Business. Since December, the mill has been operating around breakeven which is no small feat given the difficult dynamics of weak West Coast demand and increasing scrap cost. Demand has improved incrementally with steel production levels rising to 64% utilization during the second half of 2010 from an average of 52% during the second half of 2009.

As a result, our Steel Manufacturing Business delivered a 17% increase in sales volume year-over-year. The increased tonnage and cost containment initiatives improved our conversion costs, which helped to offset an overall increase in scrap cost and a composite decrease in sales price of about $30 per ton as compared to 2009. Through our production flexibility and that’s both in terms of product diversification and reduced product production time, we were able to improve revenues from all sources during fiscal 2010.

While domestic West Coast and Canadian demand have yet to generate a material increase in market activity, we believe our streamlined operation and our vertical integrations successfully positioned SMB for the recovery as it gains momentum.

So now let’s turn to slide 11. To wrap up the fiscal 2010 review, I’m extremely pleased with our performance on multiple levels. We substantially recovered from the global financial crisis that significantly impacted our markets last year. And we not only endured, we continue to invest and prosper. Today, we are reaping the rewards of strategies we’ve found over the past five years and as very much the result of our highly motivated and dedicated employees across the country and an integrated effort from all three of our business segments.

As I’m out meeting with investors, I often and publicly too often and ask directional questions about the scrap prices. And I’m sure that at some level that will never go away but it’s just a short-term factor that impacts the overall performance of our company. Our fundamental performance depends much more on the emerging market demand for infrastructure as well as our strategic sourcing, operating efficiencies, yield maximizing and global distribution network.

Our ability to systematically ply our global sales visibility to our buying activities and our ability to capitalize on our proximity to sources of scrap supply and to access growing and long-term demand are what set us apart from the past. And if you add to that, a rigorous and disciplined approach to investing in new technologies, current facilities and acquisitions, you can begin to see the value add we’re providing to this high growth industry.

So now, let me turn the call over to Richard and he’ll be discussing the performance at each of our segments in a bit more detail.

Richard Peach

Thank you, Tamara, and good afternoon to all of you on the call. I’ll start with the Metals Recycling Business on slide 12. Operating income for the fourth quarter was $21 million, which was in line with last year’s fourth quarter. As expected, this result was down from the third quarter due to softer market conditions and the impact of lagging average inventory costs.

Selling prices were also lower but the high run rate on ferrous sales volumes indicates a continuing positive momentum in emerging markets demand. In the fourth quarter, we generated record sales volumes for non-ferrous through a focus on maximizing shredder production using our separation technologies to extract more product and a success of our infinitive to expand collection activities.

The underlying trend and profitability are covered in slide 13. The short-term volatility that was clearly demonstrated in our third and fourth quarters is viewed differently when you look at Metals Recycling performance on a half-year to half-year basis. In this chart, you can see that operating income has been on a steady upward trend over the last two years with acceleration in both the absolute dollar value and the expansion of margins. This trend was driven by the combination of the continuing strong demand, with gradual improvement in raw material price and the benefits from our continuous improvement program including non-ferrous. How this trend has impacted operating income per ton is shown on slide 14.

In fiscal 2010, operating income for ferrous ton sold averaged $28. While this is less than the mid-cycle average of $38 achieve in 2006 and 2007 it still represents a very significant improvement from the $3 we achieved in fiscal 2009. When we blend together the impact of the upwards then downward of price volatility that we experienced in the third and fourth quarter respectively, it can again be seen that the underlying trend in fiscal 2010 was a continuing improvement.

The next two slides more information on our volumes, prices and global reach, so turning to slide 15. Here you can see more detail on volumes and selling prices over the last eight quarters. Against historical comparisons, ferrous sales volumes in fiscal 2010 had a strong run rate of over 1.1 million tons in each of the last three quarters. Ferrous sales prices peaked on average, $378 in the third quarter and although sliding back by $36 during the fourth quarter, prices still maintains a premium to the first half of the year.

On non-ferrous, we generated an incremental volume of 15 million pounds in fourth quarter sales which held as achieved the quarterly record and fourth quarter non-ferrous sales prices declined by $0.10 but were still at levels well above the first half of the year.

Moving to slide 16, I’ll now turn to exports and freight. The charts on the left shows the exports generate the majority of our revenues. In fiscal 2010, we exported 74% of our volumes mainly to emerging market economies. Of that total, Asia represented 78% and Europe, Africa and Middle East were a total of 22%. In the fourth quarter, China and Taiwan were the largest buyers and sales were particularly steady. Overall we shipped to 12 countries.

Export freight decreased in the fourth quarter by about $6 per ton to an average of $45. There was a slight softening in freight rates but it was mostly a change in the mix of countries that dropped down our average cost.

Moving on, I’d like to discuss our Auto Parts Business on slide 17. The fourth quarter operating income of $10 million was an improvement from $8 million in the prior year quarter, but a decline from $18 million in quarter three. While it’s still a strong result, the fourth quarter operating margin of 15% was down from the fourth quarter. This was a consequence of the drop and commodity prices and a lag in average inventory costs which failed there slowly when the purchase costs were tough.

However, our underlying business group trend continues which has seen more clearly from the next two slides. On slide 18, when you look at the performance of Auto Parts on a half-to-half year basis, you can see operating income has been on a steady upward trend for the last two years. And at fiscal 2010, we sustained a margin improvement at a high average level of 21%. This improvement has been driven by stronger momentum in car purchasing, the rapid integration of new stores and efficiency and effectiveness improvement we’ve made across our operations which we believe have increased the overall value we can achieve for every car we buy.

Increased car purchase volumes are indicative of our growth in scale and these are shown on slide 19. In the fourth quarter, car purchase volumes remained strong and increased by 13% over the prior year quarter. For the fiscal year as a whole, we purchased 329,000 which was sup significantly by 28% from fiscal year 2009. While shop commodity price movements impacted margins in the short-term, the development of our supply channels have increased and improved buying practices all contributed to the higher run rate and car purchase volumes that we’ve now achieved.

I’m now changing business I’d like to move on to discuss Steel Manufacturing on slide 20. Our fourth quarter operating result was a breakeven which is $1 million less than the fourth quarter in 2009 and $4 million less sequentially. The key factors than the lower sequential performance was softer demand and higher cost inventory at the start of the quarter.

On slide 21, you can see that on a half-to-half year basis and we are still modest, the financial performance of the steel mill was improved in the second half with higher utilization, a slight pickup in demand and benefits from previous cost reduction initiatives which have kept our cash flows near breakeven too.

Slide 22 shows year-over-year sales volumes and average selling prices. During the fourth quarter, we sold 160 million tons which was flat compared to the prior year but down 12% from the third quarter. On a sequential basis, pricing for finished steel products fell by 3% to $618 per ton. A sustained improvement and West Coast demand for finished steel products has not occurred. Until those, we’ll continue to optimize the mills performance in cash flow under their lower cost fleet base and flexible product mix. We believe we’re well positioned for when the market conditions eventually picked up.

Now moving on over the next couple of slides and starting with slide 23, I’ll summarize how our business performance has impacted our balance sheet, cash flow and net debt position. During fiscal 2010, we invested $122 million in a combination of CapEx, acquisitions and repurchasing shares. Our annual CapEx spend was $64 million, which included maintaining the business and group CapEx investments in new non-ferrous technologies.

We also spent $41 million on acquisitions for the six new Auto Parts stores and scrappy cycler based in Montana. And in the fourth quarter, we took the opportunity to repurchase 413,000 shares at a cost $17 million.

Slide 24 shows that our shows that our operating cash flow in the fourth quarter was positive $49 million and was $89 million for the fiscal year. Net debt for our fiscal year-end was just $70 million with leverage of only 7%. Despite our investment activity over the past 12 months, this low level of net debt is flat against our last fiscal year-end. As we noted previously, we have a $450 million bank facility which matures in July 2012. Our fiscal year-end we have $350 million of available capacity to draw and if we need to.

And to summarize our financial position, the combination of strong cash flow and access to credit, provides us with significant headroom as we continue to execute a strategic growth plan.

And now I’ll turn the call back over to Tamara, who will provide our outlook for the first quarter of fiscal 2011 and discuss our opportunities for more strategic growth.

Tamara Lundgren

Thanks, Richard. We do have a clear roadmap for growth so having that balance sheet flexibility is essential.

Let me take a few minutes to review our expectations for the first quarter of our fiscal year 2011. In our Metals Recycling Business, we see a continuation of the broad-based demand for our products from the world’s developing economy. In our first fiscal quarter of 2011, we expect our ferrous volumes to continue to reflect strong recent trends and be up slightly versus the fourth quarter and up significantly versus first quarter of 2010.

We expect non-ferrous volume to approximate or decline slightly from the record shipments in the fourth quarter but to increase versus the first quarter of 2010. We expect that ferrous prices will remain stable and then non-ferrous prices will increase slightly from the fourth quarter.

And finally, our operating income per ton is expected to improve and to approximate 2010 levels.

So let’s turn to slide 26. In our Auto Parts Business, we expect revenues to increase slightly versus the fourth quarter driven by better part sales and admission. In addition, we expect margins to expand from the recent fourth quarter level to the average level achieved in 2010 as a result of improved part sales and the benefit of average inventory costs.

And finally in our Steel Mill Business, the overall demand for finished goods is expected to remain a significant challenge in the near-term. We expect a slight decline in demand to occur versus the fourth quarter, resulting in sales volumes slightly below the first quarter and fourth quarter 2010 levels.

We also expect average sales prices to remain essentially unchanged from the fourth quarter. As a result, margins in SMB are expected to be slightly negative in the first quarter of fiscal 2011 but to be improved from the first quarter 2010.

To conclude, let’s turn to slight 27. As we close out our fiscal year 2010, I think it’s worth a moment to reflect on what we’ve accomplished over the last five years. Since 2005, we’ve made 15 acquisitions, we’ve increased our work force by 75% to over 3,200 people and we’ve grown normalized revenues by over $1 billion. We’ve built a very solid foundation for our company both operationally and financially. With the bi-coastal network of 74 reports and close to 100 collection facilities, we have a unique combination of scope and efficiency and most importantly, we’ve proven our ability to grow profitability and to adjust nimbly in the face of major market movements.

Operational performance and fiscal sustainability are the building blocks of how much we plan to pursue even greater growth. In fiscal 2011, we’re well positioned to reach the benefits of the many investments that we’ve made over the past five years in our people, in technologies and in facilities.

The end of the recession officially or at least technically occurred in June 2010 but it is very clear that the domestic economy still faces a long road of slow growth. But what’s more relevant to us is the demand in the emerging markets for raw materials is increasing and not just in our traditional ferrous market, non-ferrous products like aluminum and copper are at all-time high demand in pricing levels. We believe the long-term fundamental underlying our business are strong. The global infrastructure build out throughout the developing world and our ability to serve their raw material needs with recycled scraps to provide us with sustainable dynamic markets for many years to come.

Operator, we can now open the call up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Eric Glover with Canaccord.

Eric Glover – Canaccord

Hi, good afternoon and congratulations on the quarter.

Tamara Lundgren

Thank you, Eric. Eric? Operator?

Operator

Seems to have dropped out of the queue. Our next question comes from – once again Mr. – our next question comes from Brent Thielman.

Brent Thielman – D.A. Davidson

Hi, good afternoon.

Tamara Lundgren

Hi, Brent. How are you?

Brent Thielman – D.A. Davidson

Good, good. I guess first question on the Metals Recycling Business. Where there any fair shipments held over into Q1 from Q4?

Tamara Lundgren

From Q1 to Q4 or…

Brent Thielman – D.A. Davidson

I just wondering was there any shipments in terms of timing of shipments that got pushed out into the first quarter from the fourth quarter?

Tamara Lundgren

We’ve been running, I mean, nothing out of the ordinary. We ran Q4 volumes at slightly below – at about 1.1 to 1.2 million tons that’s just slightly below our fiscal ‘08 run rate, so nothing out of the ordinary.

Brent Thielman – D.A. Davidson

Okay. Okay. And then I guess on those lines, I mean any thoughts into what supporting through the sequential improvement in volumes in Q1, I just getting sort of pastures we haven’t typically seen that trend, so any other color that would be helpful.

Tamara Lundgren

Well that that’s a great question Brent. And – and we’ve talked about it internally because normally our first quarter is soft but the previous decline that we’ve – as we’ve said in the past that’s all been due to discrete factors rather than an underlying seasonality. So in the first quarter, we expect to see a continuation of the strong trend in both volumes and margins and overall we see the market stabilizing from Q4 to Q1 and improving in town. The demand remain, customers are still producing any raw material. And the excess scrap that was generated by the run up in prices in Q3 has been absorbed by the market. And the drop in price that occurred put pressure on supplies, so mill inventories are low and our outlook in town has stabilized and is improving.

Brent Thielman – D.A. Davidson

Okay, fair enough. And then I guess, Richard, sorry if I miss this but, could you provide sort of what CapEx is behind for the new non-ferrous technologies you’re implementing in the new export platform?

Richard Peach

Yeah. Well, CapEx overall for fiscal 2010 was 64 million, we expect to see kind of higher rate overall in fiscal ‘11 but actually disclosing the level of cost for our new non-ferrous technologies, Brent, that’s a commercial information.

Brent Thielman – D.A. Davidson

Okay. And then just lastly, I guess just you’ve given initial deals in the non-res construction into 2011, can you just provide an update on where the company stands with the Steel Manufacturing Business and are you evaluating sort of strategic alternatives forecasted?

Tamara Lundgren

Well, Steel Mills in the US remain domestically challenged and they will be so as long as the US economy remains sluggish. In that – in that context, we’re very pleased with our mills performance. We’re running it at breakeven, at low utilization rates, if not a drag on cash flow and we used the downturn as an opportunity to improve the efficiency so that it is able to operate at breakeven levels.

Brent Thielman – D.A. Davidson

Okay. Thank you very much.

Operator

Our next question comes from Eric Glover.

Eric Glover – Canaccord

Hi.

Tamara Lundgren

Hi, Eric.

Eric Glover – Canaccord

I guess, I’m on okay. I was wondering if you could talk about scrap flows in each of your geographic regions and whether you’ve seen any pickup in manufacturing or a prime scrap.

Tamara Lundgren

Well the flows are good at our export facilities, where we – where we’re located, we’re less dependent on manufacturing capacity. There is slower but steady at our other facilities at, which are really in the Southeast where there is more reliance on manufacturing but they’re still okay. So we’re seeing steady flows across the board.

Eric Glover – Canaccord

You think that you’ll be able to continue to increase Auto purchases in fiscal 2011, was up I’m right, 13% this year.

Richard Peach

Yeah. Well, one thing – one thing to do with 2011 of course as you’ll have our, the six new stores that we acquired in fiscal ‘10 of course, you’ll have them for two year in 2011 whereas we only had them for part of the year in fiscal 2010. So any determent that late comes from the fact that we had some conquers cars that came in and during fiscal ‘10 we believe we’ll be offset by the fact we’ve got our new stores and they’ll provide us with extra volumes.

Eric Glover – Canaccord

Okay. And could you just provide a current update on what you’re seeing out of China in particular, as well as Turkey?

Tamara Lundgren

Sure. The market – let me start on the Asia side. The market is showing broad-based demand throughout Asia and that includes – that includes China. There was less market volatility and there is less market volatility on the Pacific that on the Atlantic side. And the Pacific was actually down than the Atlantic. The Atlantic is more susceptible to change because it’s more affected as you know by the domestic market and also the Mediterranean and the Mideast demand hasn’t been as steady as Asian demand, but Turkey’s renter to the market and we’re seeing a very simple good tone.

Eric Glover – Canaccord

Okay. Thank you very much.

Tamara Lundgren

Thank you.

Operator

Our next question comes from Torin Eastburn.

Torin Eastburn – CJS Securities

Hi, good evening.

Tamara Lundgren

Hi.

Torin Eastburn – CJS Securities

Tamara, can you say that more about raw scarp supply environment?

Tamara Lundgren

Sure. Beyond what I’ve said, I could – I could put it in this scenario. Clearly, clearly with lower economic growth, we’ve seen tighter scrap flows. And we’ve also seen pretty strong – pretty strong sales prices in the context of the global financial crisis. But we performed actually quite well in that environment and so while the flows are down, our purchase volume have been up significantly year-over-year, our sales volumes have grown and our overall performance in all of our businesses has improved year-over-year. MRB sales volumes grew, as I said, last three quarters were on a ‘08 run rate which were record – record run rate.

Torin Eastburn – CJS Securities

All right. It’s tricked me that the guidance for the profit that you’re giving in MRB for the coming Q1 is actually pretty closed to what you earned back in 2005 and 2006 when the supply environment was better. Can you help me understand, I guess how much of the improvement is coming from the process improvements you mentioned and a pickup in non-ferrous versus how much is coming from a change in supply?

Tamara Lundgren

Well, our margins are improving because first, operating efficiencies from continuous improvement is lowering our conversion cost. Their margins also improve because of our cumulative investments in non-ferrous abstraction and we’re anticipating further improvements with the – coming online of this – of the new non-ferrous technologies that we’ve spoken to you about. There is a slight improvement and what I would say is more like an underlying steadiness from the material flows versus the trough of the economic crisis. And we do think that the benefits from our technology investments and our continued investments in that technology will continue into fiscal year ‘11.

Torin Eastburn – CJS Securities

Okay. Last question with this spike in non-ferrous metals prices are you seeing a change in supply environment on effort?

Tamara Lundgren

With the spike in, what did you say?

Torin Eastburn – CJS Securities

Non-ferrous.

Tamara Lundgren

Non-ferrous. I’m sorry. Well, generally start to correlate with run-up on the metals exchanges. So we are seeing a net effect of an increase in selling prices.

Torin Eastburn – CJS Securities

Okay. Thank you.

Operator

Our next question comes from Luke Folta.

Luke Folta – Longbow Research

Good evening. Couple of questions here, firstly, just to talk on the non-ferrous recovery, I think that more, I just wanted to get a sense of how much more improvement we can potentially see as you know, you did over 5% of recovery towards non-ferrous volumes as a percentage of total ferrous. What do you think that number can get to in the next couple of years as this technology again to be implemented?

Tamara Lundgren

Well, we didn’t say 5% recovery. What we said was our revenues were – for MRB volumes had increased by about 20%, 21%.

Richard Peach

Sorry. I mean what we – what we felt in the last year Luke was that non-ferrous volumes grew at a faster rate than the ferrous – than the ferrous volumes and if you look back over the last several years, as the underlying trend in our non-ferrous, you’ll see that year-over-year an underlying trend that something in the range of 10 – 8 to 10% in growth per year, what we are doing is trying to accelerate that growth with a number of different initiatives that Tamara talked about, a combination of our continuous improvement that maximizes shredder production in our export yards that gives us more an non-ferrous out the back of that process and expansion over collection facilities. And for non-ferrous through our network, the new technology that we’re putting in that will allow us to extract more non-ferrous that were not complicating and also improvements in our selling activities for non-ferrous that gives us access to greater market, so I think you can see us – expect to see us pushing on that at least the rate that you’ve been approaching since the last few years.

Luke Folta – Longbow Research

Okay. Let me refer you that. I mean, I definitely what you’re saying. I’m just looking at total non-ferrous shipments as – if non-ferrous as a percentage of your total and I noticed that is definitely going up pretty meaningfully year-over-year. But I wanted to understand where does that cap out?

Tamara Lundgren

Where does that cap out?

Luke Folta – Longbow Research

Yeah. I mean, I imagined that… go ahead.

Tamara Lundgren

We don’t – don’t really see it capping out. We’re not – we don’t see our growth capping out. We are continuing to grow through acquisitions, we’re continuing to grow organically and we’re continuing to grow through technology. So the non-ferrous when we report is both the combination of what we extract from the shredding process as well as what we buy directly. So we don’t – we don’t see it capping out. If what you’re – we don’t see it capping out.

Luke Folta – Longbow Research

I guess, I mean I’ll – tell one more time. How much non-ferrous imperials typically available per ton of ferrous at your processing facilities, because I understand the amount you’re extracting per year, current flows improving. I’m just trying to get a sense of, if you got all of it, per ton of ferrous is what – what would that equate to?

Tamara Lundgren

That’s a – that’s number one that will vary from facility to facility depending upon what we’re taking in, but the other half of that question is, is information that we don’t disclose.

Luke Folta – Longbow Research

Okay. And just secondly…

Tamara Lundgren

But that’s okay. That was four tries to finally get us there.

Luke Folta – Longbow Research

It’s okay. Just technically, you talked a bit about China. I just wondered you enjoy it maybe a little bit more, just to try to understand what – what’s happening there with the government trying to put some restrictions on production here through the end of the year but you’ve also being seeing that production seems to have rebounded here in the second half of September and iron ore market still remains pretty tight in the cadmium and they’re still buying. Just want to get a sense of what you think the impact to that whole aspect has been and what is your expectations are looking forward?

Tamara Lundgren

Sure. Well bottom line it was a non-event for us. The shut downs that occurred were predominantly impacting small remote locations not coastal mills in China and those were mills that use (inaudible) and leverage the scrap and they weren’t overly efficient. And such that so that they reduced exports from China that would have a positive impact on our customers in the rest of Asia, but I – I mean, what you’ll see in our K and the like, China was our leading ferrous buyer in Q4, so it didn’t – it didn’t impact us at all. We didn’t see a drop in demand and our understanding if that those facilities are back on line as about it that we can go.

Luke Folta – Longbow Research

Right. Okay, thank you.

Tamara Lundgren

Thank you.

Operator

Our next question comes from Timna Tanners.

Timna Tanners – UBS

Hi good afternoon.

Tamara Lundgren

Good afternoon, Timna.

Timna Tanners – UBS

I’m wondering if you could also, I guess following on Luke’s question that can you talk a little bit about potential greater export opportunities either from weaker dollar or from Korea’s new EAS. Is that something that you’re seeing as an opportunity?

Tamara Lundgren

Well, I’ll comment on both. On the currency side, we’re really not exposed on currency movements on – on a real basis. You know we buy and sell in dollars, the market – the global market is a dollar market. So on occasion with the very weak euro that calls might – it might impact us for a week or two but it really – the currency exposures don’t really – don’t really impact the market. In terms of increasing demand from the export market, that’s clearly what we’re seeing. I mean we are continuing to see new customers and old customers with higher demand continue to access us for raw materials and that’s why the Q1 tone is, has gone to a stabilizing to improving account.

Timna Tanners – UBS

So that would primarily driven by overseas demand rather than domestic demand, is that a fair conclusion?

Tamara Lundgren

Yes.

Timna Tanners – UBS

Okay, great. I wanted to just drill down, and my other question is to understand, as far as when I go to the operating income component, everything seem to fairly expected and then with the corporate eliminations in the SG&A line based on relative to what we’ve seen either in the prior quarter or in the past during your fourth quarter fiscally, but just wondering if there is anything to take away from that in terms of maybe run rate we should be looking for in either corporate eliminations or SG&A?

Richard Peach

Yeah that’s a good question. And the answer is, that in the fourth quarter we had a $3 million insurance reimbursement that we received and that – so we had a known recurring item in our fourth quarter SGA that has benefited our result which means that the fourth quarter SGA is not indicative of our future run rate. You have to add that – you have to add that back, add that back on.

Timna Tanners – UBS

What was the reimbursement? I think I missed your accent, I’m sorry.

Richard Peach

Sorry, sorry I’m still blending in. It’s insurance…

Timna Tanners – UBS

Insurance.

Richard Peach

It was insurance reimbursement.

Timna Tanners – UBS

It’s about 3 million and then so that will be in SG&A and then anything in terms of the corporate eliminations run rate, that also was a lot different than the prior quarters?

Richard Peach

That – that’s really just timing and so there is nothing to take away from that in terms of future run rates. I think the fourth quarter is no indicative of the ongoing run rate as mainly it’s normally appropriate elimination that we think as what those in the fourth quarter standalone that actually helped our profits by a small amount by about $800,000 but normally we’re eliminating profit is just – that was just an unusual item.

Timna Tanners – UBS

Okay. Thank you very much.

Operator

Our next question comes from Sal Tharani.

Sal Tharani – Goldman Sachs

Good afternoon guys.

Tamara Lundgren

Good afternoon Sal.

Sal Tharani – Goldman Sachs

Can you break down your non-ferrous volume between what you get from your ferrous extraction or ferrous separation and from your actual collection of non-ferrous?

Tamara Lundgren

No, we don’t disclose that.

Sal Tharani – Goldman Sachs

But would you say that majority is the direct collection?

Tamara Lundgren

We really don’t disclose that Sal.

Sal Tharani – Goldman Sachs

Okay, fine. Any impact on you – on your Cascade Mill from your Dallas acquisition of Temco [ph] Mills, does it any way helps you or indulge your sales in that region?

Tamara Lundgren

It hasn’t – it hasn’t had any impact on us. Temco has always been there. I will you that the challenge in the market is not competition for any of the steel mills, the challenge in the market is the economic environment.

Sal Tharani – Goldman Sachs

Okay. All right, that’s all from me. Thank you.

Tamara Lundgren

Thank you.

Operator

(Operator Instructions) Our next question comes from David Lerner [ph].

David Lerner

Hi guys. I was just wondering how far had do you sell your non-ferrous scrap, your guidance was, just considering what non-ferrous metal pricing has done. I would have thought your guidance for non-ferrous scrap would be a little bit higher.

Tamara Lundgren

Well, our forward sales are a little bit tighter than our – our non-ferrous forward sales are a little bit tighter than our ferrous on forward sales and obviously move with the market. What we guide to on ferrous forward is four to six weeks generally and non-ferrous is inside of that, but it does – it does move from quarter-to-quarter if you will.

David Lerner

Okay, thanks.

Operator

There appear to be no further questions on the phone.

Tamara Lundgren

All right. Well, at this time, I’d like to conclude our call. It’s always a pleasure to highlight strong results and I particularly would like to thank our employees for their hard work and dedication for that’s what enabled us to execute so well in our operations and in our strategic plans. Thanks for joining the call today and I look forward to speaking with you again in January.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a nice day.

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