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Schnitzer Steel Industries, Inc. (NASDAQ:SCHN)

F1Q2011 (Qtr End 12/31/10) Earnings Call

January 6, 2011 5:00 p.m. ET

Executives

Alexandra Deignan – VP, IR

Tamara Lundgren – President and CEO

Richard Peach – SVP and CFO

Analysts

Torin Eastburn – CJS Securities

Eric Glover – Canaccord

Brent Thielman – D.A. Davidson

Luke Folta – Longbow Research

Sal Tharani – Goldman Sachs

Tim Hayes – Davenport and Company

Operator

Good day, ladies and gentlemen, and welcome to Schnitzer Steel’s First Quarter 2010 earnings release conference 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)

If anyone requires operator assistance during today’s call, please press star then zero on your touch-tone phone. As a reminder, today’s call is being recorded. At this time, I would now like to turn the conference over to your host, Alexandra Deignan, Vice President of Investor Relations. You may begin.

Alexandra Deignan

Thank you, Joe, and good afternoon, everyone. I’d like to thank you all for taking 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 these slides through our website at www.schnitzersteel.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-Q for the First Quarter ended November 30, 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 second quarter of 2011 in our press release, in this presentation, and in our 10-Q, which will be filed later today. After this call, we will not be under any obligation to update our outlook.

Finally, please note that 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, Ali, and good afternoon, everyone. Thank you for joining us as we present our first quarter earnings for Fiscal 2011. We have a fair amount to share with you today, including our strong first quarter performance and an update on our acquisition activities.

I’ll start us off with the review of consolidated results and an overview of our business performance. And then I’ll move to a summary of our capital investment program and our recent acquisitions.

Richard, will discuss the First Quarter performance of each of our segments, and review our cash flow, and capital structure, and then I’ll conclude with an outlook for our Second Quarter. So let’s get started by turning to slide four.

I’m pleased to announced that we delivered a very strong First Quarter. Consolidated revenues increased by more than 70% compared to the first quarter of 2010, which was a first quarter record in our 105-year history.

Our EBITDA also increased significantly to $45 million, an 80% increase versus last year. Operating income tripled to $28 million and our earnings per share of $0.64 was more than doubled last year’s first quarter.

We also exceeded our fourth quarter 2010 performance on all of these metrics, which continues our steady trend of improvement since the global financial crisis began in 2008.

This is a terrific start to Fiscal Year 2011, and I’d like to thank all of our employees whose hard work, dedication, and commitment to excellence made these results possible.

The primary driver behind our strong performance is that growth in the developing world continues to fuel demand for recycled metals. Our geographic alignment with the export markets enables us to serve this demand efficiently through our network of seven deep-water ports.

In tandem with our strong operational performance, we’ve continued to progress on our growth CapEx program and we announced a series of acquisitions that will be transformational to our platform on both coasts.

In Metals Recycling, we announced the acquisition of five new businesses, which extend our geographic footprints into Western Canada, and enhances our existing operations in the Northeast, the Southeast, and Hawaii.

In our Auto Parts Business, we announce the acquisition of a new facility in Waco, Texas, and expanded operations in California and in Oregon. Many of these deals have been in our pipeline for some time and all are consistent with our strategies for growth. As we integrate these complimentary assets with our existing operations, we will enhance our sources of supply as well as generate operational synergies.

During the quarter, we also commenced start-up operations of the new non-ferrous separation technology at our Metal Recycling Facilities in Washington and Oregon.

Now, let’s turn to slide five and we can dig a little deeper into the factors which drove our first quarter performance.

MRB shipped 1.2 million ferrous tons this quarter, achieving record first quarter sales volume. In fact, aggregate shipments in our last four quarters approximate the total process volume shipped during our peak year of Fiscal 2008. Our ability to capitalize on higher demand and prices from the export market enhance profitability in our metals recycling business.

In APB, our Auto Parts Business, we maintained strong car-purchase volumes, and high operating margins despite the slow U.S. economic environment. And most importantly, most importantly without the benefit of the government Cash for Clunkers stimulus program that APB enjoyed last year.

Our Auto Parts Business continues to benefit from sustainable improvement achieved by its operational realignment to a self-service retail model.

We made investments of $32 million during the First Quarter, which included $25 million of capital expenditures primarily related to our non-ferrous recycling technology upgrades, and $7 million on two acquisitions in our Metals Recycling and Auto Parts businesses. The remaining acquisition occurred after the end of the first quarter.

Our activity during the first quarter clearly demonstrates our ability to progress on multiple fronts by keying both organic growth in our current operations and expansion through acquisition, which have further accelerate growth in our sales volumes and improved the returns we can generate.

So now, let’s turn to slide six. We continued to benefit from broad-based demand in the developing market; shipping to 11 different countries during the first quarter. China and South Korea were our largest buyers, and toward the end of the quarter Turkey came back into the market quite strongly for second quarter shipments.

While we have not yet seen the effect of it, and we may not see the effect for a while, the recent news from the Chinese government announcing the next five-year plan indicates that they will be increasing their use of scrap in order to reduce energy usage and CO2 omissions.

This announcement is very consistent with the trend that we’ve seen for the past couple of years, of increasing demands for scrap from blast furnaces in order to lower electricity cost and decrease greenhouse gas omission.

It’s also very consistent with the broader global trend toward greater use of EAFs due to both their economic and environmental benefits. Both these trends and the Chinese government’s announcement point to continued long-term positive momentum in the demand for recycled metals.

So now, let’s turn to slide seven. In our Metals Recycling Business, revenues during the first quarter increased 87% driven by higher ferrous volume and higher prices. The result was improved profitability. Our operating income for ferrous ton rose to $21 versus $19 in the fourth quarter of 2010.

Building on MRB’s profitability and the macroeconomic trends that underpin the continued positive long-term outlook for the Metals Recycling industry, we continue to pursue growth through synergistic acquisitions. During the first quarter, we closed one Metals Recycling acquisition in Hawaii, which added to our long-term presence in that market. And since the end of the first quarter, we’ve announced four more Metals Recycling acquisitions, which expand our footprint into Western Canada and strengthen our presence in the Northeast and the Southeast.

Taking a step back, since 2005 we’ve closed and successfully integrated 15 acquisitions. We’re looking forward to continuing our record of success with the integration of the new businesses we’ve just acquired, particularly since we’ve worked with most of the management teams for many years and believe that there are valuable synergies to be achieved by operating as one company.

I mentioned earlier the $25 million of CapEx spending during the quarter. This was primarily related to non-ferrous technology upgrades at two of our Metals Recycling facilities. Portland’s upgrade became operational in the middle of the quarter, and Tacoma is still in its testing phase. Everett and Oakland are anticipated to come online in the spring. Over the next several quarters, as we embed the new technology into our operational prophecies, we should see the benefits on our overall performance.

So now, let’s turn to slide eight for a review of the Auto Parts Business. Our Auto Parts Business achieved a 21% increase in revenues during the first quarter, and record first quarter operating income of $14 million, up 35% over last year’s first quarter, delivering a very healthy net operating margins of 21%.

The revenue growth was generated from increasing part sales and core sales, supported by stronger commodity prices. In addition, we maintained strong car purchase volume. Shortly after the quarter ended, we acquired an Auto Parts Recycling facility in Waco, Texas, bringing our total Texas Auto Parts Facilities to five.

We also announced an expansion of our operations in Stockton, California, and Portland, Oregon; both of which are in proximity to our Metals Recycling facilities, which enable us to drive further synergies.

So let’s turn to slide nine for a review of our Steel Manufacturing Business. The resilience and resourcefulness of our employees at SMB is demonstrated in the mill’s near breakeven performance despite very difficult market conditions and lower utilizations. Despite the weak market, the mill generated positive cash flow during the quarter and we remain focused on enhancing operating efficiency and product diversity to remain competitive.

As we begin the new calendar year, there are some signs of increasing near-term demand. Although it’s still not clear as to whether this demand is sustainable, or is being driven by the need to replenish low inventories. What we do know is that the mill is operating at an efficiency level that will enable it to deliver positive results when demand increases, and is the same.

Let’s turn to Slide 10, and review our acquisition activity. Since the beginning of our fiscal year in September we’ve announced a total of seven acquisitions that enhance our supply network, improve our operating efficiencies, and extend our geographic reach.

As I mentioned earlier, there’s an increasing level of global demand for recycled metals to fuel infrastructure and industrial production in developing economies. In order to meet the demand for our product we are pursuing a duel-prong strategy of organic investments that enhance the yield from every ton of metal we process, and strategic acquisitions that expand our supply network within efficient proximity to our core coastal markets.

In our Metals Recycling Business, the five acquisitions represent 16 new facilities. In aggregate, these acquisitions will provide approximately 550,000 gross ferrous tons per annum, 40% of which will be incremental.

On the non-ferrous side, these acquisitions will provide approximately 60 million pounds of materials per annum that is entirely incremental.

In our Auto Parts Business, we announced one acquisition in Texas, which will increase our retail footprint to 46.

In addition, we’re expanding locations in California and Oregon. The additional cars purchased by these operations are all incremental volume to APB, and in the case of our Stockton and Portland facilities, their proximity to MRB’s shredders in Oakland and Portland will provide additional opportunities for synergies long-term.

While the acquisition multiples for all these businesses vary depending on their size, profitability and potential synergies, the acquisitions should all be accretive to the company in the first full year once purchase-accounting impacts are complete.

I’ll turn it over to Richard now, and he can provide more detail on this as well as discuss the segment performance, and give an update on our capital structure. Richard.

Richard Peach

Thank you, Tamara, and good afternoon everybody. I’ll start with MRB on Slide 11. As shown in the chart on the left, our Metals Recycling Business achieved a first quarter sales record of 1.2 million tons, which exceeded our prior year’s first quarter by more than 60%.

Our ability to meet this strong export demand is driven by our customer relationships, a strong supply network, and continued improvements in the spreading process, which transforms raw materials in [inaudible] product.

As shown on the right, selling prices also continue an upwards trend, increasing by 3% from the fourth quarter of Fiscal 2010. However, during the change in the quarterly average, each period had different market trends.

Prices were softening coming into the fourth quarter, whereas the first quarter had a rising market trend with forward selling prices at the end, much higher than those at the start.

Moving to Slide 12, we’ll look at our non-ferrous performance. As the chart on the left shows, our first quarter non-ferrous sales volume of 111 million pounds was a slight improvement from last year’s first quarter. However, sales volumes were lower sequentially due to strong shipments in the fourth quarter. This led to a low inventory level at the beginning of the first quarter and while production levels then increased, our first quarter sales were lower as we built inventory backup to more normal levels.

However, standing back, I’m looking at our past four quarters, the underlining trend in non-ferrous sales is increasing and is higher than what we were achieving in Fiscal 2008.

Moving to the chart on the right, the combination of economic growth in Asia, an improving U.S. consumer demand has strengthen commodity crisis for non-ferrous materials. This has pushed up selling prices and a $0.94 average we achieved in the first quarter was a 12% improvement on a sequential basis.

And turning to Slide 13, this shows how these sales volumes on prices translated into MRB first quarter’s financial performance. As the left hand graph shows, MRB’s first quarter operating income of $26 million represents a continuing trend of improvement in year-over-year quarterly performance.

Operating income per ferrous ton is graphed on the right and shows that we achieved $21 in the first quarter. This is an increase from $19 in the fourth quarter, even though the second half of the first quarter was impacted by the rising scrap market. These market conditions significantly increase first quarter purchase prices for shipments that will not take place until future periods.

Even though absolute profits were much higher, year-on-year, due to the record sales volumes, it’s this [inaudible] thing that resulted in year-and-year operating income per ton being the same.

And finally, the higher purchase-price environment also compressed margins on first quarter sales in to the weaker U.S. domestic market.

The underlining trend of operating income is up, and we believe a combination of continual improvement, technology benefits, and successful integration of acquisitions will enable us to continue improving performance.

Moving on to Slide 14, I’d like to discuss further the expected impact of our recent acquisitions.

As Tamara mentioned, since our fiscal year end we closed two acquisitions in the first quarter, and since then we’ve announced five, of which three are already closed.

The aggregate cash spend for these acquisitions will be approximately $225 million, and we expect them to be an accretive to earnings per share, and against our historic trending multiples.

However, in the short-term, the impacts of purchase accounting will likely dampen benefits to our reported results. In particular, any inventory we acquire needs to be [inaudible] volume, which is typically higher than the original course.

As it gets thought through, this has a non-cash [inaudible] of eliminating most of the profit on that acquired inventory. However, due to our inventory turns, we expect this purchase accounting effect to mainly impact on the second and third quarters, after which the underlining business performance will flow through the numbers we report.

From an operational perspective, we are acquiring more than 550,000 annual ferrous tons, and over 60 million pounds of annual non-ferrous volume. All the non-ferrous volume is incremental to existing business. On ferrous, we are acquiring a mix of 40% of new tons, and 60% that we’ve been buying in the past. However, on both new and pre-existing tons, we expect to capture additional margins from eliminating action [inaudible] layer, and from achieving various operational synergies. The acquired operations will mostly be absorbed within our existing infrastructure and due to the high level of ingratiation, we’ll be able to restrict the incremental effect on our operating and production expense.

In summary, once we get through the short-term effect of purchase accounting, we expect both the new and pre-existing tons will provide accretive benefits and profit improvement.

And finally, this accelerated growth in the size of our business has also led us to obtain commitment for an increase new credit facility which our [inaudible] are on. Before that, let’s move on to Auto Parts on Slide 15.

Our Auto Parts Business once again delivered strong car purchase volumes. In the first quarter, volume of 52,000 cars was just short of the first quarter of last year; a period which included a 20% volume benefit from the one-time Cash for Clunkers program.

Seeking out that non-recurring benefit, our underline trend year-over-year was up by 17%, reflecting business growth and operational improvements. Turning to Slide 16, we can see how this worked through to APB’s reported performance.

Compared to the prior year first quarter, we grew revenues by 21%. This was primarily through our ability to take advantage of higher commodity crisis, and from the new stores, which offset the non-recurring Cash for Clunkers event.

Operating income of $14 million was a first quarter record and enabled us to deliver robust operating margins of 21%. This was significantly up in the fourth quarter, and was driven by across-the-board improvements and scrap and core sales, and in part sales and increase admissions.

In summary, APBs first quarter performance had demonstrated that our business has continued its growing track record of sustainable improvement which we saw throughout the whole last fiscal year.

Now turning to Slide 17, we’ll discuss the first quarter performance of our Steel Manufacturing Business.

As expected, demands for our steel mill products remains soft. At [inaudible] shores, this resulted in sales volume of 98,000 tons, a level just below the fourth quarter. However, on a more positive note, rising scrap cost began to flow through to selling prices, which rose to an average of $634. This reflected a gradually increasing ability to pass on the higher cost of raw materials to the prices that our end customer’s paying.

Now turning to Slide 18. You can see that while SMB revenues decreased, we were able to keep our financial performance at close to break-even, and significantly improve it against the first quarter of last year. In the current market conditions, we could not achieve these results without continuing strong discipline over cost, headcount, and level of production.

We’ve also minimized our inventory levels, and our CapEx, and as a consequence the steel mill remains cash positive.

And now turning to Slide 19, we can look at our cash flow on a consolidated basis. Due to bulk export shipments, which are near the quarter end, some lines of credit were not drawn out until early December. And consequently, operating cash flow was negative $18 million.

Such timing issues are to be expected in our business. Our investing activity reflected $7 million spent on completed acquisitions, mainly Hawaii; and also $25 million on capital expenditures including significant progress on the implementation of new non-ferrous equipment.

During the remainder of our fiscal year, we expect to spend a further $110 million on capital projects, split evenly between management and growth.

Moving to Slide 20, we’ll look at the effects of our first quarter performance on our capital structure. Even with a negative cash flow, we have net debt of only $123 million at the end of November. This represented low leverage of 11%, which was less than we had at the same time last year.

Total net at quarter end was higher at $180 million, as we had cash balance at the quarter ending for normal business needs and fund acquisitions that we’re closing in early December. By the end of the Second Quarter, we expect to have spent around $225 million on our recently-announced acquisitions. As a result, our net debt will increase.

Whether we believe the acquisitions we’ve announced could have been completed within our existing credit facility, we have worked with our bank group to obtain commitments for expansion of our credit facility, to at least $600 million from the existing level of $450 million.

This increase will provide additional flexibility for future growth and expand the current maturity to January 2016.

Finally, it is worth noting that we expect this new credit facility will enable us to fund our continuing growth entirely within the bounds of our capital structure and our cash flows, and without the need to issue equity and create dilution for existing shareholders.

Now, I’ll turn the call back over to Tamara, who will provide our second quarter outlook and some concluding remarks.

Tamara Lundgren

Thanks Richard. From a high level, our outlook for the second quarter of Fiscal 2011 is a continuation of the improving trends we saw in our first quarter performance. Of course, we expect some ups and downs within that positive outlook, so let me walk you through the guidance by business segment.

In our Metals Recycling Business, although we see a continuation of the strong demand, which is driven by economic activity throughout the developing market. Due to normal seasonal declines and supply close, and timing of shipments, we expect our second quarter ferrous volume to be below the record levels of the first quarter.

We expect non-ferrous volumes to increase as compared to the second quarter of Fiscal 2010 and the first quarter of 2011, due to higher beginning inventory levels.

We expect that ferrous pricing will continue its strong upward trend and that non-ferrous prices will improve at a more moderate pace given the higher historical levels they have already achieved.

Finally, we expect our operating income per ferrous ton to improve due to the higher sales prices and the increased relative contribution from non-ferrous sales volumes.

If you turn to Slide 22, in our Auto Parts Business we expect revenues to approximate the first quarter level as rising scrap prices are expected to offset seasonal declines in part sales and admissions. In addition, we expect margins to contract slightly from the first quarter driven by the normal seasonal impact of the winter months on admissions and part sales.

And finally, in our Steel Business, we expect the overall demand for long steel products to remain soft in the near term. We do expect slightly higher demand to be offset by normal seasonal declines in construction activity, resulting in sales volumes that approximate the first quarter. Average sales prices are expected to increase due to the pass through of higher raw materials cost. As a result, margins in SMB are expected to improve from the first quarter but to maintain near break-even levels in the second quarter.

So let’s conclude and turn to Slide 23. We’ve had a strong start to our Fiscal 2011, generating improved performance in all three businesses, and a number of notable achievements including record ferrous volumes shipped in the first quarter, and aggregate volumes for the last four quarters, which approximate our peak performance in Fiscal Year 2008.

In record, first quarter operating income generated in our Auto Parts Business and solid car purchase volume.

In addition as we mentioned, we continue to invest in our operations through growth capital for new technologies and maintenance capital on an ongoing basis to insure optimal efficiency and safety.

We also announced seven acquisitions in the first four months of our fiscal year including two acquisitions which established a new platform for our Metals Recycling Business in Western Canada.

Going forward, we expect to see a notable impact from these acquisitions, all of which are expected to be accretive and are expected to accelerate growth and create value for our core export market.

In summary, we’ve built a very solid foundation for our company both operationally and financially. With a bi-coastal network of 70 water ports, and more than 100 operating facilities, we have a unique combination of scope and efficiency. Most importantly, we’ve proven our ability to generate profitable, sustainable growth over the long-term, creating value for our shareholders and our employees.

It’s clear that the domestic economy still faces a long road of slow growth. But more relevant to us, demand in the emerging markets for raw materials is increasing and not just in our traditional ferrous market. Demand for non-ferrous products like aluminum and cooper have also been strengthening. We believe the long-term fundamentals underlining our business are strong. The global infrastructure build-out throughout the developing world and our ability to serve their raw material needs with recycled scrap should provide us with sustainable, dynamic, market for many years to come.

Now, operator, we can open up the line for some questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question comes from Torin Eastburn with CJS Securities.

Torin Eastburn – CJS Securities

Hi, good evening. How are you?

Tamara Lundgren

Fine, thank you.

Torin Eastburn – CJS Securities

First, I wanted to talk about the acquisitions. I was wondering if you could provide any historical financial data for them.

Tamara Lundgren

Historical data? No.

Torin Eastburn – CJS Securities

Okay. In this quarter you spent quite a bit more than you have in past years. Is there something about the current time period that makes you feel like now is a good time to make acquisitions?

Tamara Lundgren

Well, if you look at the 15 acquisitions that we’ve done in the past, I think that totaled, and Richard can correct me, about $500 million. So in comparison, we have spent double of this on acquisitions in the past, all of which have been successfully integrated and have added to our platform.

The timing question is a real interesting one. These transactions, we’ve been working on various ones for various lengths of time. And it was just more happenstance than anything else that they all ended up closing within a six-week period.

Torin Eastburn – CJS Securities

Okay. And I guess next to turn to the guidance. First, specifically as it relates to MRB, are you including these acquisitions in the guidance? And second, the margin outlook is unusually vague. Is there any more detail you can provide?

Richard Peach

I can. It’s Richard here. Good afternoon. As you help me see in my script, in the very short term, any benefits that come through from the acquisitions, and remember, some of them aren’t even closed yet. So they’re closing at various times during the second quarter. Any benefits from the second quarter will be very minimal. For that reason and also the purchase of [inaudible] I mentioned to do with the acquired inventory, and how that needs to be treated for accounting purposes.

In terms of the actual outlook itself for MRB for the second quarter, we should begin to see the benefits of the forward sales at higher selling prices coming through. We also have this which may be termed the high-cost problem, but it’s not currently clear for how long the market will continue to rise. If it does keep rising, we will get a benefit from higher selling prices on shipments we’ve not yet sold.

On the other hand, from the mid-quarter onwards that could actually weaken us, and can be paying still higher purchase prices for forward sales that will not ship until quarter three. However, fanning back and add last year, eventually we will see the benefits of the higher selling prices come through. That will mainly occur when the market begins to level off. And we’ll end up seeing the benefit of our forward sales at that time.

Torin Eastburn – CJS Securities

Okay, and then last question, can you provide a recent net-debt figure that is not the end of the quarter, but in recent days?

Richard Peach

Well, as we said at the end of the quarter is 123 million. And we have – all I can say is it’s actually higher, and on the basis that we’ve completed three acquisitions since the quarter ending, and that’s what’s due to our [inaudible]. But in terms of a price precise figure, I’m not in position to give that.

Torin Eastburn – CJS Securities

Sure. Thank you.

Operator

Our next question comes from Eric Glover with Canaccord.

Eric Glover – Canaccord

Hi. Thank you.

Tamara Lundgren

Hi, Eric.

Eric Glover - Canaccord

Afternoon. I was wondering if you could provide some color on the scrap flows right now. I mean, pricing has been very strong. I know we’re in a weaker seasonal quarter, so you can just talk about that a little bit.

Tamara Lundgren

Absolutely. Let me step back and give you maybe a perspective on both what happened in the first quarter, and how that’s channeling through to the second quarter.

In the last quarter, in our first quarter, both the export and the domestic sales prices transcend, and they’re continuing to improve. And that should translate into higher average sales prices in the second quarter.

If I go around the country, off the West Coast, there’s broad- based demand throughout Asia. There was during the first quarter. There continues to be in the second quarter. As I mentioned in my prepared remarks, we sold to 11 countries with China and South Korea being our top two countries. But all the Asian markets look good, and we’re seeing continuous demand.

If you move to the East Coast, it’s a different, but also positive story. Turkey came in after being out of the market for a little while. They came in at the end of the first quarter, continued buying in December, and are continuing to be in the market.

And prices started rising in November affected by the step-up in domestic demands that has been truly remarkable and positive; something that we really haven’t seen since the beginning of the global financial crisis.

In the domestic market, November prices went up $45 to $50. December prices went up $60. January levels, depending on the region, have been reported $60 to $65 up. So we’re seeing a very positive complements of events and very strong markets. In the past week, we’ve seen recent prices in excess of $500 delivered.

Eric Glover - Canaccord

Okay, that’s helpful. I was also asking about flows into your yards given these kind of pricing increases while recognizing that this is a slower seasonal period given weather considerations.

Tamara Lundgren

Floods get hit every winter obviously, but what we’re seeing is that these higher prices are offsetting some of that normal decline. So they’re pretty good at our export facilities. They’re a little slower at the facilities that have more reliance on manufacturing. And as you know, the tighter supplies are pretty much of a constant right now because the U.S. economy isn’t where it has been in the past in terms of consumer demand, CND, and manufacturing, but we are seeing it improve.

Eric Glover - Canaccord

Okay, great, and then, what was depreciation and amortization in the quarter, and what do you expect it to be for the year?

Richard Peach

It was $60 million in the quarter, so it’s on a run rate to take us to around $65 million for the year.

Eric Glover - Canaccord

Okay, thank you.

Operator

Our next question comes from Brent Thielman with D.A. Davidson

Brent Thielman – D.A. Davidson

Hi. Good afternoon.

Tamara Lundgren

Good afternoon.

Brent Thielman – D.A. Davidson

Just a question on the events in Queens. Have you began seeing indications maybe in your business either through orders or something that suggests an increase in scrap demand either by mix or by some of the mills in the area?

Tamara Lundgren

We haven’t seen anything directly at this point. What we’re anticipating is that the shortage of coal may drive more EAF pieces, which is good for the industry. But the coal supply disruption is probably temporary. If it lasts for more than a month or two, there’s probably likely to be a negative impact on fuel production, which will lead to fuel prices increasing in the first half to adjust for that cost push. And we saw that happen in 2008 when Australia experienced some floods there. But what we’re anticipating is the disruption, while temporary, will probably lead to increased fuel prices, which from our perspective will make room for higher scrap prices, but we haven’t seen any of it just yet.

Brent Thielman – D.A. Davidson

Okay, I appreciate that. And then just on the unit margin for MRB and depreciate all the factors that involved there, but as you look at it for the first half of 2011, do you think you can exceed where you were the first half of 2010 at least?

Richard Peach

Coming back from that Brent, in the second quarter of Fiscal ’10, we achieved unit margins of $24 per operating ton, or operating profit per ton, and $21 in the first quarter. So forward, what we would have to do is beat $24 in the second quarter of Fiscal ’11, and to be ahead of that. However, due to the current uncertainties, we can’t put an exact figure on it, but we very much hope to exceed where we were in Q2 of fiscal ’10.

Brent Thielman – D.A. Davidson

Okay, fair enough. Thanks guys.

Operator

Our next question comes from Luke Folta with Longbow Research.

Luke Folta – Longbow Research

Hi, guys.

Tamara Lundgren

Hi, Luke.

Luke Folta – Longbow Research

My question I guess is just to follow up again on the metals recycling margins. We’ve come at this a number of different ways, but scrap prices are, like you had pointed out, they’re exceeding $500 a ton delivered in some cases internationally. And getting a sense that they’re in the high $400 for obsolete grade share in the U.S. in January. The last time we saw scrap prices hit these sorts of levels, you guys were really not going to cover off the ball and on the margins. Can you talk about the factors that maybe would not allow you to hit those sort of EBITDA per ton numbers, or EBITDA margin numbers that we saw last time around. I understand flows haven’t completely normalized, but it seems like there’s enough with the prices going up the way they are with a much higher non-ferrous mix next quarter that you’re referring to in the press release. It seems like we could see a pretty high number relative to where we’ve been in recent history.

Tamara Lundgren

I think you hit the nail on the head there. We’re doing a lot of things that are allowing us to expand our margins and produce margins on a relative basis that we think are the best in the industry. And that’s a combination of getting closer to supplies or acquisitions, processing more efficiently, and extracting more value from every ton of material to improve technology. But these are all things that we’re doing to offset the tightness in the market, in the raw material supply market, which is really caused by the level of growth situation in the U.S. That appears to be improving. The order book for the first time since the global financial crisis in the domestic market appear to be longer out and firming. But the dam, if you will, that needs to be broken is that growth number in the U.S. that will release more raw material into the market, and enable the purchases to flow more freely.

Luke Folta – Longbow Research

So I mean, are we still kind of this couple dollars a ton per quarter sort of improvement that you’re seeing, or with this big step up in pricing, do you think that we might see more of a shift now?

Richard Peach

Volatility is generally our friend, Luke. And actually, if you think back to the third quarter of Fiscal ’10, we achieved $43 per ton in that quarter, so there’s definitely the opportunity to significantly surpass in the average level and per quarter depending on the market conditions. But just to repeat, volatility generally helps us due to our selling, and progress, and also our supply network.

Luke Folta – Longbow Research

With these acquisitions, you notice that you’ve added about 60 million pounds of non-ferrous capacity there. Your thoughts on second quarter, and kind of moving beyond that in non-ferrous volumes. I mean, could we see a double-digit increase in volumes next quarter and beyond, just on the new capacity alone, not to mention any improvement in the market?

Richard Peach

Again, in the second quarter of course, these acquisitions are all closing midway through, or partly through the quarter. Some have closed already. Some haven’t closed, so we’re very much in a parked and quarter event. So I do think the second quarter isn’t going to see any significant benefit in terms of volumes from the acquisitions. But in terms of the quarters beyond the second quarter, we should be able to see something pull through. I think just standing back, that 60 million tons of new non-ferrous material, and compares to – and last year’s full year of 480 million tons of non-ferrous sales, so it’s about 10% to 12%, 12% an increase in terms of our annual non-ferrous volumes.

Luke Folta – Longbow Research

If I could just ask one more. In regards to the effect that you’re going to have to write up some inventory as it relates to this purchase accounting, do you have some idea of what magnitude of impact that could have? And do you plan on breaking that out separately as kind of a non-recurring charge next quarter?

Richard Peach

I think if it has a significant impact on our results, we would certainly disclose the [inaudible]. However, one thing we should be provided on is that this is a non-cash item. And we actually will obtain the positive cash flows from selling all that inventory. This is really an accounting event. We turn our inventories and per-year in the 10 to 12-type level of tons, so given that, I would expect that within the course of a couple of quarters, we will be through this. And by the time we get to the fourth quarter, we should be past most of the effects of this inventory sheer volume issue.

Luke Folta – Longbow Research

Okay, thanks a lot guys.

Operator

Our next question comes from Sal Tharani with Goldman Sachs.

Sal Tharani – Goldman Sachs

Good afternoon guys.

Tamara Lundgren

Good afternoon.

Sal Tharani – Goldman Sachs

I just wanted to understand this incremental volume from acquisitions. I understand there will be some issues in the near term because some of them have closed. Some of them will close later on. If I look at the last few volumes, ferrous and non-ferrous, assume that it’s new 20,000 tons of ferrous and 60 million tons of non-ferrous is just on top of that, so sort of 5% increase in volume for the ferrous and 15% in non-ferrous if these acquisitions would have closed by the end of last year. Is that correct to assume?

Richard Peach

The benefits from what we’ve acquired will not just come from the incremental new volumes. We’ll also achieve benefits from the pre-existing volumes because effectively, when all of the tons and pounds that we’re acquiring, we’re actually capturing profits that were previously obtained by the acquired companies. So to that extent, we’re getting the source so to speak. And on top of that because we’re acquiring companies that are either adjacent to or within our current regions, their significant operating synergies. And we’ll be able to obtain and tell the benefits from really the utilization of our existing infrastructure, integrating all of our working practices, selling, buying, and ability to use our back-office function. So it’s a whole range of different ways that we will be able to obtain benefits from these deals.

Sal Tharani – Goldman Sachs

I understand that. So if I look at like the Boston acquisition appears to be dead. The company you bought was a [inaudible] next quarter of scrap, so you’ll hardly get much more benefit than buying a [inaudible] acquisition who was just was simply a feed facility for you in the past. Is that correct to assume?

Richard Peach

Each deal has its own characteristics, so it’s hard to make a generalization. You’re correct in that in general terms, an export margin – ability to export produces margins that are greater than domestic. But on the other hand, some of the domestic companies are already making considerable margins, so there’s no one-size-fits-all in terms of these deals.

Sal Tharani – Goldman Sachs

Combined with the operating benefits, you’re going to get maybe some purchasing benefit because there are less competitors in the market, and the new technology you are starting to implement for extracting better on the ferrous – non-ferrous side. Eventually, your margin should be higher than the cycle margins you’ve acquired in the past.

Tamara Lundgren

That’s correct, assuming we get back to mid cycle. That’s right.

Sal Tharani – Goldman Sachs

Okay. The last question I have is, which is the largest facility you acquired, you spent a lot – the most money on these acquisitions?

Female

Sal, we haven’t broken that out. We haven’t disclosed – we haven’t broken down either volumes or prices for any of the acquisitions.

Sal Tharani – Goldman Sachs

Which is the largest facility of these five facilities you’ve acquired?

Tamara Lundgren

We really haven’t broken it down. In large, it’s kind of how you’re looking at it. In terms of number of facilities, the Western Canada one comes with most facilities in terms of number of yards. Macon has two yards. State Line has one. I think together, Field Pacific and Amix has 12, so it would really depend upon how you’re asking about large. But except for indicating how many operating facilities each company has, we haven’t disclosed anything further.

Sal Tharani – Goldman Sachs

Okay, I was just thinking in terms of volume, where the biggest volume would be. Would it be the Western Canada or the East Coast one?

Tamara Lundgren

Again, if you look at the yard breakdowns that I just mentioned, and those have been publicly disclosed.

Sal Tharani – Goldman Sachs

Okay, great, thank you very much.

Tamara Lundgren

You’re welcome.

Operator

(Operator instructions). Our next question comes from Tim Hayes with Davenport and Company.

Tim Hayes – Davenport and Company

Thank you. Good afternoon.

Female

Good afternoon.

Tim Hayes – Davenport and Company

Just two questions, on your comments about ferrous volumes for the recycling business in the February quarter for some seasonal pull-back, that was a little bit of a surprise to me. When you look back historically, the February quarter has actually been higher than the November quarter. Can you give some more color on why November was unusually strong, or why you’re going to see a decline sequentially this year that we haven’t seen in the past?

Tamara Lundgren

Certainly. I mean, the first quarter for us as we mentioned before was a record quarter. We just had a situation in the last half of the quarter where we saw a significant step-up in domestic demand, and in demand of Eastern Met. And that drove a lot of – those are the two things that drove a lot of activity in previous first – we certainly didn’t see that last year first quarter. And I know what you’re getting at because we talked about this before.

First quarters for us have always been our weakest quarters, but for a variety of different reasons. And in a way it was because freight rates had gone through the roof. The year before we were putting in mega strutters, so our first quarter has been weak historically for a number of reasons. This one was strong because I think we are just beginning to see perhaps, not clear yet, a more sustainable recover in U.S. domestic activity.

Tim Hayes – Davenport and Company

Okay, that’s quite helpful. And then, the second question, just to repeat the CapEx, you said $110 million, was that for the rest of the year, or for the full year?

Richard Peach

That’s for the rest of the year.

Tim Hayes – Davenport and Company

Okay, thank you. That’s all my questions.

Tamara Lundgren

Okay.

Operator

Our next question comes from Evan Kirks with Morgan Stanley.

Tamara Lundgren

Hi, Evan. Okay, Operator, I think we’ve lost Evan.

Operator

Our next question comes from Sal Tharani with Goldman Sachs.

Sal Tharani – Goldman Sachs

Just a quick question on the volume for the ferrous, non-ferrous for second quarter. You mentioned that it is going to be higher. Have you given any indication how high should we expect them as what we saw in the fourth quarter, or somewhere in-between the two?

Richard Peach

I think our outlook, Sal, is that ferrous will actually be more than the first quarter for two reasons. One, the first quarter being a record, and secondly, normal seasonal effects on supply flows so the second quarter ferrous volume should be slightly lower.

On the other hand, we are predicting that our non-ferrous volumes will be higher than they were in the first quarter.

Sal Tharani – Goldman Sachs

And will it be as high as we saw in the fourth quarter for the non-ferrous?

Richard Peach

We’re not disclosing that. It possibly could be, and it certainly will be higher than the first quarter.

Sal Tharani – Goldman Sachs

Okay, so all these volumes, I just to understand that on the same-store sale basis, the non-ferrous volume, is that going to be higher also, I mean excluding the acquisition volume?

Richard Peach

Yes, it will be.

Sal Tharani – Goldman Sachs

Okay, great, thank you very much.

Operator

Our next question comes from Luke Folta with Longbow Research.

Luke Folta – Longbow Research

Hi guys, just one quick follow-up. We didn’t talk a lot about the steel business right now, but can you give a sense of kind of what your long-term thinking is there, and if that’s something you would consider core moving for, or something you might be able to sell if you got a decent offer?

Tamara Lundgren

The mill’s been an important asset and business crutch for a long time, and obviously has been operating quite well in a weak environment. They’ve been very disciplined about matching production to demand. They’ve kept inventories low. They’re generating positive cash flow. So we believe that they are well positioned for recovery as they’re operating close to break even on very low utilization rates. But these are our strategic growth. You’re going to be seeing a direct acquisition activity and the like into the MRB and APB business.

Luke Folta – Longbow Research

Okay, great, thanks.

Tamara Lundgren

You’re welcome.

Operator

I’m showing no further questions on the phones. I would now like to turn the conference back over to Tamara Lundgren for some closing remarks.

Tamara Lundgren

Thank you everyone for joining the call today, and we look forward to speaking to you again in April. Thank you, operator.

Operator

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

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