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Executives

Alexandra Deignan - Investor Relations

Tamara Lundgren - President and Chief Executive Officer

Richard Peach - Senior Vice President and Chief Financial Officer

Analysts

Timna Tanners - Bank of America Merrill Lynch

Philip Gibbs - KeyBanc Capital Markets

Luke Folta - Jefferies

Brent Thielman - D.A. Davidson

Bridget Freas - Morningstar

Timothy Hayes - Davenport & Company

David Lipschitz - CLSA

Mark Parr - KeyBanc Capital Markets

Schnitzer Steel Industries, Inc. (SCHN) F3Q12 Earnings Call June 28, 2012 11:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Schnitzer Steel Third Quarter 2012 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Alexandra Deignan. Ma’am you may begin.

Alexandra Deignan

Thank you, Marry. Good morning. I am Alexandra Deignan, the company's investor relations contact. I would 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 that you can access on 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 are also included in our press release of today and in the company’s most recent Form 10-K. 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. Please note that we will be discussing some non-GAAP measures during our presentation today. We have included a reconciliation of these metrics to GAAP in the appendix of our 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, Ally. Good morning, everyone and welcome to our fiscal 2012 third quarter earnings call. I will begin this morning with a look at our Q3 results and recent market trends. Richard will follow with a more detailed review of the financial performance of each of our segments. I will wrap up with some comments on current market conditions and then we will open up the call for some Q&A.

So if you will join me by turning to slide four, we can get started. As we noted in this morning’s press release, we reported earnings per share of $0.40 for the third quarter. This reflects an increase of 16% over our second quarter performance. Our operating income also reflected significant sequential improvement. Q3 consolidated operating income was up 23% versus Q2. These results exceeded our third quarter market outlook, primarily due to better than anticipated performance in our metals recycling business towards the end of the quarter. All of the markets in which we operate continue to face challenging conditions.

Our earnings and margins have increased over the course of this fiscal year, yet they are still below where they were in fiscal 2011. Our consecutive quarters of sequential improvement over the last nine months, however, is a reflection of the strength and competiveness of our people and our operating platform because we face tougher market today than we did last year.

In our last fiscal year which ended August 31, the export markets experienced a steady increase in sales prices driven by rising demand. And as you may recall as well, in our last fiscal year, average ferrous and non-ferrous sales prices increased by about 30% during the year, which was one of the drivers of our expanded margins. This situation changed abruptly in the fall of 2011 with the onset of the European financial crisis, the slower growth projections in the developing world, and the uncertainty in the U.S. economy in the face of our nation’s fiscal clip.

Although year-to-date, export scrap volumes have stayed relatively flat versus 2011, the volatility from the month-to-month has been very significant. And export sales prices have also been quite volatile during the last nine months with a peak to trough difference of approximately $100, and with an overall trend downwards during this time period. Falling price environments typically act as a damper on supply flows, and our margins have compressed during this time period as purchase prices have not fallen as quickly as sales prices.

Notwithstanding these headwinds, we have been able to maintain our financial discipline by staying focused on the things that we can control. We remain highly focused on maintaining our positive cash metal spreads, extracting synergies between our MRB and APB divisions, reducing SG&A throughout the company, and strengthening our supply chain and our operating efficiencies. This has enabled us to generate strong operating cash flows and to execute a balanced capital allocation strategy. We have reduced our outstanding debt, we have returned capital to our shareholder through share purchases, we have substantially increased our annual dividend to $0.75 per share, and we have been able to continue to invest in the growth of our business.

Our capital allocation strategy is a reflection of the long-term strength of our business model. We have a uniquely positioned operating platform, which enables us to meet the fundamental demand that exists, and is expected to continue. The developing world is still growing and is still short of scrap. So let's turn to slide five to take a deeper dive into our sales and supply markets.

As you can see from the year-to-date statistics, even in this challenging environment we have been able not only to maintain our market share but also to grow both our ferrous and non-ferrous sales volumes. This has been due to our integrated MRB/APB supply chain model, our strong feeder yard network, our capital investments, and the ten acquisitions that we made last year. In our auto parts business, the year-to-date statistics also reflect our ability to maintain our market share in a tough market environment.

In the third quarter, higher parts sales and lower SG&A drove sequential growth in revenues and a significant increase in operating income. Scrap and core revenues were essentially flat as compared to Q2. And in our steel manufacturing business, sales volumes are up slightly year-to-date. Although sales volume were a bit lower this quarter, SMB achieved breakeven operating performance. The reduced volumes were offset by lower operating costs and slightly higher prices due to product mix.

Let’s turn to slide six to review the pricing environment in both the export and the domestic markets. Looking at prices. While average ferrous sales prices in Q3 were flat versus Q2, they began higher in February then declined significantly and remained relatively flat through May shipments. Our Q3 margins compressed versus Q2, primarily because purchase prices did not fall as quickly as sales prices. During the quarter, both export and domestic prices were affected by the weakening global economy.

In the domestic market, declining steel production due to uncertainty regarding the impact of the weakening U.S. and global economy and increased imports, contributed to lower prices. In the export markets, while export sales volume remain stable and broad-based, lower domestic prices, the uncertain global outlook and a supply push of raw material from both Europe and Japan, suppressed a pricing recovery. And as you can see from the pie chart, during the third quarter we exported about 80% of our volumes to 19 countries.

We shipped our ferrous exports to ten countries. Turkey, South Korea and China were our top three ferrous export destinations. Our top three non-ferrous destinations were China, the U.S., and South Korea. Since the end of our third quarter, sales prices in both the domestic and export markets have declined significantly and we anticipate that sales volumes in the fourth quarter may also be lower. Since average inventory costs typically decline more slowly than cash purchase costs for raw materials, this may negatively impact our fourth quarter results. We intend to provide our Q4 market outlook on expected pricings, volumes, and margins during the second half of August.

While we can’t predict when the cycle will turn back up, the most recent publicly reported export sales prices indicate stabilizing prices as the export market buys scrap to meet their production needs. The announcement of U.S. domestic steel mill production cuts, some temporary and some longer term, and the infrastructure stimulus advocated in Europe and reported in China, are also indicators of a potentially recovering price environment.

So let’s turn now to slide seven to discuss our capital allocation strategy. During the third quarter, we’ve generated $95 million in operating cash flow and we’ve generated $136 million in operating cash flow for the first nine months of the fiscal year. A clear demonstration of our financial discipline and our focus on operational performance. As a result of this strong cash flow generation, during the third quarter we repurchased 555,000 shares. This repurchase together with the significant increase to our annual dividend which we announced last quarter, reflects our commitment to returning capital to our shareholders. Our higher dividend and the share repurchases underscore our confidence in the long-term fundamentals of our business.

We have 2.6 million shares remaining authorized for repurchase and/or existing board approvals, and we anticipate continuing our practice of repurchasing shares. It’s equally important to note that our consistent cash flow generation means that we were also able to continue our capital investment program and still reduce our net debt leverage to 21% at the end of the third quarter, down from 24% at the end of the second quarter. Our capital allocation strategy will continue to balance strategic growth initiatives to enhance our market position and operating performance, maintenance of a strong and flexible balance sheet, and return of capital to our shareholders.

Now I’ll turn it over to Richard, who will provide more information on our company’s financial results for the third quarter.

Richard Peach

Thank you, Tamara, and good morning. I’ll start my presentation on slide eight with a discussion of market trends impacting MRB. Steady volumes during the third quarter of 1.4 million ferrous sales tons approximated the second quarter. Year-to-date, MRB’s ferrous volumes have increased 4% due to incremental sales volumes from a combination of organic growth and contributions from last year’s acquisitions. Average net ferrous selling prices increased by 1% sequentially. Prices had been on a rising trend in the prior quarter, but then [fill-ins] coming into March and remained flat for shipments during April and May.

Due to market conditions the drop in selling prices occurred more quickly than the reduction in average purchase costs. As a result, MRB’s margins in the third quarter were slightly compressed, compared to the prior quarter. Towards the end of May, selling prices for shipments in the fourth quarter began to decline more significantly which resulted in a drop in average purchase costs. This reduction combined with other benefits to cost of goods sold enabled MRB to exceed our Q3 outlook.

Moving to slide nine, we’ll review non-ferrous trends. Non-ferrous sales volumes were 154 million pounds in the third quarter. This was an increase year-on-year but a sequential decline of 9%, primarily due to the second quarter benefiting from a processing of backlog material. On a year-to-date basis, non-ferrous sales volumes are up by over 80 million pounds due to contributions from increased collection activity and last year’s technology investments and acquisitions. Average selling prices for non-ferrous increased sequentially by 7% primarily due to a greater proportion of higher valued non-ferrous products.

Now I will move to auto parts on slide ten. In our auto parts business, revenues increased 6% sequentially due to seasonally higher part sales and admissions. Operating margins of 15% also included benefits from higher car purchase volumes which increased sequentially by 6%. Weak markets for end-of-life vehicles continues to put pressure on margins, which we were able to partly mitigate through volume benefits from last year’s acquisitions and marketing initiatives for sales of parts.

Moving to slide 11, we turn to our steel manufacturing business. In our steel manufacturing business, sales volumes were down 8% sequentially, but increased 2% year-to-date. Sales prices were slightly higher sequentially and rolling mill utilization was 54%, which was the same as the prior quarter. SMB continues to operate efficiently despite weak markets on the U.S. West Coast.

Now moving to cash flow and capital structure, let’s turn to slide 12. Operating cash flow was positive by $136 million year-to-date. The primary drivers are positive EBITDA and reductions in working capital including lower inventories and receivables. Capital expenditures were $55 million year-to-date and we anticipate full year CapEx to be 15% to 30% less than fiscal 2011.

As a result of the third quarter strong cash flow, we were able to continue our share repurchase activity and fund our dividend increase, while at the same time reducing our net debt to $301 million and our net debt leverage to 21%. In summary, we continue to prioritize a strong balance sheet which gives us the ongoing flexibility for effective capital deployment.

Now, I’ll turn the call back over to Tamara for some concluding remarks.

Tamara Lundgren

Thanks, Richard. Market conditions are challenging right now. However, the long-term fundamentals driving both fixed asset investment in the developing world and increased EAF steel production throughout Asia, Turkey and the Middle East, still exist. And we have consistently shown that we’re able to successfully navigate through difficult markets. We have seven well-positioned bulk export facilities. We have integrated our MRB/APB supply chain in the regions where we have operating proximity. We’ve developed and are continuing to develop our strong network of feeder yards. We have invested in state of the art non-ferrous extraction technology that’s enabled us to significantly grow our volumes, and we have aggressively focused on reducing our SG&A company-wide.

The results from all of this can be seen in a number of areas including our increased sales volumes, our SG&A run rate which has decreased by about 10% year-over-year, and our cash flow generation which has increased by over $100 million. Longer term, we believe that market conditions will improve as the need for infrastructure development and the rising demand for recycled metals continue to be global priority.

Operator, let’s open up the call now for some questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Timna Tanners from Bank of America Merrill Lynch. Your line is open.

Timna Tanners - Bank of America Merrill Lynch

Yes, hello, good morning. I tried to listen carefully to everything that you said and I appreciate that market conditions are somewhat challenging. I guess, I’m just stuck and I want to look specifically on scraps EBIT per ton, so the MRB division. And we’re still talking about average first three quarters of the year being in the low teens versus average last year being more than double that. And so that’s still including the fact that you bought these feeder yards, your non-ferrous business is up and exports are strong. So I mean there was certainly uncertainty at the end of last year as well, and I’m wondering is there something more that’s going on here. How much of this is structural, how much of this is maybe greater challenges in the North American scrap side of the equation rather than the export demand?

Tamara Lundgren

There are a lot of questions embedded in there. Let me see if I could (inaudible). So, first of all, you made the reference to structural, and we don’t see this as long term. And last year we were working in a rising price environment and this year, our fiscal year, a lot seems to line up with global financial crisis, whether that’s the fall of ‘08 or the fall of 2011. So the beginning of our fiscal year began with a significant fall in price environment. So that’s really the big difference between what was going on last year and what was going on this year. But as to the structural part of your question, we are still selling into markets that continue to grow, and this is a cyclical business. The current pricing weakness is due to different reasons, I think, in different markets whether you’re looking at domestic or exports, but I think the one common reason is global uncertainty.

Timna Tanners - Bank of America Merrill Lynch

Okay. But if I look at your scrap prices last year, yeah, you’re right. On a calendar, on a fiscal year basis, this year has been particularly challenging. But there has been times in your history where prices have fallen and there hasn’t been that much variation this year in the scrap price. So, you make the point that you haven’t been able to go back to your -- to be able to cut your price at the yard as quickly as you were having to cut prices. So isn’t there something going on in that domestic scrap industry that hasn’t enabled you to maintain your margins as well as you have in the past?

Tamara Lundgren

Well, if you look back in the past sort of ‘06 and ‘07, big difference between that environment and this environment is the lower growth U.S. GDP environment. And what you see in today’s market is purchase prices are more sticky than they were in a higher GDP growth environment because the obsolete scrap pool is affected by lower consumer spending. People hold on to their cars and their bikes longer. So you don’t see the same elasticity in the scrap supply and in purchase prices as you did in higher U.S. GDP growth environment.

Timna Tanners - Bank of America Merrill Lynch

All right, I’ll shift gears and ask an easier question then I’ll hand the call off. But if I could, we are seeing a strange divergence between scrap prices in last couple of months sharply down, globally, and yet iron ore price is much more stable. I mean what are you seeing to make you believe that scrap prices will stabilize soon?

Tamara Lundgren

Well, we are seeing that in the market right now, is that we are seeing good demand in Turkey. We are seeing China in the market, we are seeing Southeast Asia in the market. And if you look at the reported prices, you can see some price stabilization.

Operator

Thank you. Our next question comes from Phil Gibbs from KeyBanc Capital Markets. Your line is open.

Philip Gibbs - KeyBanc Capital Markets

Good morning. Good job on the SG&A cost reduction, it looked like you’d come down another $2 million sequentially or how much more momentum are we expecting here going forward?

Tamara Lundgren

Well, we’ve got good momentum going forward as we leverage our infrastructure across all three of our divisions and shared services, all three of our operating divisions and shared services. And where I see some benefits going forward is in the increased focus we’ve got on driving synergies between our MRB and APB platforms across our buying, processing and selling activities. So, we still got a high focus on that.

Philip Gibbs - KeyBanc Capital Markets

Can you talk a little bit about the integration of Western Canada and any view on when you may implement another shredder up in Vancouver?

Tamara Lundgren

Sure. That shredder in Canada is currently being constructed and the acquisitions that we did last year are showing benefits in terms of volumes and we are anticipating to see increased benefits from Canada once that shredder is up and running. And we’re in the middle of construction on that right now.

Philip Gibbs - KeyBanc Capital Markets

Okay. Just lastly if I could here, what is your view of the recent listing on Russia’s scrap ferrous and have any of your conversations with customers been focused on that or has that issue come up? Thanks, much.

Tamara Lundgren

We haven’t seen much of an impact from the Russia scrap export lifting of their ban. Our perspective is we believe in free trade and fair trade, but we haven’t seen any real impact from the Russia activity.

Operator

Thank you. Our next question comes from Luke Folta from Jefferies. Your line is open.

Luke Folta - Jefferies

Good morning, guys. My first question -- I was hoping -- can you talk some, just about the process that you use for setting purchase prices for scrap. I’m just curious if you feel like there is anything you can do to speed up the reaction time regarding scale prices when you see a move in selling prices. And also just as a kind of follow up to that, have you studied the trade-off at all between maybe missing out on some sales in order to protect your metal spread. Maybe you don’t get as much flow or maybe you can’t sell as much, but your actual metal spread is better. Have you kind of studied that trade-off and do you feel like you’re most optimized in that sense?

Tamara Lundgren

We do feel that we are optimizing in this current environment. The biggest issue is the generation of obsolete scrap in a low U.S. GDP growth environment. And so as sales prices move, we adjust purchase prices, and as you know where we sell in the spot market on both -- we sell in the spot market and we buy on the spot market. So both of those prices move up quite quickly. As I was mentioning earlier, the elasticity of, or the stickiness of purchase prices, is different in a lower U.S. GDP growth environment when the obsolete scrap supply flows are influenced by lower consumer activity. And so that’s really what you see in the difference in the environment this year and last few years versus what you saw in a higher GDP growth rate environment.

Luke Folta - Jefferies

Okay. So, if the elasticity is less now than it was in the prior cycle, would that kind of suggest that maybe the amount, the magnitude that you adjust your purchase prices isn’t quite as high as it has been historically, because if you raise prices it doesn’t bring in as much scrap as it used to? Just trying to understand how it works there.

Tamara Lundgren

Well, that is exactly how it works. So, that you end up reaching out further for scrap, and in falling price environment it dampers or dampens supply growth.

Luke Folta - Jefferies

Okay. All right. Thank you for that. And secondly, just over the last six weeks or so, I think that some of the industry publications have been talking about some bankruptcies amongst some of the real smaller players in the market. Is that something that you’ve seen in your regions or something that you expect to benefit from in the near future?

Tamara Lundgren

Well, we’ve seen the announcements of the bankruptcies. This environment, coming into this particular financial crisis, I think people are coming in with different financial strength than what they were coming into the last one. So, we’re not so surprised to see it. I think, the ones that have been announced have been scattered around the country and not really, I think one was in one of the regions that we operate, but they’re really quite small.

Luke Folta - Jefferies

Okay. All right. And then just last one, I mean your cash flow are, all piece considered, pretty decent. But of course not quite as robust as they were historically. You’ve increased your dividend meaningfully and you’ve bought back some shares here. Have you kind of put your acquisition strategy, I don’t want to say on hold, but are you starting to use a lower allocation for cash outlay as it relates to acquisitions in your plans over the next 12 months?

Tamara Lundgren

No, we are continuing our acquisition strategy. As you know, you don’t really control the timing of that. You don’t see them. You see them coming out when they come out. But we’re looking to continue to make acquisitions in both our MRB and APB businesses.

Operator

Thank you. Our next question comes from Brent Thielman from D.A. Davidson. Your line is open.

Brent Thielman - D.A. Davidson

Hi, good morning. Have you seen any cancellations in orders in the recycling businesses as prices have sort of fallen here in June or was it pretty well anticipated by the market?

Tamara Lundgren

No, we haven’t seen any cancellations.

Brent Thielman - D.A. Davidson

Okay. And then on the steel business, it seemed like you’d have kind of a tailwind here looking ahead with lower scrap prices or you’re starting to see some pressure in steel. And then any sort of indications in the backlog there or the signs of improvement.

Tamara Lundgren

Well, I think that the construction markets, probably the construction markets on the West Coast are beginning to see a little bit of life. But we are still waiting for some significant or still hoping for some significant increases in both non-res and infrastructure construction on the West Coast.

Brent Thielman - D.A. Davidson

Okay. And in terms of lower scrap cost, I mean should that be a tailwind here in terms of profitability for that business?

Tamara Lundgren

We’ll announce our Q4 indication towards the end of August.

Brent Thielman - D.A. Davidson

Okay. And then on, and I am sorry if I missed this before, but on corporate expense, is Q3 a good run rate to use here going forward?

Richard Peach

Yeah, you’ll notice that we are on a lower run rate this year than may have been previously. So I would have said in terms of the fourth quarter, if you are estimating you should look at the [third] and just not that one.

Operator

Thank you. Our next question comes from Bridget Freas from Morningstar. Your line is open.

Bridget Freas - Morningstar

Hi, good morning. I am curious about the disconnect in ferrous scrap pricing. It looks like a little bit higher export prices made up for lower scrap pricing in the U.S. during the quarter. Can you give us some sense of what’s happening there, especially it seems that somewhat softer export demand is causing some of the downward pressure on pricing here?

Tamara Lundgren

Well, I think the current pricing weakness is due to different reasons in the domestic market versus the export markets with one common theme that they are both being impacted by global uncertainty. In the domestic markets, the pricing weakness we believe is really being driven by lower steel production to lower demand for scrap, as well as imports which are affecting steel production. And in the export markets, the lower domestic prices, the significantly lower domestic prices haven’t gone unnoticed by the export markets, and there has also been a supply push of material from Europe as they go through a significant transition in their growth rates, as well as from Japan.

Bridget Freas - Morningstar

Okay. But your average selling prices in the third quarter on the export market were higher than in the second quarter, right?

Tamara Lundgren

That’s right. That’s right. Slightly higher and the domestic markets quarter-over-quarter were about $20 lower.

Bridget Freas - Morningstar

Okay. My second question is on the production levels at metals recycling. It sounds like the better than expected performance attributed somewhat to higher production later in the quarter. Was this in anticipation of better shipping levels. It sounds like you’re expecting lower, possibly lower sales volumes in 4Q. So can you give us some more clarity on that?

Richard Peach

No. It’s really just based on operational performance and the more production you have, what that does is it reduces your unit cost per ton, so it benefits your cost of goods sold and really gives you a better margin expansion because you are using your fixed cost base more efficiently.

Bridget Freas - Morningstar

Sure, but I’m just curious at the time of your guidance, you expected production to be lower than it actually was. So, I’m just wondering was that, some of that a pull forward or are you producing more in anticipation of better than expected shipping levels?

Richard Peach

It is a good question but, no, it was not pull forward. It was just simply better operational performance than we had projected at the time.

Operator

Thank you. Our next question comes from Tim Hayes from Davenport & Company. Your line is open.

Timothy Hayes - Davenport & Company

Just a question on recycling, the metals recycling business, looking at the upcoming quarter. And perhaps a little premature since we will get some mid-quarter update, but the decline in the scrap being so pronounced here in June I’d have to think that the operating income per ton is going to take a step down in the quarter, and I’m worried that maybe we get started close to maybe low single digits on that operating income per ton. I just want to make sure if that direction is correct and any, maybe thoughts on that?

Tamara Lundgren

Well, what we highlighted is the average inventory hit. I mean we continue to focus on cash metal spreads and we anticipate that those will remain attractive. But with a big drop that we saw between May and June, we wanted to highlight that there is the potential for a average inventory costing adjustment and that is what normally occurs when you see a big step down that we did between May and June. We’ll obviously update with more specifics towards the end of the quarter.

Timothy Hayes - Davenport & Company

Okay. And my....

Tamara Lundgren

We just wanted to highlight the difference between cash purchase cost and average inventory.

Timothy Hayes - Davenport & Company

Sure. And then in terms of scrap flows, I mean coming out of recession I would imagine that at least now the amount of scrap in the U.S. being generated say in 2012 would be more than what was generated in ‘09. Would that be correct? Just because the economy is bad we do have more run around scrap, I’m assuming, with the car sales up that there is more junk cars coming to the market. Is that true or not?

Tamara Lundgren

Well, there will be eventually, but you don’t go from a new car, your trade-in doesn’t go to end of life immediately. It goes through sort of a waterfall of trade-ins. Down a waterfall, if you will, until you hit end of life. So, that’s why we focus on long-term fundamentals. Because consumer activity will generate the obsolete scrap and in this low growth environment you do see people holding on to their cars longer. But the average age of cars on the road right now is about 11 years, about 130,000 miles. And so eventually you’re going to see that tightness if you will, loosen up, as those cars reach and those appliances reach their natural end of life. But I think, it’s too quick to make a connection between increase in auto production today and end of life vehicles today. You need to give that a little bit more of a timeline before we start to see the flows into our facilities.

Operator

Thank you. (Operator Instructions) Our next question comes from David Lipschitz from CLSA. Your line is open.

David Lipschitz - CLSA

I’m just trying to get this straight from the earlier question. So a better GDP, a higher scrap in the U.S., that just pretty much protects you from the downside, you still need the -- and the international market helps you to the upside but you just need that to protect your downside and protect your margins. Is that a good way of looking at it?

Tamara Lundgren

The higher GDP growth creates a higher flow of our raw material. And with a higher flow there’s more elasticity in the prices that we get through with just upwards or downwards as sales prices move. Because, remember, it’s a spot market. And so when we saw higher GDP growth in ‘06 and ‘07 where U.S. was around 4%, we saw a really good flow of material. But the export demand and the growth in emerging markets, those growth rates while we are seeing them slow down, they are still strong growth rates. And their need for scrap and steel over the long term is very robust. So when we are talking about U.S. GDP growth we are really talking about what that -- we are really talking about the generation of that obsolete scrap supply.

David Lipschitz - CLSA

Well, that’s what I mean. So basically if the world slows, if the U.S. is going strong, it protects you on the downside because your prices move lower, because you have more scrap availability is what you are saying?

Tamara Lundgren

That would be one way of looking at it, yes.

David Lipschitz - CLSA

Okay. So what happens, if Europe and Asia, you know everything slowing, if iron ore predictions are right that it goes back down to 190 and stuff like that. How do you offset, if we grow slowly, what are you doing about to offset that? Or do you just stock with the lower prices, because if the scrap goes down and iron ore is going down and things like that, what do you do to try to offset some of the margin declines?

Tamara Lundgren

Well, there are a couple of things that we do. Focusing on our cash metal spread is clearly one of them. Focusing on consolidating our supply chain, investing in technology is another one, and that’s where you have seen our volumes increase both in ferrous as well as non-ferrous volumes, for example, this year have increased 22% year-over-year. You see us able to drive synergies between our MRB and APB divisions which gives us the ability to buy more effectively across the larger platform, process more effectively, sell more effectively. And then obviously we continue to focus on making sure that we are running our SG&A efficiently and leanly. So those are really where we focus on because those are the things that we can’t control.

Operator

Thank you. Our next question comes from Mark Parr from KeyBanc. Your line is open.

Mark Parr - KeyBanc Capital Markets

I was wondering if you could give us any color on what sort of capacity utilization rates in the metal recycling business you’re achieving here at 1.4 million tons of ferrous.

Richard Peach

Well, we’ve -- I think that based on the [because] as we’ve got very significant headroom and enough capacity, we don’t run 24 hour shifts. And back in 2008 when volumes were at all time highs we were still nowhere near capacity. So we’ve got very significant capacity for growth. Now as you know, we expanded our supply network over the last year, they give us even more capacity. And so I think we’ve got a pretty strong platform when things pick up and improve to really capitalize on that stronger platform and that headroom on our capacity. So the answer is we’re nowhere near through capacity.

Mark Parr - KeyBanc Capital Markets

Okay. If I could ask a follow-up question, just kind of a high-level question. One, I’m just curious it seems like the barriers to entry for shredders is relatively low. It’s not that difficult to put a new shredder in. I’m wondering if there is anything on the horizon, anything coming out of (inaudible) or anything that you’ve detected that might increase the barriers to entry for someone who wants to put a shredder on the ground?

Tamara Lundgren

Well, I think that the barriers to entry are actually pretty high for well run shredders. I mean I think that you’ve got to position it in a place that allows you to buy effectively and operate effectively. You’ve got to be able to manage the environmental complexities around shredders, and the capital required is pretty high. So, I’m not sure that the barriers to entry are low. I mean where we operate shredders, we obviously operate shredders at our Southern [Port] facilities, and I think that they are very high barriers to entry in terms of establishing shredders at [Port] facilities, particularly, because you’ve got to be able to operate them efficiently, you’ve got to be able to operate them in compliance with complex environmental regulations. So, I’m not sure that they are getting easier, but that maybe in certain parts of the country where we are not operating.

Operator

Thank you. I show no further questions and would like to turn the conference back to Ms. Tamara Lundgren for closing remarks.

Tamara Lundgren

Thank you, and thanks everyone for joining us today. We look forward to speaking with you again when we report our fiscal year-end results in October. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.

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