Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Frank Magdlen - The Robins Group.
Frank Magdlen - The Robins Group
Could you give us a little more guidance or help in trying to understand the significance of steel scrap pricing or proceeds you get in your refurbishment and parts business? I’m trying to smooth out the gross margin contraction that occurred in the quarter.
Bill Furman
There was quite a contraction particularly in scrap steel pricing and we receive a yield from scrap steel pricing where our business model works particularly in the wheel business and repair and refurbishment. We sell just in that unit approximately 10,000 tons of scrap steel each month. On a gross revenue basis you can calculate what a $10 change can do in the average price of scrap and so looking at simple terms a $10 reduction or increase in scrap can mean $1 million in the time frame that we are talking about per month.
However, it is not quite that simple and it has to do with the surcharges that are built into inventory and the cost inventory. Particularly in the first quarter there was a lot of moving parts and we expect as scrap prices stabilize and increase, which they have been doing, you have to distinguish between the domestic and international market in that regard when you are looking at scrap and you have to distinguish by region. Nonetheless there is a pronounced drift upward in scrap steel. This will have salutary effects on that unit so we think we took the principle hit in that unit in the first quarter.
The other business we have been awarded should generate between $10-12 million gross revenue. Of course not all of that will come to the bottom line. Those are some of the moving parts related to scrap. Basically the outlook in steel is more positive than it was a few months ago and scrap is still a fairly weak commodity market.
Frank Magdlen - The Robins Group
If I can clarify, every $100 was it just a slip of the tongue? Every $100 if we are shipping 10,000 tons a month then approximately every $100 equates to $1 million?
Bill Furman
I’m sorry, I did have a slip of the tongue. It is a significant item but the kinds of movements and it has affected us each month probably in this particular downturn by at least $3-5 million.
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