Steel Dynamics, Inc.
Q1 2010 Earnings Call Transcript

Published: 21 Apr 2010

Operator:

Ladies and gentlemen, please standby, we are about to begin. We’d like to welcome everyone today, to today’s Steel Dynamics First Quarter 2010 Earnings Call. Today’s conference is being recorded. Joining us today are Keith Busse, Chairman and Executive Officer; Richard Teets, Executive Vice President, Steel Dynamics Incorporated and President and Chief Operating Officer of Steel Operations; Mark Millett, Executive Vice President of Steel Dynamics Incorporated and President and Chief Operating Officer of OmniSource Corporation; Gary Heasley, Executive Vice President of Steel Dynamics Incorporated and President of New Millennium Building Systems; Theresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics Incorporated; and Fred Warner, Investor Relations Manager. For opening remarks, I would now like to turn the call over to Mr. Fred Warner. Please go ahead, sir.
Fred Warner:

Thank you. And welcome to the Steel Dynamics first quarter 2010 conference call. The call is being webcast live April 20, 2010 from Fort Wayne, Indiana. Later today, you will be able to replay the call from our website, or download the call as a podcast. During today’s call, our management will make some statements that are forward-looking. All statements regarding anticipated future results or expectations are intended to be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements which by their nature are predictive and are not statements of historical fact are often preceded by such words as believe, anticipate, estimate, expect, or other conditional words. These statements are not intended as guarantees of future performance. We caution that actual future events and results may differ materially from such forward-looking statements or projections that may be made today. Some factors that could cause actual results to differ include general economic conditions, governmental monetary and fiscal policy, industrial production levels, changes in market supply and demand for our products, foreign imports, conditions in the credit markets, the price and availability of scrap and other raw materials, equipment performance or failures or litigation outcomes. You may find additional information concerning a variety of factors and risks that could cause actual results to differ materially from today’s forward-looking statements. Refer to sections entitled forward-looking statements and risk factors in our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q, as well as other reports we file from time to time with the Securities and Exchange Commission. These reports are publicly available on the SEC website www.sec.gov, and on our website www.steeldynamics.com. We now have two brief announcements before proceeding to today’s discussion. First, we note that the 2010 annual meeting of Steel Dynamics, Incorporated would be held on May 20th, one month from now in Fort Wayne, Indiana. Details appear in the proxy statement that has been mailed along with our 2009 annual report to our shareholder and on our website. We plan a live audio webcast of the annual meeting again this year. Secondly, I want to share an item of interest or at least an item of possible interest to some of you listening today. Tomorrow night on the Discovery channel, there will be a program that features one of Steel Dynamics facilities. Last year a video crew visited to tape the operations of our melt shop at the Flat Roll Division at Butler, Indiana, the same operation that is featured on the cover of this year’s annual report. The program is a part of the new Discovery channel series entitled, What a Tool that showcases large impressive machines and technology. The half-hour segment featuring Steel Dynamics tomorrow night highlights the electric-arc furnaces at Butler. This is an opportunity to see an EAF in operation in a way that few will see filmed in high definition with some segments in slow motion. Again, the program is on the Discovery channel, What a Tool, and will be shown at 10 p.m. tomorrow night Wednesday, April 22nd, replay is schedule for 1 a.m. Now let’s begin today’s call with comments from our Chief Executive Officer and Chairman, Keith Busse.
Keith Busse:

Thank, Fred. Good morning, ladies and gentlemen. It’s a pleasure to be with you this morning and to report on the first quarter of the year 2010. We had an excellent quarter, simply said. We delivered $65 million of net income in the first quarter, or $0.29 a share, compared to a $27 million net income or profit in the fourth quarter, or $0.12 per diluted share. And when compared to last year, which was a loss of $88 million or $0.48 a share, that’s a remarkable change. I certainly was interested as I read the morning commentary about the description of the quarter, most of it very positive. A couple of comments centered around a clean quarter, I’m not sure exactly what that means, but I think it means without any garbage of any sort confusing the numbers, but nonetheless it was a good quarter. The sales as you note in the press release were at about $1.6 billion, which, when you annualize that is slightly north of $6 billion and we like to kid around little bit. We were a $8 billion company that in the depth of the recession we became a $4 billion company and it’s nice to be coming back and heading in the right direction north of $6 billion. At the low point, if you look at the net sales $815 million, we were only a $3.2 billion company at one point in time in the first quarter of 2009 on an annualized basis. So, the other thing I wanted to point out is that steel shipments for the quarter were 1.4 million tons, approaching 1.5 and when you annualize that kind of figure you’re getting, you’re pushing towards 6 million tons. So, again, similar story where volumes are declined below 4 million tons and are rising in a much more positive climate than we’ve had in some time. So our steel shipments for the quarter were up 20% as noted. Steel segment profit margins also as noted, came under just a little bit of pressure as scrap costs which were up sequentially, month in and month out, December, January, February, March kind of timeframe. Put a little pressure on us. Pricing almost kept up with scrap cost on a net ton charge basis going up $56 per ton, while pricing went up $50 a ton. OmniSource’s first metallic shipments were 1.2 million tons, slightly north of that and on an annualized basis that’s approaching 5 million tons. Not quite back at the peak where OmniSource had almost gotten to 7 million tons, we certainly have that kind of capacity and the flows are very good today and improving. So I think we’ll continue to gain on that from a volumetric perspective in the second and third quarters of this year and we anticipate fairly decent scrap flows. And in that segment of our business, which continues to grow and expand on a quarter-by-quarter basis. But shipments were of ferrous metals up 15% in the quarter and non-ferrous was up 17% in the quarter. During the quarter, the company steel operations on a pre-profit sharing and pre-intangibles basis produced an operating income of $138 million, about $99 per ton shipped. I think those are very, very good numbers. I think you’ll find them to be excellent numbers while -- when compared to our peers in the steel community. And OmniSource benefited from increased volumes, a higher scrap prices achieving an operating profit of $43 million during the quarter. I might point out as I was reading the morning mail and all the analyst reports that, there were some folks that saw our earnings maybe coming in a little short on the steel side from their respective projections and maybe a little north on the scrap side from their projections. We probably need to get a little bit better alignment there, because our steel earnings from an internal perspective were better than our expectations and our scrap profitability was probably just a little softer than we had contemplated, fairly close though to the numbers we had contemplated in the first quarter. So the steel units really had a very, very good quarter. I think they’ll have a good second quarter. The Flat Roll Division continues to run at capacity as does the SPQ bar division and our merchant operations are, I think the last time we chatted, we were in the 60s and now we’re in the 70s. 75% arena, I believe today, so we’re feeling better about that. Still lagging is the Structural and Rail Division, although up from the 25% to 30% arena, probably more appropriately into the 33% arena and hanging in there from a bottom line perspective, is our Structural and Rail Division, as I said. They’ve done a good job in the face of an extraordinarily soft marketplace, although they are developing new products, quarter in and quarter out and I think, one of the significant things to note is the certification for our rail to AREMA standard strength, not just for rail, but for welded rail as well as you read in the press release. I want to remind everyone though, that from an outage perspective, we may not ship quite as many tons in the second quarter. I know as you add quarters together, you get 31, plus 31, plus 28 in the first quarter and that’s 90 days, and you take, 30 plus 30, plus 31 is 91, you’d see the quarters as having an equivalent amount of shipping days. But I want to remind everyone that we have our spring outage in the second quarter and that will affect the two divisions a little bit at flat roll and SBQ because they are running at capacity. The other divisions would be rather unaffected by an outage, because they are not running at capacity, the outage will really have no impact from that perspective. In our ferrous resources platform, I think the exciting news is Mesabi Nugget and I’ll try not to go into great depth and length there, save some of it for Mark. But let’s say, it’s working very well from a process perspective. And so, our eyes are on that ball initially is getting the process to work well and we’re pleased to report that it is. So I think it is one of the world’s first new breakthrough technologies in making pig iron if it were iron, converting an iron oxide to iron. So we’re starting to achieve very, very high yields in the high 90s with that product. And although we were constrained by conveyor issues -- conveyance issues in Q1, those problems are now behind us and the new conveyor systems, I believe you’ll hear are working well and as we said in the press release, we’re hoping to achieve, 12,000 metric tons of shipments in April alone. So we’re moving in the right direction although, I read in one of the morning lines, that somebody said, these guys will be at 60% by the end of the second quarter. I don’t think it’s going to be quite good that folks but it certainly moving in the right direction. Obviously some of the early problems with conveyor systems and what not, which impacted and impeded our startup in Q1 also had an impact on the bottom line as well. As I said earlier, recycling, before I move to that, let me tell you, Iron Dynamics did make a profit in the quarter, very pleased about that. It continues to work very well although we don’t think it’s the technology of choice. We believe Mesabi Nugget is that new technology of choice. But in recycling, I might remind you that our ferrous shipments got as low as 2.6 million tons. Mark and I were talking about it this morning and now we’re operating close to 5 million tons, certainly a significant improvement there. I also noted when I read a lot of the releases this morning, that consensus numbers were fairly high and growing and I would tell you that the recovery is moving at a very modest pace. There is a recovery going on. I think there is increased demand in various segments of the marketplace and we’re going to enjoy the fruits of some of that and I will standby certainly the statement I made in here, but I think, as I see those estimates for consensus today, they are probably a little bit high. I really don’t have any other remarks at this point in time and would turn it over to Dick Teets from our Steel Group to talk about the Steel segment results.
Richard Teets:

Thank you, Keith. Good morning, everyone. I’d first like to congratulate all of the employees for their continued effort on of improving safety. Most noteworthy is the Pittsboro plant where they achieved another quarter of zero loss-time accidents, this is on top of a full year last year. And also the Steel of West Virginia and The Techs worked a quarter without loss-time incident. So thank you very much to everybody. I’d also like to congratulate The Techs and the Roanoke teams for their continued rankings as number one in customer satisfaction surveys, great job for the sales and shipping teams at both of those facilities. From a plant perspective at Butler, as Keith mentioned, we continue to break production records. The first quarter was a quarterly record at 770,000 tons. And the shipment record just right at three quarters of a million tons was a record. Thank you so much for all of those efforts. And actually The Techs, with Butler running full, The Techs aren’t far behind. They, in the first quarter operated net of maintenance and scheduled and unscheduled at 86%. So, the flat roll world is alive and well in our facilities. Also part of that being driven at The Techs is interest in light gauge and agricultural markets. In Columbia City, the structural and rail continue to operate well below our capacity as noted. The first quarter was, as Keith said, at 33%. I am proud of the efforts at Columbia City in relationship to rail production. Also as Keith mentioned, we recently received approval and an order from a second class one railroad, maybe he didn’t say that, but we did and that’s exciting, for our standard AREMA rail product. The Number 2 Caster project is nearing completion from an installation perspective and then we’ll go into cold and hot commissioning. Interestingly, I’d like to point out that we utilized our own employees to construct a caster. These were people that were originally hired for the operation of the number 2 rolling mill and when the market fell off for the structural sections, we redeployed them. We’ve successfully done that where -- and we really only used contractors in critical applications, critical list, critical welding, high-voltage terminations were involved. But congratulations to everyone for working very safely and being utilized in using a skill set that really they were not hired for. Number two medium section mill will resume operation shortly as the inventory is required. This will allow for more time for rail production on the heavy section mill with all of the products, up to 14-inch sections being shifted over to the new mill. At Pittsboro, in March the melting and casting, the rolling mill and the shipping performances were all in the top 10 months historically. Our finishing also set a quarterly record for throughput reflecting the increased interest in value-added products. March was also the third best month ever for sales with inventories on all parts, ours and our customers very low, our shipping was temporarily strained, but we are all focusing with our priority on-time deliveries to all of our customers. At Roanoke, the quarter continued to show improvements in operating utilizations, as Keith mentioned, the melting and casting department operated at 74% and the rolling mills at 77%. Now these rates continue in an improving trend. Our Roanoke also had their maintenance outage, as Keith referred to, the maintenance outages. They had theirs the last month of March and the first month of April, so this should really be negligible impact in the second quarter at Roanoke. Steel of West Virginia, the sales and earnings have continued to improve with truck trailer and truck body orders leading the way. I think the most exciting result of this stabilization of the market is the recall of all of our employees there. In fact, we’ve had to hire new workers to compensate for attrition that we have experienced. The new straighteners in both the rolling mills are working as expected, providing efficient production and also quality products. Steel of West Virginia will be taking a two-week outage in June, to allow for installation of their opacity equipment in conjunction with requirements of air permit. But they’ll make accommodations through the purchase of billets to Roanoke to not be influenced in the rolling mill. Keith?
Keith Busse:

Thank you, Dick. I’d like to just jump back in, before turning attention to Mark and his report and tell you that the, because you always ask about the backlogs. The backlogs continue to be in good shape at Butler. They are steady, but they’re not long. I think there’s a real different order entry pattern that emerged post recession as opposed to the order entry pattern that was pre-recession, where sometimes, as the world got a little crazy, backlogs will stretch out to three months. That’s just not the modus operandi in the world today. And we tend to receive a good volume of orders each and every week, replacing those that we shipped and really don’t see any change in that. I think Dick did note and if we didn’t, we should note that, we completed the expansion at Butler in July of last year and they’re already shipping at the 3 million ton pace, which is a real tribute to that management team’s accomplishment in a difficult environment. I usually always do offer my own personal comments on the scrap market as we go forward. Mark and I have not compared notes, but I think the market got a little ahead of itself in the first quarter and a lot of it was due to flows. It was a wicked winter and it brought flows to a stand still and for those that needed scrap, it became a little bit more expensive than contemplated, probably moved a little faster than market pricing at that time was moving. But I do believe the flows are very good today and you are probably going to see scrap get a little softer for delivery in the month of May. I really don’t know what to tell you about June. It could be down a little. It could be up a little. It could be sideways. And during the July timeframe, we normally do experience tightness and see prices go up, but the expectation currently is that the market will move south for delivery in May. A lot of you who worry about that from a pricing perspective, I think it, I wouldn’t necessarily conclude it’s going to have an impact on merchant shapes, let alone flat roll. I think there is a -- not necessarily a disconnect but probably going to be no correlation between where flat roll pricing goes or ends up or what is temporarily happening in the scrap universe. So with that, I’ll turn it over to Mark.
Mark Millett:

Thanks, Keith. Good morning, everybody. As has already been suggested, increasing steel mill utilization through the quarter, created relatively strong demand and progressively high monthly shipping volumes for OmniSource. Total ferrous shipments were 1.2 million gross tons up 15% over the last quarter. 42% of our OmniSource shipments went to our own SDI mills, about 520,000 gross tons and that’s roughly 46% of their needs. Early in the quarter, cold weather hampered retrieval efforts, creating a tight supply environment, pushing higher prices. It gave the scrap community including ourselves an opportunity to liquidate low-price scrap accumulated in the November, December timeframe. In February, strong order books in the flat rolled arena pressured prime scrap supply, the market becoming somewhat disconnected as prime pricing went up $20, $25, or shredded and obsolete grades remained essentially flat to down 10, as bar mill interest was pretty flat along with export interest was somewhat stagnant. However, the March ended strong, prime pricing pushing up $60 to $65 gross tons to approximately $470 a gross ton for prime grades. Our non-ferrous operations showed a similar improvement. Volumes climbed to 238 million pounds, up around about 17% over last quarter. After retrieving in February, copper pricing advanced on perceived improvement in both the U.S. and global economies recovering, strong Chinese import activity, the most influential, probably hedge-fund activity and the weak dollar. There still seems to be a disconnect between pricing and supply/demand fundamentals in that particular metal. Aluminum remained strong throughout the quarter. Continued focus on cost control as volumes have returned, coupled with margin expansion from the appreciating markets, drove an operating profit as Keith mentioned of about $43 million prior to amortization of intangibles for the metals recycling team. They had pretty strong favorable performance relative to what we might see from our peers. The immediate markets, again, we didn’t trade notes, but Keith and I are in the same -- of the same opinion. Immediate markets do appear to be softening. Inbound flows have strengthened dramatically induced by the improved weather and higher pricing. Transportation difficulties leading to temporary inventory shortfalls have diminished and both the domestic and export demand appears to be flat. So the recycling platform will thus not have the same advantage of expanding margins in the near-term and earnings expectations of metal recycling should therefore be, I think somewhat tempered for Q2. Ferrous resources relative to iron resource initiatives, Iron Dynamics continues to provide an important part of the Butler iron need. We transferred about 58,500 tons of liquid pig iron and HBI over to the sheet mill at (inaudible). And in addition to positive financial contribution to the quarter by the Iron Dynamics team, the liquid iron allows significant productivity and cost-control enhancements to the melting operation at Butler. Furthermore it has reduced their dependence on the expensive and appreciating import pig iron market. In Minnesota, Mesabi Nugget, the startup and commissioning of the Mesabi Nugget plant has been progressing well, as Keith mentioned, we shipped about 7,000 -- 7,200 metric tons during the quarter, since our mid-January 1st round. During the last call, it was noted that the principal conveyor systems transferring iron concentrate, pulverized coal, fluxes and other process materials between the core components of the plant were such poor design and poor fabrication that the plant could only function a few hours at a time. In March, these systems were replaced and now functioning without issue. In April month to date, the plant has been operating at about 40% to 45% availability, a phenomenal operating performance for this stage of commissioning of the pioneering technology. As is typical though with commissioning of new processes and large complicated equipment, when one bottleneck is cleared and another hurdle appears. Currently the product coolant is contained throughput to about 50% of eventual capacity. An additional drive system is on order and will be installed during this quarter. No fundamental issue, just a hurdle to jump over. Relative to the process itself, the specific nugget qualities are expected, but fair amount of fines generation has been experienced. Excessive fines are being created during green ball storage and transfer and handling, by inconsistent green ball chemistry and Hart’s [ph] reaction. The fines generation effectively reduces the process yield and increases material consumption per ton of nuggets produced. These issues, similar issues were experiences during the pilot plant operation and will be resolved through process optimization but are increasing operating costs for the time being. As a result of the conveyor equipment replacement, along with additional material consumption related to the fines generation, the plant’s operating loss for the quarter exceeded our initial estimate, the impact of the company being a pre-tax effect of about $11 million. With continued improvement in operating rates and process yields, the facility should continued to ramp up, with a projected throughput approaching 30,000 metric tons for the quarter, for the second quarter, obviously with a caveat that we’re still in a commissioning phase and unforeseen difficulties can still crop up. I’d just like to take a moment to take -- to acknowledge and personally thank the Mesabi Nugget team along with our employees from Columbia City and from Iron Dynamics that went up there temporarily to help with startup. For anyone that has experienced the construction and startup project of this magnitude knows the sacrifice they and their families are making and hard work and perseverance that is required to be successful. And I commend each and every one of them. Keith?
Keith Busse:

Thank you, Mark. I’m sure that job was even more difficult in a harsh Minnesota winter environment.
Mark Millett:

Minus 30 degrees did inhibit performance earlier in the year, yeah.
Keith Busse:

Before I get to Gary, I didn’t comment a lot of our fabrication in the body of my report but I don’t think a lot has changed in terms of the world in which Gary and his team live today. They are doing an excellent job. I do believe though that our losses will be narrowed in the second quarter somewhat but we will not return to profitability until later in the year, hopefully. Gary?
Gary Heasley:

I think that’s right, Keith. Thank you.
Keith Busse:

Okay.
Gary Heasley:

Non-residential construction activity continues to be weak and as it’s likely to continue to be weak for some time to come as everyone knows. For joist and deck, industry-wide bookings remain at low levels historically, but January and February bookings were flat with 2009, which supports our belief that we are at or near the bottom of the level of demand for joist and deck. We’re beginning to see the benefits of the exit of a major competitor from joist and deck markets and we are seeing that in the form of quote activity that’s increased and we are seeing that in terms of improved backlog as well. And based on steel pricing and other factors, selling values are creeping up as well, so we’re seeing some very positive momentum in some key areas. Our joist and deck sales teams are working very, very hard to increase share which is difficult to do in a weak market, they’ve been on that mission for some time, and I think that long-term they’re going to hit some other goals, and we will see a greater market share. We have been establishing new customer relationships that are important to New Millennium as we move forward. We’ve spent a lot of time on that and we continue to monitor costs closely in order to lay the groundwork to return to profitability. So overall, I think the outlook is positive in spite of very, very weak markets. The cost reduction efforts that the New Millennium team has made will continue to benefit them as we recover and the exit of this major competitor is very positive for New Millennium. So as Keith said we expect to narrow our losses in Q2, as we see more volume and better pricing begin to impact results and move from the order book to the shop floor. Thank you.
Keith Busse:

Thank you, Gary. Theresa?
Theresa Wagler:

Good morning, everyone. During the first quarter, we opportunistically accessed the high-yield market and we strengthened our liquidity position and our longer term view capital structure. On March 11th, we issued 350 million of ten-year non-call five senior notes at 7 5/8 that are due in 2020. We used the net proceeds to repay all outstanding amounts under our revolving credit facility and at the end of the quarter, our cash on hand was $226 million and we had availability on the revolver of $846 million. Since the end of the year, we’ve increased our liquidity from just over $690 million to $1.1 billion. In addition to adding the flexibility of increased liquidity and historically advantageous long-term pricing, the tender notes also allowed for greater flexibility within our debt maturity time horizon and to ladder that nicely with our existing maturities occurring in years begin 2012 through 2016. During the quarter, net debt decreased $33 million and our leverage ratio continued to improve as total debt to EBITDA was 4.1 times versus 5.5 times at the end of the year. And our interest coverage ratio improved from 2.6 to 3.8 times. Cash flows from operations were $73 million as working capital required additional funding during the quarter, primarily reflecting increased finished goods and selling values, not volumes, at our mills recycling and steel operations and most notably in our flat rolled products. We currently anticipate a further draw on cash flows related to working capital movement throughout the third quarter with a normal seasonal trend of decreased working capital needs in the fourth quarter. At the end of the year, we had a $137 million state and Federal income tax receivable. During the first quarter, we received just over $14 million of those funds in state income tax refunds and we continue to expect to receive a large portion of the remaining $125 million in the second quarter or at worst-case scenario beginning of the third quarter. Our effective tax rate before minority interest was 35.2% which was lower than anticipated during the last conference call due to the recognition of state income tax benefits. This impacted the quarter by about one penny. We currently estimate our full-year effective tax rate to be approximately 37%. This would mean that second quarter effective rate would need to be around 37.5%. Capital investments during the quarter totaled $31 million, of which a little over half was related to the Minnesota project. Depreciation during the quarter was $43 million and capitalized interest related to these projects was $3.5 million. Capitalized interest is actually about half of what it was during the fourth quarter of 2009, we expect that trend to continue and the capitalized interest to decrease further, as our capital projects that are currently under construction are completed. Our estimated 2010 full-year capital investments remain at an amount at less than $150 million, again a very low rate as compared to historical levels. Our philosophy remains disciplined, these plans only include those items with compelling and fairly quick returns or those impacting environmental and safety issues. As we proceed through 2010 if market and demand levels warrant and liquidity remains strong, we would increase the number of authorized projects. Currently over half of the planned projects reside within our steel operations. The outlook related to 2010 depreciation and amortization remains between $55 million and $60 million per quarter. At March 31st, we had 216.4 million shares of common stock outstanding, 16.4 million shares related to convertible notes outstanding and 6.1 million of outstanding stock options. For the second quarter, given our current dilution expectations, we would expect diluted shares to be in the range of 235 to 235.5 million shares. And then for some of you that like to have some volume information, I’ll give a breakdown of the flat roll shipments during the quarter. We have hot roll shipments of 354,000 tons, pickled and oiled shipments of 90,000, cold rolled at 50,000, hot rolled galvanized at 104,000, cold rolled galvanized at 65,000, painted products at 65,000 and Galvalume at 21,000 for a total of 749,000 tons. In addition, I’m not sure if either Dick or Keith mentioned it, but we had rail shipments of just under 4,000 tons during the quarter. To conclude, I would just like to make a note on the supplemental page of the earnings release that you would have seen. We made a change due to the way that we internally discuss and actually discuss externally, volumes related to our iron making projects. We’ve changed our iron dynamics and our Mesabi Nugget tons to be in metric tons and we’ve changed all metal recycling ferrous tons to be in gross tons. So you may have seen a change in that. Keith?
Keith Busse:

Thank you. One of the other things to note there statistically was Theresa reporting hot rolled shipments. That used to make up half or better of our total flat rolled shipments and today it’s under 40%, which is really a good thing in a lot of ways because we make more money off of value added products, obviously. So good report. Thank you all. Leslie, we’re ready for the Q&A component of the conference call, sir.
Operator:

Thank you very much, Mr. Busse. (Operator Instructions) We’ll take our first question from Kuni Chen with Banc of America/Merrill Lynch.
Kuni Chen:

Hi. Good morning, Keith and everybody.
Keith Busse:

Good morning, Kuni.
Kuni Chen:

Just to start off. Maybe you guys went through it a bit quickly, so perhaps I missed it. Can you just quantify the outages for 2Q in flat rolled and SBQ?
Keith Busse:

They are about four-day outages, Kuni, at both operating units at SBQ and flat roll and will impact to some degree the shipping volume in the quarter, not to a great degree. You have comparable number of days1 in each quarter, but from our perspective, the outage occurring right in the heart of a shipping week and production week, you might see a little less volume coming out of flat rolled and SBQ, although they are continuing to achieve great things in the SBQ bar division today. So and their backlogs are in excellent shape, so maybe they can make up a little ground. I was just trying to point out for those that model things, the volume could be slightly less than Q1 but it’s not because of market conditions.
Kuni Chen:

Okay. So four days for both.
Keith Busse:

We can make up ground in the other units…
Kuni Chen:

Right.
Keith Busse:

Because we are not operating at full capacity.
Kuni Chen:

Got you. And as far as SBQ goes and the strength, we’re seeing in that market, can you just comment on what you are seeing as far as underlying demand versus inventory restocking?
Keith Busse:

I will tell you that it is both of them that we have noticed, off-road construction, equipment suppliers, OEMs, have continued to order. Some of them a little bit preemptively, the scrap prices are rising but those are more the inventory adjustments that we’ve seen. I will tell you it is a mixed bag. So it’s a general, overall, steady improvement.
Kuni Chen:

Okay. And then just lastly and I’ll turn it back over. I guess with the amount of cash that’s on the balance sheet right now and kind of a -- kind of continued capital spending outlook, are there any other thoughts for deploying that cash?
Theresa Wagler:

Kuni, we talked earlier looking at different options and one of those I think I mentioned we might be able to do some additional projects during the year that we wouldn’t have done otherwise. But in addition to that, we’re constantly looking at our capital structure as well to see what might be done with existing facilities, et cetera.
Keith Busse:

We’re still looking, Kuni, at possibly another flat-rolled effort, as we commented on earlier, but there’s really nothing new to report there right now.
Kuni Chen:

Okay. Very good. Thanks.
Keith Busse:

Thank you.
Operator:

Thank you very much. We’ll take our next question from Brett Levy with Jefferies & Company. Please go ahead. I’m sorry, our next person in queue is Mark Parr with KeyBanc Capital Markets. Your line is open.
Mark Parr:

Okay. Thanks very much. Good morning.
Theresa Wagler:

Good morning.
Mark Parr:

Keith, I just had a couple of questions, points of clarification. You had said that you didn’t see scrap coming down as having an impact on pricing in the second quarter. Was that referring to the hot rolled business?
Keith Busse:

Yeah, Mark.
Mark Parr:

Or flat rolled?
Richard Teets:

Usually, some of the -- for the operations that work with surcharges, it may or may not impact them. I think that’s too early of a call, but my comments are directed more at flat rolled, where all input costs have risen sharply and are rising, and market conditions are healthier and any backward momentum in scrap related to flows and the winter, and pricing getting ahead of itself, may not in my opinion have an impact on flat rolled, probably will not have an impact on flat rolled pricing.
Mark Parr:

Okay.
Richard Teets:

So the fact that it might back up in May, will probably have very little to do with pricing -- the pricing environment in the flat rolled community, as I see it anyway.
Mark Parr:

Okay. How much for Steel Dynamics for Butler, how much of your mix are on CRU 90-day contracts and what is that number looking like for the second quarter versus the first quarter?
Richard Teets:

Well, I can’t tell you the exact percentage; needless to say it’s one of a number of tools that we use from a pricing perspective and so, I don’t know, Keith do you have a --
Mark Parr:

Just in general, could you make a comment about the index pricing that you have on the books and how much of an impact that will have on the second quarter?
Keith Busse:

Well, some of that is averaged over time, where one month drops off and another month is added and you are looking at averages. There’s all kinds of programs that we engage in out there and it’s pretty difficult for us to access them, but if scrap backed up for one month on an overall impact it may be very modest on value-added in terms of an index number.
Mark Parr:

Okay. All right. Again, I’m just, do you think, I mean, I’m just trying to get into a discussion about the demand for flat rolled definitely is healthier?
Keith Busse:

It is.
Mark Parr:

… than some of the other areas. And so, I’m just trying to get into a little bit of your thought process around why you would think pricing is not going to come back, if scrap comes back or…
Keith Busse:

I didn’t say that relative to bar it’s down shapes, I can’t pre-predict that it will or it won’t in structural. There’s been a little strengthening in that area.
Mark Parr:

Right.
Keith Busse:

If scrap comes down it may index backwards for those products and it will be a benefit. We don’t carry any -- our inventories are very short there.
Mark Parr:

Right.
Keith Busse:

And therefore, any of that benefit would almost be immediate. So I don’t think it has a significant bottom line effect to us, when you are operating at 33%.
Mark Parr:

Right.
Keith Busse:

And I can’t pre-predict what is going to happen on smaller merchant shapes, but I don’t think it’s going to have much of an impact at all backing up a little on flat rolled pricing.
Mark Parr:

Right.
Richard Teets:

On the bars, also, Mark, again, there was a slight increase in scrap and there was no price increase, stability is the name of the game right now in the merchant section and in construction world.
Mark Parr:

Okay. Just to get back to flat rolled, how much of your order book at Butler is on -- some sort of a formula pricing mechanism?
Keith Busse:

I don’t have that at my fingertips, Mark. Dick doesn’t either, obviously.
Mark Parr:

Okay. All right.
Keith Busse:

He is shaking his head.
Mark Parr:

Okay. And then just one last question if I could. You know, you would -- Keith you had made a comment, you thought consensus was perhaps a little bit high, were you referring to the second quarter or the full year in that thought process?
Keith Busse:

Second quarter, not the full year necessarily. But, I saw some comments at $0.45 and $0.40, and I think that’s getting a little out there personally.
Mark Parr:

Okay. All right. And congratulations on a great quarter. Thank you very much for the color. Appreciate it.
Keith Busse:

Thank you.
Operator:

We’ll take our next question from Brett Levy with Jefferies & Company. Please go ahead, sir.
Brett Levy:

Thanks for the heads up that I was in the batter’s box for starters. Keith, great quarter. Got to wonder, in terms of the Southern Sheet Mill, I think you said Southeast? You said sheet, I don’t know if you have said hot rolled only. I don’t know if you said sort of a size, 1 million tons or more, whether there would be any finishing associated with it. Can you sort of talk about any size, location, product orientation, thoughts that you have about the Southern Sheet Mill?
Keith Busse:

We would decline to comment on it, it would not be a 3 million ton effort, it would be closer to 1.6 million to 1.8. million and obviously all of the output initially would be hot rolled, but we would have a cold rolled presence at that facility, but that mill could not only sell cold roll products, it could sell into the coating markets we already are engaged in.
Brett Levy:

So it could like source The Techs and that sort of thing?
Keith Busse:

It’s possible. I mean, U.S. Steel does a good job. The Russians do a good job out of Sparrow’s Point at providing product. But that mill is supplied by many others as well, by all their product in one place and it can certainly supplant some of that.
Brett Levy:

Okay. And then the second question, you guys guided to better gathering activity at OmniSource in 2Q and 3Q and you had slightly weaker pricing in May. As you look at it all in, do you think on an operating income basis, do you think OmniSource is directionally up or down from 1Q to 2Q?
Keith Busse:

It is probably in my opinion, fairly flat.
Brett Levy:

Okay. Thanks very much, guys.
Keith Busse:

Yeah.
Operator:

Our next question is from Timna Tanners with UBS. Please go ahead.
Timna Tanners:

Hi, good morning.
Keith Busse:

Good morning.
Theresa Wagler:

Good morning.
Timna Tanners:

One follow-up on the flat rolled segment; it’s interesting you comment about lead time being pretty short. What do you think it’s going to take for those to extend?
Keith Busse:

I didn’t say lead times ever were short, Timna.
Timna Tanners:

Just flat rolled?
Keith Busse:

I think in the integrated steel community, lead times would be further out than they would be with the mini mill such as our Butler works. I’m just saying the order entry patterns with everybody not wanting to get carried away, afraid of run away freight trains and pricing and whatnot and not wanting to over inventory, in a recovery of the economy, yet not a real healthy economic environment yet, an improving one, I don’t think you are going to see people inventory heavily. I think their inventories are probably going to have to grow shipments are up and service center inventories are because of the shipping volume rising, the days in inventory are less and I think that that bodes well for continuing volume being delivered to the flat rolled universe out there, us included, naturally. But I just don’t think you are going to see people engage in returning to the levels of inventory they were prior to the collapse and I think they are more willing with availability at facilities like ours to engage us on a let’s say a 45-day basis rather than a 90-day basis. I do think you’ll probably find order entry in the integrated universe where it takes a little longer to work through the system, could be out two months from where we are today. We’re not seeing a real change at all, very positive order-entry flow. We’re just not building a great backlog. I can’t sit here and tell you we’re through June. We’re into May kind of thing and the orders come in very, very steady every week and we deliver on a very timely basis.
Timna Tanners:

That makes sense, yeah, go ahead.
Richard Teets:

Timna, I might add that everything to what Keith has mentioned is that as we filled up, once we became full on the hot side -- on the hot mill side, then that choked off any expansion of value-added orders that we could take because they were already committed to other orders. Now as the mindset and the reality sets in that we’re full, now we’ll start to see a little bit building of a backlog because it’s a value-added process, because we’re not sold out on our main lines. And there are some little bit of inkling in at The Techs, as I said. And so those value-added processes become, the customers recognize that we’re full, that will extend those types of products a little bit longer in our backlog.
Timna Tanners:

Okay. So is the potential for improved mix then going forward? Is that what you’re saying?
Richard Teets:

It’ll be a greater presence of painted products and a little bit of galvanized that will show up in our shipments, as we expand down the road here. We’re full on the hot side but anything that might have been ordered for a painted product was consumed let’s say in a hot-band sale or in a pickled and oiled sale. And therefore, the steel wasn’t available to have the full value-added process applied to it. But that will push those types of orders. Those customers will recognize they have got to come in a little earlier now.
Timna Tanners:

Okay. Great. So, my follow on question is really, as you see more of the integrated capacity restart, how do you think that might change both your shipments and your mix going forward on the flat rolled side?
Keith Busse:

I think the economy is moving forward a little faster than all of us contemplated. It is still going to be a very slow and arduous process, that climb back up the hill, but I think it is going a little better. So as demand continues to improve and some of that volume enters the marketplace, hopefully it will be absorbed by an improving economy. Right now, I’m not worried that we’ve over engaged supply. That doesn’t mean two months from now I’ll feel the same way.
Timna Tanners:

Okay. Great. Thanks very much.
Operator:

Thank you very much. (Operator Instructions) We’ll take our next question, Michelle Applebaum with SMI. Welcome.
Michelle Applebaum:

Hi.
Theresa Wagler:

Good morning.
Michelle Applebaum:

Real nice quarter and but I had a question, I thought I heard you say that consensus was too high, Keith. Were you talking about the June number, $0.37 or were you talking about the fiscal year, December 10th number of 131?
Keith Busse:

I think the second half of the year is going to continue to improve. We haven’t -- not having the backlogs that we used to have, where you model precisely for the quarter, we haven’t engaged that process fully yet. But when I start to see $0.40 and $0.45 numbers out there, I think it’s getting a little ahead of itself. They maybe already wrapped in the $0.37 consensus, but I would say let’s all work with baby steps. I think that $0.40 certainly I think is a stretch.
Michelle Applebaum:

For the second quarter?
Keith Busse:

Right.
Michelle Applebaum:

Okay. And in this market nobody is asking you to forecast beyond next week much less for the rest of the year. I just wanted to clarify what you were referring to? My second question is on Omni. It sounded to me like Mark was a little bit more hedged. Keith, you said flat results in the second quarter. Mark, I thought you said it would not be a repeat. Can you guys, am I hearing that correctly? And by the way, wow, performance in the quarter.
Mark Millett:

I think my words were tempered, Michelle, and I guess just difference in personalities between Keith and I, I’m a little more tempered then Keith, I guess.
Michelle Applebaum:

You stand back and he’s optimistic, so I know how to, I just want to -- I know how to take both of you, but I just -- so you are…
Mark Millett:

I think from my personal perspective in this industry, as I think I said the last earnings call, to look forward more than three, four, five days in this business seems to be almost, I think, it’s just crazy. As things can change dramatically, right now, the market is softening, nice to see a slight contraction in margins as opposed to the expanding margins that we saw in the first quarter. Who knows what June may bring, don’t know.
Keith Busse:

But volumes are going to be up. So it’s hard do really forecast it, Michelle.
Michelle Applebaum:

Okay. And then you said something about another flat-rolled mill and I just...
Keith Busse:

We said something about it last time. There’s really nothing new to report.
Michelle Applebaum:

Okay. No thoughts about, you had talked for a long time about Texas or West Coast -- Texas was a while ago then a West Coast, Texas I think …
Keith Busse:

I never talked about Texas.
Michelle Applebaum:

Okay.
Keith Busse:

And West Coast was a long time ago.
Michelle Applebaum:

Okay. Texas may have been the early ‘90s, so joint venture, the cedar well [ph] pipe, I think is what I recollect, but anyway could have been ‘95?
Keith Busse:

We’re still engineering a better mouse trap and we’ll have more to report later.
Michelle Applebaum:

When you say better mouse trap, are you talking about a traditional mill, are you talking about something that could be more of the micro mill style?
Keith Busse:

Well, if any mills have become traditional, let’s just say it would be an improved version of the traditional mill then.
Michelle Applebaum:

Likely to be something with smaller capacity, smaller footprint is what I would suspect?
Keith Busse:

Yeah.
Michelle Applebaum:

Okay. Could it be half the volume of a traditional Steel Dynamics mill?
Keith Busse:

There you go…
Michelle Applebaum:

I know. It’s 20-year old technology but it’s still new technology, so I have to say it carefully?
Keith Busse:

I think you said it carefully, correctly.
Michelle Applebaum:

Okay. So something that could be half the size, you are saying?
Keith Busse:

Yes.
Michelle Applebaum:

Okay. Or smaller?
Keith Busse:

I didn’t say smaller --
Michelle Applebaum:

Okay. I’m sorry this is very, I get into the technology, this kind of stuff, so it’s very exciting to hear you talking a little bit about something that is that new, it wouldn’t be a SDI technology, I presume it’s purchased technology, right?
Mark Millett:

We’re looking at improvements upon the existing purchasable technology.
Keith Busse:

I think SDI engineering and thought process will have an impact on a more perfect tool.
Michelle Applebaum:

You don’t have to answer this question, but would the technology be from a domestic or foreign source?
Keith Busse:

No comment.
Michelle Applebaum:

Okay. Please don’t judge me for asking. Great. That’s very exciting. Okay. Thanks and nice quarter and subdued outlook is great and whatever you’re doing, just keep it up.
Keith Busse:

Thank you.
Mark Millett:

Thank you.
Operator:

We’ll take our next question from Sal Tharani with Goldman Sachs. Welcome.
Sal Tharani:

Good morning, guys
Keith Busse:

Good morning.
Theresa Wagler:

Good morning.
Mark Millett:

Hi, Sal.
Sal Tharani:

Hi. How are you. If I look at the tempered comment from Mark Millett on scrap, does it help you more in terms of on a consolidated basis when scrap goes down on the steel mill side than the scrap or do you think it’s a one-to-one offset?
Keith Busse:

Well, with shorter inventories, I don’t know that it matters all that dramatically to tell you the truth. There’ll be some positive impact early in the quarter because obviously the steel divisions have that scrap in hand that they will be consuming in May and if it comes in the door in May at a down number, that will impact June and it’s too soon to tell what June is going to look like. So I can’t tell you, what will happen from there. But at any rate, I think steel can benefit. I think the scrap side of the plan could be impacted to some degree, but I think volumes are growing and any margin lessening could be, I think, positively dealt with through volume improvement.
Sal Tharani:

Okay. And on the scrap side, Mark. Can you, I mean, you’ve been now in scrap for more than a year now. Do scrap companies or processors look at the pig iron, iron ore/coking coal prices, because that has been traditionally the sort of substitute? And if these global coking coal iron ore is now quarterly indexed product then it will be probably pushed up in the third quarter based on latest spot market price we are seeing. Will that prevent scrap guys to really drop the prices too much if that were to happen?
Mark Millett:

I don’t think the -- they react quite that way. Although as with any commodity, traders will scratch at any particular notion of an up market or down market. I think generally, higher commodity prices -- concentrate pig iron pricing will tend to support the market and will tend to support pricing both on scrap and on the sheet mill side of our business.
Sal Tharani:

Okay. And last question, Mark, on the Mesabi Nugget. You mentioned two bottlenecks besides the conveyor system, which you have resolved. One is the cooling system I believe you said, which you have ordered some new equipment. Can you let us, can you give us an idea of when do you think will be replaced? And the other was a problem which you said you also had in the pilot project, which I believe you said it produces too much fines. Is that -- and what can be done to resolve that or how impactful that problem is?
Mark Millett:

The equipment bottleneck, the cooler, we hope to have an additional drive system in probably in the next six to eight weeks, but it certainly will be within this quarter. And it’s constraining throughput, I would suggest when we are running, it’s constrained it to about 50, maybe 50%, 60% of our eventual capacity. So it is having a marked impact to us right to say. The fines generation, again, it’s, as Keith had suggested earlier, in any commissioning of the sort of technology like this, first and foremost focuses to get the thing up and running because volume, obviously is a critical component of your cost structure and your pricing. And then as you do that, you tinker with the optimization of the technology itself. And that’s just where we are. We’re adjusting chemistries and the ways in which we’re making the green balls and we’re hammering the green balls. And I have no doubt that we will solve that. It’s not something you are going to solve within two or three days. It’s going to be through the quarter. We’re slowly reducing the fines generation and hence, the yield of the process will continue to improve, I do believe through the quarter.
Keith Busse:

My…
Sal Tharani:

Go ahead. I’m sorry.
Keith Busse:

My challenge to Mark, Sal, would be that, if you’re constrained to 50% to 60% because of the cooler then you need to have better availability, let’s get our up time up to 90% and we’ll make some more progress.
Mark Millett:

That has not changed in 20 years.
Sal Tharani:

Are these two mutually exclusive problems, it means you can work on the one while the other one you are waiting for the equipment?
Mark Millett:

Absolutely.
Sal Tharani:

Okay.
Mark Millett:

We’re working on the process every single day.
Sal Tharani:

Okay. Thank you very much.
Operator:

Next we’d like to welcome Tony Rizzuto with Dahlman Rose & Company.
Tony Rizzuto:

Thank you very much. Hi, everyone. I just had a couple of questions. The first one is just a follow-up on Mesabi Nugget again. Do you guys anticipate that you will be operating at effective capacity or close to effective capacity as you move into 2011?
Mark Millett:

I think in 2011 we will get there, don’t know where we are, actually estimated, hang on one second, probably mid-2011.
Tony Rizzuto:

Okay.
Mark Millett:

The last -- with any process like this, the last 20%, takes a lot of effort and some time. The learning curve is a lot steeper at the present time.
Tony Rizzuto:

Thanks, Mark. And the other question, just a follow-up on the demand that you are seeing on the flat rolled side. And obviously coming into this year, the end of destocking and automotive and energy markets and service centers, continue to maintain very low inventories. But are you seeing any broadening out right now of that demand? Is it getting better and will it broaden out into other areas? What can you tell us about the real physical demand for flat rolled right now?
Keith Busse:

I guess all I’d say is, needless to say, automakers reported sales up a little over 15% in first quarter over 2009 numbers.
Tony Rizzuto:

Sure.
Keith Busse:

We are also looking that and you say, residential housing, the starts were below, so they, offset, they were down 10% to 15%. But with commercial construction being light and so forth, we seem to pick up a little bit more in appliances. Consumers tend to lead the way, in this kind of recovery with construction of residential and then commercial following are deals [ph].
Tony Rizzuto:

So I guess it comes down, I think it was asked earlier by another person maybe by Timna. Are you concerned, how concerned are you that we are having restarts now by the integrators later this year? We’ve got slabs that will be coming into this country and being processed in Alabama. How do you see all of this playing out? I know the visibility is very short right now but what thoughts do you have about that, are we possibly running up the risk here of seeing capacity just come on too quickly in the industry as a whole?
Keith Busse:

We run that risk, Tony, I think that’s what we said before.
Tony Rizzuto:

Yeah.
Keith Busse:

Right now, we don’t believe that supply is an issue. I said two or three months from now, I may feel differently about it. But we’d all like to see demand start to push north of 100 million tons, that makes us all feel a lot better.
Tony Rizzuto:

Right.
Keith Busse:

Because it would be a lot better balance. But I can tell you one thing from a -- just looking at it in a micro menu-type view, I just bought into an automotive dealership. It’s a General Motor’s dealership and it’s not a small one. It’s a fair-sized dealership, in the top 150 in the country, I think, for GM type products. And right now, we just can’t get enough product, we can sell all of the product we can get. The new Buick LaCrosse, the Enclaves, the new CTS Cadillac, we just can’t get product. So, we’re begging for product and the clients are begging for product. So they haven’t caught up yet.
Tony Rizzuto:

All right. That’s very encouraging. Thanks, Keith.
Operator:

Thank you, Mr. Rizzuto. Mr. Chairman, with three questions in queue, we’d like to welcome Chuck Bradford with Affiliated Research Group. Your line is open sir.
Chuck Bradford:

Good morning.
Keith Busse:

Good morning.
Chuck Bradford:

Hi. I’m assuming you are not buying much pig iron these days, but I also assume that you get pretty good intelligence as to where the price would be if you were taking pig iron up from, let’s say Brazil to Butler. How would that compare using today’s pricing, to what you expect Mesabi Nugget to be able to deliver to Butler, let’s say, the second half of next year?
Keith Busse:

Second half of next year?
Chuck Bradford:

Assuming you are at capacity, midyear? I’m talking about Butler’s cost then compared to pig iron today?
Keith Busse:

Well, Mark is looking at his forward-looking operating data.
Chuck Bradford:

Because today’s costs at Mesabi Nugget are obviously above where you would be on a more steady state basis?
Keith Busse:

That’s absolutely right and you won’t get there even throughout the year, so it’s a good question. Right now (inaudible) and then up to Butler would be north of $500, so if scrap backs up at all, scrap becomes obviously the better buy. Go ahead, Mark. Are you there?
Mark Millett:

Yeah. I’m here. I believe it should put us into positive territory. I think your question is aimed at how positive is it going to be. Next year we are obviously not mining our own material, so we are at the vagaries of the market, depending on where iron concentrate costs goes up, this year 80%, 90%. That could impact our cost structure by about $75 and coal is creeping up for another $25 but $100, that will push production costs to $425 or thereabouts and you have a market today of (inaudible) $540-ish, $560 and trending up.
Chuck Bradford:

Does the $525 include freight to Butler?
Mark Millett:

The $425?
Chuck Bradford:

Yeah.
Keith Busse:

No. The $525 to $540.
Mark Millett:

No, sorry, that’s …
Chuck Bradford:

Yeah. But you talked about Mesabi Nugget?
Mark Millett:

Yeah.
Chuck Bradford:

Being up, I thought you said $425.
Keith Busse:

He was really just giving you an estimate of a cost structure out there in time, which could be $400 to $425, because the rising input costs until such time as we get to our own mining efforts.
Chuck Bradford:

Okay. That was going…
Keith Busse:

That went down sharply at that point in time.
Chuck Bradford:

That was going to be the next question. Just what would it be once you have the mines up and what is the current status of the permitting?
Mark Millett:

Well, again, I don’t think the cost structure is dramatically different than what we’ve advertised in the past with, if you transfer con [ph] straight at cost from the mine, you’re in that $325, $350 number. The permit itself, we just received the response from the MPCA on our EIS study, Environmental Impact Study, that we provided to them end of last year and to be honest, we’re still interpreting those results. They asked a lot of questions and it takes quite a lot of time to delve into exactly what the impact is going to be to us. But, again, we’re still hopeful to get a permit, end of this year and even into first quarter of next year.
Chuck Bradford:

Net effect is once you get all this done, there’s still a good possibility of more than 100 million, sorry, $100 a ton savings?
Keith Busse:

There is.
Chuck Bradford:

Okay. Thank you.
Operator:

We’ll take our next question from John Tumazos with John Tumazos Very Independent Research. Welcome.
John Tumazos:

Good morning. Could you describe the important customer categories driving the strong engineered bar orders? Clearly engineered bar is tailored for an application and a little less subject to inventory bubbles than commodity steel grades? And secondly, could you talk about the volumes that are your ambition for the iron ore mining. Some of the, you may or may not be aware of it, the two large companies in Minnesota that mine do not disclose iron ore grade. And some of their grades, I understand from field geologists are as low as 13% and there actually could be a fine opportunity to develop newer deposits that are less depleted and better. So I’m very interested in your mining?
Keith Busse:

John, this is Keith. I think on SBQ, you are seeing strength in off-road. You are seeing strength in heavy equipment. Strength from forgers, order entry from forgers is up even cold finish bar guys order entries are up, driven by, again, off-road and driven by heavy construction, probably, also driven by the fact that we have earned our spurs or earned our wings. You don’t enter this business, day one, with the confidence in the market. You have to prove yourself to the market and prove that you can make all of the different grades that the other players that you compete against can make. And I think we have done that and done it well. And I think our product is being very, very well received, so I would tell you we’re gaining market share as well. It’s not just off-road and it’s not just heavy equipment. As well as the energy has had a slight rebound and included in energy is our offshore shipments of mooring chain to Brazil. Those have also shown improvements.
John Tumazos:

Thank you.
Mark Millett:

And John, could you just clarify your second question…
John Tumazos:

So what are your ambitions about iron ore mining? You are presumably going to mine enough to feed Mesabi Nugget.
Mark Millett:

Yes.
Keith Busse:

Yes.
John Tumazos:

But I was expressing, I guess, doubts of my own about the quality of some of the existing aged historic iron ore mines and the potential that you could, have a fresh deposit that’s a lot better than some of the historic deposits i.e. opportunity...
Keith Busse:

With success of the technology, we would want to support future batteries and future sales of the finished product with that ore content rather than sell it to others.
John Tumazos:

So there is no ambition to a minor per se?
Keith Busse:

Per se.
Mark Millett:

Not particularly. Let’s call it, an additional capital expense we obviously looking to mine and just concentrate the ore for use at Mesabi Nugget. Obviously, the product of favor from the range, actually it’s pellets, for the back spots [ph], so that is an additional set that we wouldn’t want to necessarily enter into.
John Tumazos:

Thank you.
Keith Busse:

Thanks, John.
Operator:

Please go ahead, sir.
John Tumazos:

Thank you. I’m done.
Keith Busse:

Okay.
Operator:

Thank you very much, sir. We’ll take our next question from Mark Liinamaa with Morgan Stanley.
Mark Liinamaa:

Yes. Hi, all. Just quickly back to scrap. OmniSource on a standalone basis had a pretty nice operating profit. I believe it was $43 million. Mark or Keith, can you comment on where you see that as being relative to normal? How much upside in terms of volume we could see on a normal run rate basis? Thanks?
Keith Busse:

Well, obviously, we’re not back to 7 million tons, volumetrically. We’re still short of 5 million. So there’s room to multiply whatever margins we’re going to enjoy by more tons and obviously, in a less cyclical and common environment I think stabilized margins and perhaps grow them to some degree from where we are. I think I said before, I believe we can deliver operating income numbers in the 200 range in stable markets where the volume is approaching 7 million tons, kind of thing.
Mark Liinamaa:

Great. Thanks.
Operator:

Our next question is from Brian Yu with Citi. Welcome Brian.
Brian Yu:

Great. Thank you. Keith going back to your earlier comment about scrap, is there a difference in your view between what’s likely to happen in the prompt versus the obsolete market in terms of the price decline?
Keith Busse:

I think the flows of both are probably going to be up and I think they’ll both be impacted as they have been. As you went up the hill, they’ll both be impacted to some degree. If you travel down the hill, slightly, I don’t think it will be one or the other.
Brian Yu:

Okay. And then following up on Chuck’s question earlier about, concentrate costs at Mesabi Nugget. Does the change into quarterly versus an annual pricing system impact your existing commitments, I think in the past you said you have various agreements with CLIF [ph], QCM and some tailings processing?
Keith Busse:

That strengthens our resolve literally to get our mining operation going because we don’t want to enjoy any sort of indexed increase throughout time. We have hedged some of our bets here in 2010. A little in 2011, but we’re going to have some exposure down the road. So the sooner we can get the mining operations going, certainly the better off we’re going to be.
Brian Yu:

Is there some percentage or concentrate purchases there that’s exposed to the (inaudible) settlement or is it all exposed?
Keith Busse:

It’s not all. A certain amount is though.
Brian Yu:

All right. Thank you.
Operator:

Thank you. And Mr. Chairman, as there appears to be no more questions at this time, I would like to turn the conference back over to you, sir.
Keith Busse:

Thank you, Leslie. Let me just wrap it up by thanking all of our employees who have really endured a long, tough, hard pull through a very bad economic time. They hung in there and you all have done a great job and we’re starting to see some real positive results and from a compensation perspective, I certainly hope you are starting to see some real positive results as well. Thank you, ladies and gentlemen for your perseverance and for your efforts. And thank you, ladies and gentlemen for being interested in our company. Bye now.
Operator:

Ladies and gentlemen, that does conclude the Steel Dynamics first quarter 2010 earnings conference call. We thank you for your participation.

Steel Dynamics, Inc. Q1 2010 Earnings Call Transcript

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Steel Dynamics, Inc.
Q1 2010 Earnings Call Transcript