Steel Dynamics Inc (STLD) 2002 Q3 法說會逐字稿

Please stand by, we're about to begin. Good day, everyone and welcome to today's Steel Dynamics third quarter earnings conference call. As a reminder today's conference is being recorded joining us today are Mr. Keith Busse, President and CEO, Mr. Tracy Shellabarger, Chief Financial Officer, John Nolan, Vice-president Sales and Marketing, Mr. Mark Millett, Vice-President, and Mr. Richard Teets, Vice-President. For opening remarks I am now turn the call over to Mr. Fred Warner, Manager of Investor Relations.

Thanks I for joining the Steel Dynamics 2002 conference call October 15, 2002. Today's much discussion may contain forward-looking statements. Actual future events and results my differ materially from the plans projections or statements made today. You may obtained additional information concerning that may cause, from forward-looking statements made today by referring to our most recent annual report on form 10-K as filed with the SEC. Specifically refer to those sections in the 10-K regarding forward-looking statements and risk factors. This 10-K annual reported and other reports we file with the SEC from time to time are publicly available on the SEC is the website. And now I'll turn the meeting over to Steel Dynamics president and Chief Executive Officer Keith Busse.

Thanks. Good morning ladies and gentlemen and thank you for joining Steel Dynamics conference call this morning. I. Think it obviously goes without saying that we're extremely pleased with our p quarter. We had a record quarter in terms of EPS earnings per share. And net income. We had a record in production, not necessarily in shipments. The net sales for the quarter were approaching a quarter of a billion dollars at 241 million, 13 percent increase over the second quarter and a 44 percent increase compared to the first quarter. Selling values were 4 and 3 dollars a ton, up about $63 from where we were in the second quarter. So significant increase. I think it goes without saying that when you compare any of the statistics we have in the third quarter of this year to the previous quarter of 2001 there were just significant increases, approaching 50 percent increase in sales etc.

The Butler Division as noted produced 607,000 tons that was an increase of 7,000 tons. Again, just an outstanding team performance in Butler. The mill is on a pace to run nearly 2.4 million tons of production this year which is_- has been an all time record for the corporation, previous recording being down near 2 million tons.

The company recorded as you can see 95 dollar a ton consolidated operating profit but as noted on a stand alone basis, the Butler Flat Roll Division operating profit approached $120 a ton for the third quarter. So just a great effort. I don't know that anyone in modern steel making times has ever made $120 a ton in this business. I don't recall such numbers in any case for the past 30 years. So incredible team performance by the people at Butler. The mill, by the way, just experienced an early October, 3 and a half to 4 maintenance days which is a normally scheduled maintenance outage - the mill back up and running like a Swiss watch. Our volume may be off just slightly in the fourth quarter because of the planned maintenance outage. Other than that many we're doing very very well. We have a full backlog of business for the fourth quarter. In other words, we're basically sold out for the quarter. We anticipate that we'll have decent bookings in the first quarter, it's too early to tell. We'll talk a little bit more about that in a minute.

The flat roll shipments were down 38,000 tons. There might be a question or two about that. We really built a lot of inventory in advance of the maintenance outage so we could keep the cold mill supplied with tonnage. It would be hard too duplicate the second quarter quarter's much shipments since we were dramatically re-reducing inventory at that point in time. The Butler division as I said in goodly health with a very excellent backlog, women carry us all the way through the fourth quarter of this year. As in regard to Iron Dynamics, might talk about that for a second. We anticipate we may well, and Mark will talk about it an little more detail. We might have an opportunity to ramp those trials up to sometime in November. At least start the (inaudible) trials in November with perhaps hot metal trials in December. So that restart of that of facility to get a handle on productivity issues with all the retrofitting that's been done will occur in the fourth quarter and is proceeding as planned.

The ramp up of production in our Colombia City, Indiana structural mill as I said is proceeding very well. Dick and his team have commissioned beams anywhere from 8 inches to 24 inches so they've done 8s, 10s, 12s, 18s, 21s and 24s. They have yet to commission 27, 33, and 36 inch beams and that will occur later this quarter. Reliability of the mill is picking up. We have- we give the mill back to some the contractors from time T time to complete automation upgrades and things of that nature and startups in the structural arena tend to be sloi. At least that's our experience to date. In this quarter, we produced 33,000-plus tons and shipped about 15,000 tons. Beginning production and shipping in July. Actually, we shipped almost nothing in July. But did produce some tons, though.

From a melting and casting perspective, the performance of the mill has been outstanding. They are casting (ph) heats in the low 40 minute range already. They've worked I think all the bugs out of the caster. From a quality perspective, they're just doing an excellent job there and going through the learning curve as it regards a full range of products and hope to complete that learning phase or commissioning phase by year end. Of course it won't be long thereafter, we'll be looking at commissioning the trials as in regard to standard net (inaudible) and rails, later in the first quarter of next year.

I think all of you know that we closed on the Qualitech purchase, not too long ago. We spent $45 million for Qualitech as the press release indicates we plan to invest between $60 and $70 million of additional capital to convert the quality tech facility to production of merchant shapes and reinforcement products. We are not out the gate planning to produce SBQ products at this location although it is our engineering game plan to retain that many capability and perhaps at later date enter that market when we get the mill up and running and put a foundation under the house. We expect that facility in time, will yield about 5 to 600,000 tons of production annually. It's going to take 6 to 9 months to obtain an air permit. And that will put us out to next summer sometime, call it June, July, in that timeframe.

We will be engineering the retrofit of the mill in the next couple of months. We will be doing some light work, refitting and restarting some of the equipment. In other words, get the bearings greased the and get the wheels turning, if you will, on some of the machinery, but would not think we could get in the ground until next summer with foundation work which we ought to be able to complete within a 3 or 4 month period of time. We don't expect the equipment to deliver until the fall the year and hope to install it within one or two months and start to commission the mill late December, but I wouldn't expect any production until 2004. That's the current game plan as it regards the restart of the Qualitech assets.

I don't have any other comments about our performance in the third quarter and the restart of some of these facilities but I would offer some comments as regard our outlook for the future. And maybe just wrap them around some comments about the third quarter as I said earlier, our selling prices were up about $63/ton. Our scrap costs went up about $17/ton. I think I predicted on the previous conference call about 15, it was actually about $2 worse than that prediction. And we experienced positive cost compression of about $4/ton. So when you take 63 and add $4 cost compression, $67 of things going the right direction and $17 with things going the wrong direction, you might say, so a $50 gain in margins. If you multiply that times tonnage and add that to the last quarter's performance and take into consideration additional interest costs and additional startup costs, the structure of the mill and add things of that nature you would come down to the $29 million worth of net earnings that we experienced in the third quarter of this year.

As I said earlier, I think production will be will be slightly less in the fourth quarter. perhaps in the 585 range, 580 range because of the maintenance outage during the fourth quarter. Shipments may we will keep up with production because we had a little bit of a an inventory build so we may ship nearly as much as we produce in the fourth quarter. I think that selling values will be up in the fourth quarter. I know there's a lot of conversation in the industry about softening in the market. I don't know that hot-rolled is going to be any better for us in the fourth quarter. But I think we had some longer term commitments in the cold-rolled imported area that we've worked through and our backlog of selling values for cold-rolled coated are higher than the third quarter averages that we had. So when you put it all together in the mixer, I think selling prices could be up by on an average by about $10, maybe as wide as $15. I don't want to get too far out an limb with regard to the estimate but somewhere in that area.

I think scrap prices will be flat, up $2 on a quarter to quarter basis. Although, I would tell you that scrap costs like market pricing is or will decline I believe in the near term. Scrap went down a little bit last month and I think the scrap community is telling us they believe that scrap will regress in the next couple of months. So any softening in selling values and there has been some softening in selling values, I think will be only - will be offset to some degree by lessening scrap costs.

The hot-rolled numbers reached about him $380 to $400/ton at their peak. Although, the average was probably in the range of 18 cents or 360, and has come oh off of that recent high to 340 to 350 as we see it in the market today. I know there are those that think that there being some better numbers out there. I'm not so sure that's just a buyer wish or a buyer's mentality as opposed to reality. I think there will be will be will be some slight increase in imports. We all know there's some capacity coming back into the market, all though we must remember that Cleveland West will remain down and again Geneva is not likely to restart, and Ball State's is not going to restart, and the Tri-Co (ph)startup will not reach peak for sometime.

So there still will be some supply constraint issues offset perhaps by some additional imports. So I don't know that the market is going to go one direction or the other to any great degree. I think it's going to hang in the area that we just previously discussed. And we could realize those kind of selling values on hot-rolled going into the first quarter. So when you - I think it's shaping up to go of to be a good year as I said earlier. I expect that we can be above 60 cents in the fourth quarter. Perhaps as much as 65 cents or thereabouts, potentially. I think there's every reason to him believe we're going to have a very good year in 2003. We had a week quarter in the first quarter and didn't the entire industry in 20022002 and a better quarter if the second quarter. But if you can't get your arms around 60 cent quarters on a going forward basis I think that would be dangerous thinking, even if it backed off into the 40 to 50 cent range times 4 consistent quarters it still could be a good year, perhaps a record year in 2004 for Steel Dynamics.

It's way too early to tell. We barely could see the first quarter at this point in time. But I think in talking with our marketing group we think it's going to be a decent year. That could get helped enormously by economic pickup. Resurgence in the economy could tighten up supply just a little bit. Obviously if the market went the other direction and we lost any more competitors there also could be a tightening in the market. So it's- I don't have a crystal ball that big at this point in time but I think we're thinking it's going to be a pretty good year. I now would like to turn the meeting over to Mark Millett. And he's going to tell us a little bit about performance at our Butler Flat Roll Division.

Not too sunny down here Keith. I do believe the numbers are starting to speak for themselves. The Butler team has worked very very hard, very hard actually through the adversity of late 2000 and last year. And I think it's becoming increasing evident that the focus we had on cost compression, equipment maintenance, and our operating practices during those times are reaping their reward. Equally important I think was maintaining a marketing strategy at the ends of last year. But by not taking on commitments at the stressed prices, we've been able to fully capitalize on the spot price this year.

We have a hell of a team at Butler, I think their creativity are far from drained. You saw a multitude of ideas that will continue to build our future success there. Probably the more exciting project we have going at Butler currently is the paint line. We think that's an exciting value add opportunity for us. I do believe it's natural for a paint line to be adjacent to the mill as it used to be in the US and currently throughout Europe and Asia. It eliminates the freight bill, a $15 freight mill from the mill to the coater. Reduces net operating costs by eliminating corporate hierarchy and utilizing our existing infrastructure. It brings substantial savings to the customer. It's going to him reduce the supply chain inventory quite substantially.

Just completed the building foundation, pouring some floor. Mechanical equipment in the line has been placed. I think it's going to be one of the, surely one the premier coating facilities in the US once it's complete. We will have building products, HBAC and appliance and white goods capability at about 240,000 tons per year: line electrics, cranes and all the ancillary equipment has also been purchased. The project will shortly be brought in for within the 25 million dollar capital budget. I think we should be operating next August, bringing painted product into the market. The mill is running incredibly well. Phenomenally excited super of group of people there.

Dick, do you want to add color.

The 270 employees at Colombia City are very thankful that Mark is doing so well. And deflect a little bit but needless to say we're very attendant to what's going on at our place. The metal shop as Keith said is running very well, running basically two to three days a week to supply the dog bones to the rolling mills. The rolling mill is commissioning sections weekly. We're very pleased with that performance. We are running seven days, 24 hours a day in the rolling mill and are now actually rolling to a (inaudiblie) schedule. From a rail standpoint, the equipment is being delivered and installed currently. The straightener has arrived, it is the largest single piece of equipment in the project. And the vacuum tank of gas has a late January delivery. But we're out to bid on the foundations and the mechanical installation. We're focusing on lowering or costs and helping to contributing to the bottom line. Keith.

You might mention Dick when you mentioned seven days a week, you do interrupt that building schedule tore commissioning.

That's correct. We do and we also, as Mark, I think you mentioned. We took three days down last week, beginning of the week, to allow Toshiba and (inaudible) to continue their commission phase of the job.

Tracy.

Thank you, Keith. I a couple of pieces of information to share. First with regard to our credit facility, I would like to point out that our $75 million. revolver remains undrawn, that coupled with our approximately $25 million of cash means that we have available liquidity in the quarter of about $100 million. Startup costs thankfully are no longer with the structural mill. As we indicated at the last earnings call, effective the beginning of the third quarter, no longer classified that way. But wanted to share with you that their operating expense for the quarter was about $7.5 million. We further expect Cap-ex (ph) to remain within our original budget for '02 about that $145 million, '03, inclusive of the construction activities that remain at the structural mill and elsewhere including down in Pittsboro, the new bar products facility there, would total an estimate in '03 of before $70 to $75 million or so. Interests for the quarter popped up from about $5 to $10 million . That reflected the fact that we're no longer required to capitalize interest at Colombia city and I think that $10 million level is indicative of what we're going to see for the foreseeable future. I think that will remain the case for 2003. Subject of course to any significant movement in interest rates.

Cash taxes paid during the quarter of about $110,000 and year to date about $4.5 million so and a cash interest paid during the quarter was $15 million. That was reflective of our September bond payment which is about p $9.5 million. On year to date, the cash interest paid was about $27.5 million. Consistent with the rest of the year there was year there was no- there were no shares refer purchased during the third quarter for the whole year. I think that's all we got, Keith.

Thank you, Tracy. I think our leverage position did improve during this quarter.

I did walk want to talk about that if I may. On a long term debt to total book capital ratio, we've got down to which 51 percent, we haven't reached Keith's objective of less than 50 percent but we're working toward that. that compares to 57 percent at the ends of 2001.

Thanks, Tracy. We might just have John Nolan, our VP of sales and marketing, talk a a little bit about the marketplace right now.

Keith, I believe you covered most the points. The only thing I would like to add is our order book looks extremely good to me right now. And I don't see or anticipate any significant change in the coming weeks that would materially impact that.

Thanks, John. Dianna, I think it's time to open it up to questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question please do so pressing the star key followed by the digit 1 on our touch-tone telephone: Please make sure the mute function is turned out of to allow your signal to reach us: We will take as many questions as time permits. Please press star 1 on our touch-tone telephone for questions. We'll pause for a moment to give everyone an opportunity to signal for questions. And our first question comes from Peter Marcus (ph), World Steel Dynamics.

Peter Marcus (ph): Hi, gentlemen. I have a question about the structural and rail mill. How much is the capacity of the mill? How much of that could be the production of rail and how much rail might you produce in 2003? At what point might you be fully qualified to sell rail to the railroads in the future?

Peter, the capacity with the (inaudible) we've pegged at 1.2 million tons a year to 1.3 on all products. Of that, we've long term expect to capture 350,000 to 400,000 tons a year of rail products. We look at about that on a 50-50 or slightly heavier in favor of (inaudible) products but we believe 400,000 tons ultimately can be achieved. In '03, we targeted 20,000 tons of shipments to be made. None of that really being head-hardened (ph) but a section standpoint and getting into the customer's hands to initiate some in field trials. But very little quantities because we won't be able to be in the- we already have gone through the bid cycle for the supply of the rail products to the Class 1 railroads for '03 and we're not capable of participating in that bid cycle. Did I answer all your questions.

Peter Marcus (ph): Okay. So you expecting to be qualified fully for 2004.

For 2004, yes, Peter.

Peter Marcus (ph): You risks, won't be, the head hardening won't work or something like that.

Based on trials we performed in Europe on that product using a a a prototype arrangement we're confident we'll be successful.

Peter Marcus (ph): My second question, in terms of iron dynamics, Keith or Mark, can you give is a general sense of what could be the cost level of the liquid pig iron for this approach?

Peter, they've done a lot of work in an effort to reduce costs. I don't think we warrant to tell you it's going to be any better than $150/short ton.

Peter Marcus (ph): 150.

Right. It could be slightly better paved on improvements they've made but I would use that number right now.

Peter Marcus (ph): That's a pretax number or operating number, sir?

That's a_- the cost of liquid pig iron, of course pretax.

Peter Marcus (ph): Depreciation and interest in it?

Yes.

Peter Marcus (ph): Could you give an estimate of what those numbers might be.

Peter, I don't really recall. Tracy doesn't have those numbers with him, either.

Peter Marcus (ph): Thank you.

Don't forget, that $150 a short ton carries probably a $20 credit because it's liquid hot and those sort of thing.

What Mark is saying it doesn't cost you $50 to make it into steel on the hot side but rather 30. So when you try to compare it to it to an all end cost of another product, you're looking at maybe 180. If you're buying pig iron, if you are, for 150, on a long ton basis, it's 135, on a short ton basis, yield could be 142 plus 50. There appears to be some room. Some reasoning power to run Iron Dynamics.

Peter Marcus (ph): Okay. Thank you.

Our next question comes from Wayne Atwell(ph), Morgan Stanley.

Wayne Atwell(ph): Good morning, Congratulations on a great quarter. Did I understand your results on your structure mill were a negative 7.5 million for the quarter.

Yes, sir.

Wayne Atwell(ph): Okay. Can you go over what's happening in the structural pricing and also talk about your participation in autos. Are you going to get more heavily involved in the auto business and ramp up your contract participation?

Wayne, this is Keith. I want to point out that's an operating number, 7 and a half million. Does not have interest considerations in there. As in regard to our future in contractors and spot business, autos, supply, discuss that with you.

Yeah, Wayne, good morning. I would say that based on the efforts of late last year and to date this year, we will have a significant improvement relative to our historical participation with General Motors. So I can't quantify it for you. But, yeah. It will go up approximately, I would say, somewhere between 5 and 10 percent of our total mix of products, will be committed to that type of contract next year.

Wayne Atwell(ph): Would that everybody about ten or fifteen percent in the past.

Not on a direct basis, Wayne. I think we said that we do around 30 percent. With the automotive community through other partners. That's going to increase our exposure to automotive. But yet, it will take some away from the partnership as well. I think what John is saying, on a more direct basis around five to ten percent rather than two partners.

We're going to see, as Keith points out, that may come from certain existing arrangements, it's going to be on the resale side, you've heard of the GM resale program I'm sure. That's where they have us ear marked.

Wayne Atwell(ph): Right. Pricing the structural market?

Both the demand and the pricing is softening in the big picture. On a more focused note, we through the efforts of the sales team had record orders last week that we're very proud where the pricing is has given us the opportunity to be much more competitive in Canada where there are no producers left in structural markets therefore it's opening up doors and opportunities to us. In general in the Midwest, with our- advent of our production and becoming a shipping point is providing Midwest service centers and fabricators with lower cost supplies, so exciting things for us.

Wayne Atwell(ph): Do you think you might ship as much 50,000 tons in the fourth quarter?

The target is to ship nearly 60 in the fourth quarter.

Wayne Atwell(ph): Great. Thank you very much.

We will continue on with Eric Fenniger (ph)(inaudible).

Eric Fenniger (ph): Good morning, gentlemen.

Good morning.

Eric Fenniger (ph): This is for Keith. With the present pressures on the steel supply demands in the US, what your feelings about tariffs for the next year and whether or not the. Steel industry high prices that the steel industry has been get for their product if this holds up for the next year, will that effect the profits for Steel Dynamics.

Very few competitors have seen any real benefit in terms of the return to profitability. I think New Corp (ph) has experienced some benefit. We have. A number of other producers. And losses have diminished for other producers but they're still losses for some producers. I think that the- 201 impact is positive. I think the industry is a little disappointed that there were so many exemptions. I think the fear that spot pricing would go to him $450/ton was totally unfounded. We may have gotten up to 380, 390 rather quickly but that's ramped back down to what I what I what I would consider more normalized market pricing levels as we discussed earlier. I don't know that the administration will be inclined to end the 201 program early. There is a possibility it's going to be reviewed at whatever, end the 12, 18 months. Could they ramp it back down at that point in time? I think that possibility exists. Could they do more exemptions? Starting in the November realm, yes, they probably can and will. Although, the industry is trying to remind them that this was a safeguard measure to restore health to the industry and you can hardly say it's done of that as in regard to most producers. I think it will ramp down to 24 percent.

Eric Fenniger(ph): 24 percent you said.

Probably. It's a guess.

Eric Fenniger (ph): Okay. All right. Is this Mr. Busse I'm speaking.

It is.

Eric Fenniger (ph): I think you know my father Bill Fenniger (ph). I would like to introduce myself.

Yeah, we do. Thank you.

Our next question comes from Andrew O'Connor, Storm Capital (ph).

Andrew O'Connor (ph): Good morning, guys.

Good morning, Andrew.

Andrew O'Connor (ph): Keith, can you give us or make any other comments regarding indication for first part of '03 bookings.

We haven't opened up the first quarter, but we have a fair number of customers who in foul or or fair weather are going to buy from us. When we open up the book, we shouldn't have too much trouble filling the mill up. I wouldn't anticipate that we overbook it or anything like that but I don't think we're going to have gaping holes in it either. That's about the only color I can provide. I think as I said pricing will come off perhaps 20 bucks or something like that in the first quarter but I think the gloom and doom numbers that you're hearing at 300 bucks or 290 bucks by the first quarter are not going to materialize.

Andrew O'Connor (ph): Thanks for that. Then a couple of another's questions. Point of clarification, do you guys expect rail products from your newer structural mill to be commissioned. Maybe I missed that.

They will start producing that material in the second quarter. But it will go into test tracks principally where the material will be tested for six months. As Dick mentioned we missed the- not missed, we had no capability of being involved in the '03 bidding cycle but hope to be aggressively involved in the '04 bidding cycle so my real significant output in production output and shipping output won't come until '04.

Andrew O'Connor (ph): Okay. What would you say the company needs to do to take domestic market share in high grade rail products? I think most high grade rail in the US is imported from which Japanese steel makers, is that correct.

A lot of it is purchased here as well but the Japanese are favored supplier. I think Dick is successful in trials, he said early he certainly expects to be, if we are successful in the head hardened trials I think we're going to be a premier provider to that industry. I don't think there's any question with it. And the competition has 80 foot lengths, can't get any longer lengths on the belt so to speak. And we're going to have 240 foot lengths graduating up to 320. So just a lot less maintenance and fewer welds and it does cost money to weld them together. But with regard to the purchase of our product. I think we'll be- once we're there and are qualified, I think we'll be a naturally favored supplier.

Andrew O'Connor (ph): Thanks very much. Congratulations on your quarter. Good luck, guys.

Thank you.

A reminder to the phone audience, if you do have a we have press the star key followed by the digit 1. Chuck Harris (ph), Salomon Smith Barney Asset Management, (inaudible).

Chuck Harris (ph): Tracy, I just want to review a couple numbers you had. The Cap-Ex numbers you said were 145 for this year, did you say 70 to 75 million for next year?

Yes, I did.

Chuck Harris (ph): You're estimating 20 million in the in the Cap-Ex for the fourth quarter, is that right.

Yes.

Chuck Harris (ph): How does 70 to 75 jive with the what you're expecting to put into Qualitech , 60 or 70 million bucks, right.

The timing of the Qualitech expenditures will spill over into the end the year and into the following year.

Chuck Harris (ph): You're expecting 50 million in. Quality tech, and the remainder in firm business?

We've got $40 million or so much expected in 2003 for the Pittsboro asset.

Chuck Harris (ph): Okay. And then can you give sort of a guidance for what we should expect out of structural. What your output expectation is versus what the market is, etcetera. Is it 7 and a half million of performance in the third quarter going to be something we should expect over the next several quarters at about this level before it comes down materially? Or as the product ramps up it should come down.

We've got, we certainly expect it's going to be coming down as volume increases which is Dick and his team are first focusing on. I would guide you, first I tell you that the '03 budgets still being finalized so I will did he ever to Dick and Keith to chat with you about that. I would say the fourth quarter should come in, we're anticipating come in slightly better than what we saw in the third quarter. Not appreciatively, I would say it's going to be between $6 or $7 million or so is our projection now on the operating basis for the fourth quarter. So it will be better than that.

Why. I think Dick's numbers will be probably half to two-thirds of what they were in the third quarter. I think this will be the peak for losses will be the third quarter. They will not as sharp in the fourth quarter.

Chuck Harris (ph): For next year, break-even too optimistic an observation?

I think you got to lose money in the first quarter and have an opportunity to make a profit in the second quarter. And it depends on the market to a great degree. If it's really soft, the second quarter could be somewhat in jeopardy, although, I don't think so. And if they continue do that throughout the year, I think the division could be profitable in 2003.

Chuck Harris (ph): Okay. Thank you.

I would also like to take an opportunity to clarify something that I have not clarified but correct something I said earlier. I misspoke when I said that the cash taxes for the third quarter were $110,000 , that was our first quarter number. The third quarter number was actually 2.7 million which brings the year totaled to 6.9 million. And Peter Marcus had the follow-up to your question as a about depreciation, and interest, at IBI, I would guess that those two numbers are going to combine to around $10 million or so for '03. Dianna.

Our next question comes from Mark Parr (ph) with McDonald Investments(ph).

Mark Parr (ph): Hi, guys.

Hi, Mark.

Mark Parr (ph): I would like to add my congratulations. You guys are really establishing yourself as a premier flat roll supplier. I had one question just regarding the new paint line. I was just wondering, Mark, if you could give us some sense of what the incremental value-add is for the paint line? And what the- what you would expect as far as incremental costs associated with actually painting and running coils through the line.

The cost number for running coils through the line, Mark, is incredibly dependent on paint. You could put $50 a ton for paint on or it could be $300, depending on the types of primer and finish coats and those sorts of things. The operating cost is tough to hit. But we have- I think it's very very conservatively plugged into our budget, a $50 add.

Margin. You're talking about margin, right?

Yes.

Drops off the bottom line. .

Mill that's above and beyond what the (inaudible) margin would be.

Mark Parr (ph): Okay. Terrific. That's helpful. And most of my other questions have really been answered. I again want to say good luck and wish you all the best of continued success.

Thanks Mark.

Thanks Mark.

Our next question comes from Aldo Monteferro (ph),Goldman Sachs.

Aldo Monteferro (ph): Hi. Good afternoon. Good morning. Mark, can you say how many people you might add on that paint line.

We're going to add- I forgot, 34 or 37 people? Call it 35 people.

Close enough, Mark.

Aldo Monteferro (ph): That's for three shifts, would you say.

That would be four shifts.

Aldo Monteferro (ph): That's the full number.

Yeah. That when operating at capacity.

Aldo Monteferro (ph): All right. And Mark, is there is there anything else on the- under the heading of value added mix improvements in terms of increasing percentage of cold-rolled, galvanized, anything going on in '03 that you can point to that might improve your weighted average mix coming out of the Butler mill.

Most of the lines, are running already above capacity and probably be able to tweak a little bit more added on. But great profitability is not going to come necessarily through a great deal of increased production there. With the exception of the coat reversing mill. We've been in August we ran up to about 40,000 tons, we dropped back to I think 30,000 tons last month. But if we were to put two more crews on, we could quite well establish consistently 50,000 ton a month operating level there and improve that value added.

Aldo Monteferro (ph): Great.

You've got to get it through the pick ler (ph).

Aldo Monteferro (ph): Right. One final question on the paint line. Where would that material substrate come out of the new mix? Cold-rolled or. Hot-rolled?

Principally cold-rolled galvanized. The inception the project really germinated with LTV's demise last year. We jumped into the raised garage door panel business which is cold-rolled galv (ph)business. We're currently supplying about that 8 to 10,000 tons of that product per month. And that again, most of that goes through to roll coaters right now. And that we obviously would take that in house and coat it here. But I would say 80 percent would be cold-rolled galv. Probably 15 percent cold-rolled and rest of the mixture would be hot-rolled galv and a little bit of paper product.

We might talk a little bit about if you're going to steal a lot of product from the cold-rolled galv line.

Yeah. We need to expand. We're looking at expanding the or extending the furnace on our existing hot-rolled galv line and adding a cleaning session and that will give us the ability to run the cold roll galvanized on both our lines. Maintain our existing cold-rolled galvanized customer base.

That could help the value added on the equation slightly.

Right.

Aldo Monteferro (ph): In the SG&A line, Tracy, was there anything related to the Qualitech deal or other factors that drove that number up a little bit in the quarter.

No. Nothing associated with the Pittsboro stuff, no.

Aldo Monteferro (ph): Was that 6 and a half percent of sales.

What's going on with those, it's a good problem, I think, and the- as we continue to make more money, we're going to may out more in bonuses and profit sharing and that's the principle driver you're seeing there.

That's right.

Aldo Monteferro (ph): Okay. Thanks. I'll let someone else go. I'll come back.

Our next question comes from Michael Correlli (ph) from Barry Vogel and Associates (ph).

Michael Correlli (ph): A good morning. A few questions for Tracy. How much expenses related to the outage will be related in the fourth quarter.

I can't estimate that Keith.

I'll take a stab at it Barry. Somewhere between a half million and a million.

Michael Correlli (ph): Okay.

Not significant.

Michael Correlli (ph): Tracy, you said you only had 6.9 million in cash taxes year to date. .

Yes sir.

Michael Correlli (ph): Why is that so low?

We weren't terribly profitable in the beginning the year. We're going to expect that to go up dramatically in the fourth quarter: that's going to be over $15 million in the quarter alone.

Michael Correlli (ph): Okay. What's the status of potential equity offering?

We are committed as we said earlier to broad anything our equity base, putting larger foundation under our house. As you know, we have no pressing need to go to the market at this level of pricing. So, we'll just look for a better market place in general. Continued success for the company. And hopefully we'll be rewarded for that success and some later point in time we'll be more comfortable with going forward with our equity offering.

Michael Correlli (ph): Okay. Thank you.

If you do have a question, please press the star key followed by the digit 1. Our next question comes from Michael Gambardella (ph), J.P. Morgan.

Michael Gambardella (ph): Yes. Good morning, and congratulations on a strong quarter. Couple questions. One on the sheet business: when you talk about the fourth quarter showing average price realization of $10 to as high as $15 per ton is there a mix impact on that going from sequentially from 3 to 4 Q.

Yeah. The hot-rolled numbers aren't going to change lot and the cold-rolled coated will drive most of that increase. We were lagging as I said I said earlier. We had a lot of committed business earlier in the year which compressed to some extent our selling values on cold-rolled and coated. We'll realize better values there - it's a little stronger market. Hot-rolled, probably not going to change a heck of a lot.

Michael Gambardella (ph): Are you able to ship more cold-rolled and coated or maybe another way to put it, on a constant mix basis, what would the price change be for you on average realization on the fourth quarter?

Well, we're going to be up, as I said, on a cold-rolled, we don't develop those numbers. I would guess, though, cold-rolled will be up ten, fifteen bucks. Maybe 20. And same way on coated products, maybe as high as $20. When you consider over half our business is in value added now, that would yield about a $10 or $15 average impact on the quarter.

Michael Gambardella (ph): Okay. And question on the structural side. Are you still looking next year to a target of shipments somewhere math 650 to 700,000 ton range?

Unless the market deteriorates, that's our target.

It's been soften anything as you know, Mike. That's still our goal. I think the mill physically will be capable of doing it in its full year of operation without major commissioning situations. But hopefully the market will cooperate.

Michael Gambardella (ph): If you look at a year say 650 for the mill, how much buffer do you have on pricing to break-even for the year? From where pricing is right now?

Well, I think the mill could break-even clearly at 50 percent of its capacity. Fairly effectively. Today's numbers are slightly worse numbers form matter.

Michael Gambardella (ph): Okay. Great. All right. Thanks a lot, Keith.

Our next question comes from Charles Bradford (ph), Bradford Research (ph).

Chuck?

Charles Bradford (ph): Odd changes that have occurred in the market that have added some confusion to some of the customers. Can you try to clear that up a bit?

Chuck. We missed the very first part of what you were saying. Can you repeat that?

Charles Bradford (ph): Okay. I understand that there's been some confusion in the marketplace on the structural pricing based on some changes made by one of your competitors. Can you try to clear that up a bit, what's happened and how did you react to it.

Chuck, this is John Nolan. I don't know that we're confused about what some of our competitors have been doing. They're focusing on offers and trading companies. They've created what's called port pricing program, it's aggressive relative to what I would call scheduled prices. And it's a competitive standard at the moment. We have an alternative which is not to participate in those kinds of programs. But I think it makes good business sense to participate in those kinds of programs.

Chuck we're obviously not shipping enough volume to have my real impact on the marketplace, at least in any opinion. We're not shipping enough to have an impact. I have said many times that I believe that there's room for all of us in this market. Especially in the health think market and perhaps not any room for much in the way of imports. All of whom live with the very same production pluses and minuses that we do domestically. So I think clearly, collectively we can have an impact on imports over a period of time. Market is a little soft right now and everybody is reacting to that as well. But we're not a driver at this point in time. I don't think anyone is being chased around as regards to the low volume we're putting out.

Charles Bradford (ph): Can you direct the issue of ISG, whether they've had impact on the market or are you seeing that in the market?

I think ISG is pretty full from a bookings perspective. Perhaps a little fuller than they would like in that they're a little behind on their shipping curve. I think they're behaving in the market from everything I understand from Mr. Nolan and our troops. I don't think they're out there tanking the marketplace. John any comments?

Just to reinforce what Keith said: They have a very very long position. We understand they're overbooked frankly. We don't bump into them all that much. They've picked their spots, they're playing the game in a very responsible fashion.

Charles Bradford (ph): Thank you very much.

Final reminder to the phone audience, if you do have a question please press the star key followed by the digit 1. John Hudson (ph), Goldman Sachs.

John Hudson (ph): Good morning.

Hi John.

John Hudson (ph): Tracy can you give us the shipment breakdown byproduct?

Yeah, John. Hang on a second. Got to get my hands on it here. Here we go. The hot-rolled shipments were about 253,000 tons. Pickeld and oiled was about that 48. Cold-rolled, 80. Hot-rolled galvanized, 104. Cold-rolled galvanized issuing 69. Post and (inaudible) product, about 24. And the rest is just the odds and ends from New Millenium Project and others.

John Hudson (ph): Okay. And just to confirm, there was no much capitalized interest this quarter.

There was about $500,000 or so.

John Hudson (ph): Just from miscellaneous stuff.

Yeah. Closer to 550. We're still required to capitalize some interest on the rail project. We'll continue to do that. And we will be required to do something for the Pittsboro assets, the bar products assets as that commences. Kind of early to know what that's going to be but I wouldn't expect that to be more than another half or 3 quarters of a million dollars per quarter.

John Hudson (ph): When Keith was going through the p outlook for the fourth quarter in terms of shipments, I'm assuming that 580 number he threw out there was excluding Colombia, City, right?

Yes. I'm sorry I didn't make that clear. 575 to 580 its where I kind of hope or expect the flat rolled shipping level to be. Dick, could add 60,000 tons or so to that.

John Hudson (ph): The same with the average price guidance, that was really just talking about flat rolled, right.

Yes.

John Hudson (ph): Structural becomes a bigger part of the mix it may start dragging the consolidated number down a bit, right.

Yeah. Because it's all.

John Hudson (ph): Lower price.

Yeah you're going to mix it in with value added galvanized and of whatnot, it can only negatively impact of that number.

John Hudson (ph): Tracy, what should we be thinking about in our models from working capital impact in Colombia City as it starts increasing volumes.

I'm told we're going to have to lay in a good bit of inventory. That's of the market dynamic at the moment to be able to compete. We're going to continue to be building working capital for at least the much foreseeable future. I can't quantify that for you but it will be going up rather than down. As they builds receivables that will happen as well. Between the two it's clearly going up.

John Hudson (ph): Last question. Just on the Qualitech purchase. Do you anticipate any issues with getting the air permit approved?

From a technical standpoint we don't believe there's in my opinion real pitfalls in it. We believe we're submitting it shortly and working it through. We have to see what is going to what comes up in the comment period.

John Hudson (ph): I know you have a lot of friends in Indiana that got involved in the Colombia City permit.

It's hard to predict.

Most have been positive. Unfortunately a few of them negatively and you never know.

John Hudson (ph): This mill had an air permit at one point, right.

I don't think the local community will be an issue. What knows what the plumbers and pipe fitters union is going to do, again.

John Hudson (ph): Okay. Thanks very much.

We will continue on with Kathy Muldoon (ph), (inaudible) Asset Management.

Kathy Muldoon (ph): Where do you see flat rolled prices going next quarter and into next year?

We've already commented on that. We don't talk about all the products, we kind of use hot-rolled as a benchmark and we see hot-rolled being off $20 or so in Q1. And perhaps remaining in that range throughout the remainder of the year.

Kathy Muldoon (ph): Thank you.

Our next question comes from Leo Larkin (ph),(inaudible).

Leo Larkin (ph): Good morning. I'd just like to qualify the expenditures for Qualitech in 2003. Is the 40 million, did I get that right?

Questions. You did.

Leo Larkin (ph): Thank you.

We will continue on with John Novak (ph), TD (inaudible).

John Novak (ph): Can you give us your current assessments and outlook for the construction market with respect to your individual products? I guess on the call someone had has talked about the about the demand in pricing the outlook was trending downwards.

I think it is still impacting our sheet goods business. But we've successful penetrated other markets and if you looked at our m global mix in the sheet goods business, there's less construction activity and more activity in other market segments or sectors. And Dick's business it's solely tied to the construction marketplace. And it's a softer market. No doubt about it. You can see that in New Millenium building systems as well. Their volumes are off as is the entire industry. Everybody that produces (inaudible) reports, their booking to their respective institutes and those numbers are shared with the group, and their numbers are off. Construction activity has not picked up. It's a soft markets.

John Novak (ph): What about with some every your decisions to expand into rebar. I guess your assessments of how you're going to build your structural books going forward as well.

Well, we're going to continue to I think have somewhat an advantage in certain places that will help us with the with the structural book on a go forward basis. I think we'll not be able to run at capacity next year. Perhaps that will match up fairly well with the earlier forecast of the softer construction throughout the winter. We may see some increases next summer and feel differently about the health of the construction community. I think it was in regard to New Millenium, that's going to be a soft market for some period of time as well. I think the general malaise in the economy is going to have a lot to do with where we're at.

John Novak (ph): With respect to rebar? How would you be entering that market.

We're not going to get there until 2004, I certainly hope the double dip or triple dip whatever we're dealing with in the economy is long behind us at that point in time. I think for timing for entry into the marketplace as regards to Qualitech is going to be very good. The structural perspective is what it is. The market is a little soft right now. And I guess you can look at that positively, we're not trying to book the mill out at 100,000 tons a month either. We're still in the commissioning phase. Maybe it's not hurting us as much as it could.

John Novak (ph): Great. Thanks very much.

It looks like we have a follow-up question there Wayne Atwell (ph), Morgan Stanley.

Wayne Atwell (ph): Thank you. Will you be able to upgrade your mix very much in the fourth quarter or are you already running at your maximum mix? In the paint business, how much of that business do you already have where you're sending it out to have it processed by others and how much will it require you to break into the market?.

We discussed that earlier. We're not going to be improve on value added all that much dramatically. We're going to upgrade hot-rolled, hot-dip galvanized line that could give it the capability of a cold-rolled coated line , so that could help us a little because a lot of the tons that are that are going through our cold-rolled galvanizing line will move over to the paint line. They're still going to be over to the cold-rolled line but come out as a coated painted product. If we want to continue penetrating the cold-rolled market, we do need the additional capability, and that's the upgrade on the hot-rolled, hot dip line that Mark spoke of earlier.

We are currently putting 8 to 10,000 tons, garage door, market that is currently getting coated elsewhere.

Wayne Atwell (ph): You're contracting that out now.

That's not a single invoice transaction. People are buying the steel from us and transporting it to the to the coater and picking that bill up themselves.

That's just the garage business. There are other people that ship their cold-rolled coaters. There's 12 to 14,000 tons that's coming through our cold-rolled galvanized line that's getting painted.

That's correct.

Wayne Atwell (ph): A meaningful part of this business is in-house already and you'll just paint what's already being painted by your customers.

If they favor us with that business, yes, that would be the case.

Wayne Atwell (ph): Did I understand that you were taking about all 50 dollar per ton market.

That's what Mark indicated, additional market.

Wayne Atwell (ph): You're talking about $12 million on a $25 million investment.

Yes.

Wayne Atwell (ph): Okay. Thank you.

We will continue on with yet another follow-up question from all Aldo Monteferro (ph)from Goldman Sachs.

Aldo Monteferro (ph): Tracy, just a quick question on the startup budget that you mentioned for I should say the much capital spending budget for Qualtech, any startup or cash capital investments.

That 40 million was all capital. We're still putting the budgets together. I would expect the operating startup costs are going to be fairly small, certainly less than $10 million, if we want to be conservative, let's guess between 5 and 10.

Aldo Monteferro (ph): That would start late in '03.

More so, yes. Couple million in the early part and the rest of it in the latter part of the year.

Aldo Monteferro (ph): Do you know yet what kind of ahead count you might have there.

About 250.

Aldo Monteferro (ph): All right. And Keith, could you just briefly, I know it's a long conference call, but could you briefly comment on what your thought process was when you decided to go kind of downgrade that mill a little bit into merchant and rebar rather than SBQ

Well, we certainly understand there are better margins once you're qualified and SBQ_- in the SBQ side of the business. But Qualitech, I think the team made considerable number of mistakes in regards to the deployment of technology. And certainly they couldn't make it, round one, couldn't make a good of it in round 2. I think there's a lot of equipment that needs to be re-engineered, redesigned, retrofitted and we believe we can do that. But to bank the startup on it and we thought was perhaps a little bit reckless. Commodities are sold everyday of the week in the marketplace. As you look at the upper Midwest there's only one significantly large commodities player, that's Birmingham Cancakey(ph), I think we could be a major market fact tore in the upper Midwest. We know how to produce commodities, I think as well as the next fellow, if not better. Could put a significant financial foundation under the house. It is admittedly a lower margin business.

Once we drive that volume up to where we can, we would want to start experimenting with retrofitting the facility if not earlier, starting retrofitting to do SBQ shapes and go through that long and arduous qualification period with those that buy product of that nature. Clearly, I could tell you, Ford and Chrysler have already sent very strong signals they would like to see us run a lot of SBQ at this facility. So we're considering the demands and rigors of the marketplace.

Aldo Monteferro (ph): Looking at future years down the road, if you were to be successful in merchant bar, rebar, half million ton rate, and decided to go to go into that SBQ, would that require more melt capacity and ultimately close to a million tons type volume.

That furnace has that capacity right now, to run 750 million tons. Let's say we achieved 600,000 tons of capability,we probably just dedicate a couple 100,000 tons of that to SBQ.

Aldo Monteferro (ph): Thanks, Keith.

No problem.

Our next question comes from Andrew O'Connor(ph), Strong Capital (ph) A follow-up question.

Andrew O'Connor(ph): Thanks. Keith or maybe John, related to the discussion on end markets, can you make any comments regarding service centered inventories and how you see them trending at the moment.

I would tell you Andrew, I see them trending up. We'll have a better feel for that I think after the Census Department (ph) publishes the import numbers for September. The reports I'm getting tend to suggest that they are moving north.

Eric Fenniger (ph): How does Steel Dynamics feel a conflict with Iraq may or may not affect business.

A conflict with Iraq would perhaps panic the markets but as far as industry goes, you hate to say a war would have a positive impact. We certainly don't want to see that. But at the same time I think it very well could. I don't think we're a major player in war material type goods but as others could be it might have a positive impact rather than a negative.

Eric Fenniger (ph): Thank you very much.

Our final follow-up question comes from Wayne Atwell, Morgan Stanley.

Wayne Atwell (ph): If we could follow up your comments about SBQ. My understanding it's always been difficult to put out a high quality and low quality product out of the same mill. With a commodity grade rebar or long product with SBQ. My understanding was that the configuration of that mill was wrong. They had pretty good sized furnaces for the small orders they came, 130 ton furnace and orders came in 5 to 10,000 ton lots. It was structured incorrectly. Am I wrong? Do you think you do things differently.

Qualitech wishes they came in 5 to 10,000 ton lots. They came in 50, 60, 70 tons. You're right. The furnace has the capability to run good volume. And so, wasn't geared to 50 ton lots. I think in talking to the consuming community they're very capable of buying 500 tons and 2,000 tons, you just need to qualify the product with that community. As in regard to capability, can the people do it? Absolutely. I think they can. It's a discipline. And I think we have very disciplined employees at Butler that produce commodity grade hot bands as well as very exotic products today. And Dick will produce he can exotic head hardened rails and structural products in the very same mill. I think if you're trying to do it by stretching your equipment capability, that might be another issue. But we're going to have all the tools to do SBQ in place and that product will track through different production cost centers, if you will, or environments. I think we can do it, Wayne.

Wayne Atwell (ph): You think your order flow would be different. Your customers would give you larger lots so you could have several heats of one type of product.

I think we're going to have time to experiment. That's the key. We're going to be running a lot of volume through there with commodities. We're going to have time to go in there and make 80 tons of it and if we're successful we'll get bigger lots and then we'll look forward to producing them on the mill. Clearly, I can tell you, conversation with the customers, said Ford and Chrysler could buy thousands of tons at a time. That would be music to our ears but we have to be able to consistently produce the product.

SBQ is a catch all for a whole lot of different products. And the requirements from initial testing and acceptance range is a full gamut. And as long as you become a reliable and a quality supplier, you can get early acceptance, depending on the market and demands out there. On some that product significantly much quicker than the horror stories we've heard. But balancing that product is where we stand to benefit from the Qualitech facility,

Wayne, that mill is geared to produce large volumes, in its early initial life span it was not able to garner large volumes and it was a train wreck. Furthermore the quality of the product was impaired. They had problems with the saws, they had problems with the burning equipment and that needs to be remedied.

Wayne Atwell (ph): I guess you ran out of capital which is maybe part of the same issue.

Yes.

Wayne Atwell (ph): Thank you.

Diana, I guess that concludes the questions.

That's correct. There are no further questions.

Ladies and gentlemen let me thank you for some very good questions. Very long conference call. We had more people dialed into this conference call than we ever had in the past. Again thank you for your interests in Steel Dynamics and we look forward to speaking to you in the future.

We thank you for your participating and wish you a wonderful day. That concludes the conference call with Steel Dynamics.