Steel Dynamics Inc (STLD) 2002 Q4 法說會逐字稿

Please standby. Good day everyone and welcome to today's Steel Dynamics Fourth Quarter Earnings Release Conference Call. As a reminder today's conference is being recorded. Joining us today are Mr. Keith Busse, President and Chief Executive Officer, Mr. Tracy L. Shellabarger, Chief Financial Officer, Mr. Mark D. Millett, Vice President, Mr. Dick Teets, Vice President, Mr. Fred Warner, Manager of Investor Relations and Mr. John Noland, Manager of Marketing and Sales. For opening remarks, I would now like to turn the conference over to Mr. Keith Busse. Please go ahead sir.

Thanks Phil. Good morning ladies and gentlemen. Welcome to SDI's fourth quarter conference call here in Antarctica, no I'm only kidding although it is pretty cold here. I hope it's warmer where everyone else is.

SDI obviously had a great year, reporting on a diluted basis $1.64 a share. Before we get into the details though I would like to have Fred Warner read the traditional disclaimer. Fred.

Thank you Keith. Good morning and thank you for joining us on January 28th 2003 conference call covering Steel Dynamic's Fourth Quarter and year-end 2002 financial results. Today's discussion may contain forward-looking statements. Actual future events and results may differ materially from the plans, projections or statements made today. You may obtain additional information concerning factors and risks, which could cause the actual results to differ materially from forward-looking statements today, by referring to our most recent annual report on Form 10K as filed with the SEC. Specifically please read thoroughly both sections in the 10K regarding forward-looking statements and risk factors. This 10K annual report and other reports we file with the SEC from time to time are publicly available on the SEC website at www.sec.gov. And now I'll turn the call over to the Steel Dynamic President and Chief Executive Officer, Keith Busse.

Thanks for that. As I said ladies and gentlemen, SDI had a great year, recording diluted earnings per share of $1.64. Prior to extraordinary items actually we did better than $1.70 a share on the year. In the fourth quarter, as you know, we recorded earnings of $0.64 prior to extraordinary items and after extraordinary items $0.61. I think certainly in line, if not exceeding our estimates a quarter ago.

Business was fairly strong during the quarter but regressing to some extent from a pricing perspective. The marketplace became a little sloppy late in the fourth quarter. And prices came off of their second and third quarter highs and the market has remained sloppy I might report I think through early January. Although we believe that with reasonable doubt, that we will see a turnaround in the marketplace in the March timeframe.

We did have some holes in our order book as a result in cancellation that we suffered and I'm sure others suffered during this timeframe. But we were able to build the quarter up with export business to China. And I think SDI was in an excellent position to take some excellent orders to China. Now we wouldn't traditionally think about SDI being an exporter, since we do not have ready access to water. But I think the fact that we can produce lighter gauges than most any of our competitors in the industry, made us an attractive target for those kind of offerings into the strong Chinese marketplace. Which meant that we got better price rules. So I think the price that we got from some of the China export orders, I think, I know exceeded any stock market pricing that would have been available to us late December, early January in the quarter.

So we had a great year, a good quarter. We set some new records. Our productivity was outstanding reaching 0.31 man-hours per ton. Although I will tell you that we have a goal of being better than that, being below 0.30 man-hours per ton and I think we are going to achieve it.

The operating profit reached $98 [inaudible] operating profit per ton shipped excluding start-up costs and extraordinary items increased to $74 for the year. But we reached a record as I said of $98 in the fourth quarter.

As you now, we were able to put the litigation between the [indecipherable] Group and SDI and [indecipherable] behind all of us in the fourth quarter. And are moving ahead with our plans at the new Pittsboro mill. We have selected Glynn [indecipherable] to lead that team on behalf of Steel Dynamics. And he is busy at this point in time assembling his team. I think he has chosen who will be the Engineering Manager at that facility, but certainly has a lot of key positions yet to fill.

From an environmental perspective, I think we submitted our increment by year-end and so that is in the works at this point in time. And I think, or we are surely hoping that that increment will be reviewed and issued to SDI sooner than the 270 days. Which I think, is generally speaking the maximum or average timeframe that it takes to give permit of that nature turned around. So that's in the works. I'll be getting to look at the ordering of equipment I think. And the engineering on the facility is underway and accomplished. And we will be ordering equipment shortly.

I will tell you that the lead times on the equipment are such that they will probably dovetail rather nicely with the Environmental Committee Department. And we hopefully will be in the ground in the fourth quarter setting equipment perhaps by the first quarter and hopefully by the end of the first quarter of 2004 be producing merchant shapes at our new Pittsboro Mill. We hope to produce ultimately in time some 500,000 to 600,000 tons of material at that location.

As regards the structure steelworks, we had some rather positive results in the fourth quarter. Productivity increased rather nicely during that quarter. Again we rolled more tonnage and Dick and his team are doing a great job. I think from a rolling perspective this month, they will be approaching 40,000 tons, if not better. Which is on the way to being 50% of their capability.

So that effort is coming along rather nicely. The losses have been dramatically paired back as a result of more productive activity at the mill. I think from a melting and casting perspective that that facility is probably capable of running at capacity from a rolling perspective. If we have a more robust order book, I would believe we probably could roll at about 50%, to 60%, to 70% of their capabilities within a very short period of time. And Dick will speak to the progress on the structure mills a little later on the conference call.

During the quarter, we also had some trials with regard our Iron Dynamics facility. And I am pleased to report that those trials went extremely well. We are very pleased with the trials at IDI. We ran trials with, what I call a normal mix of iron oxides and binding agents and [reductants] in the first trials in November and came back and ran trials were marked and discussed and looked at zinc separation and issues like that in the December trials.

I think we concluded that we can run this facility at approaching 400,000 tons a year of hot [indecipherable] iron and something slightly in excess of 350,000 tons of liquid pig iron at a cost structure that would allow that facility to make a contribution to Steel Dynamic's earnings and cash position. We are and have told everyone that we believe that our cost production is on a net ton basis of $140 to $150 ton range. That is still where we see it at today and we think we have been able to better perform that with these trials. Our metalization is consistently 85% to 90% whereas in the earlier offering, results of Iron Dynamics we were all of about anywhere from 20% metalization to 90%.

We have absolute consistency. The physical quality of the hot [indecipherable] iron was as good as I have ever seen in hot brickets. Unfortunately we can't take all of that product through the electrics on a direct basis, because of the sulphur content that exists in the HPI. But can obviously use somewhat on a direct charge basis with the rest of it going through the iron reduction plant.

So we were fairly pleased with the trials at IDI and believe that in this little bit of a frenzied market as regards track costs and [indecipherable] earn costs will serve Steel Dynamics very, very well in the months and years to come.

It will be some time before we can put the capital to work. These are only trials and the Board needs to authorize the additional expenditure of capital as regards buying additional [indecipherable] before we kick that project off. So it could be 6 to 9 months before we actually potentially reactivate Iron Dynamics. But I think it will come at a very opportune time in the market.

I would like to share with you my thoughts about the marketplace in the year 2002. Obviously I think a lot of things came together to create a very positive market environment. We had a number of bankruptcies and we had a lot of antiquated capacity re-shuddered. Obviously some of it returned to the marketplace but that shuddering of capacity in conjunction with the trade cases, which were having a positive impact on onerous imports. And in conjunction with the Bush Administration's 201 action, provided the opportunity in the year 2002 for the market to stabilize. And it did. And imports initially backed-off.

We saw a resurgence of them in the August to September timeframe. And then obviously with roll demand picking up and that demand again principally being driven by China, the imports have backed-off and as regard the flammable business to a great degree. And we are benefiting from that. Obviously we still have an economy with a flat tire and that does not bode well for the steel industry. But I think with some exporting activities that are not only just available to Steel Dynamics, but available to everyone in the market, I think we perhaps with some stimulance in the economy, we will see the marketplace start to turn in the March timeframe.

I think service center inventories were rather robust at year-end. And needed to be worked off and I think the service center and order entry volume has been rather light. I think those inventories probably at this point in time are now coming down. And perhaps we will see a different order entry pattern in the near term.

So our backlog is in good shape. We are capable of running a full-out we do believe throughout the quarter. We do have a maintenance already scheduled for the month of March at [indecipherable] mill to do some maintenance work during that time. But the mill is running very, very well. Mark and his team as you know produced nearly 2.4m tons, an all time record for hot-band production in the flat-rolled segment of our business and he's shipped nearly 2.3m tons last year.

So the Butler team just had a great year. The mill is still running very, very well. I think Mark and his team will produce well in excess of 200,000 tons in the month of January. The month of February is a short month in terms of production days and shipping days, and I don't think we will see that kind of tonnage in February. But again, we'll see some rather good productive effort in the March timeframe. Although we do have a maintenance outage planned for that timeframe.

The fourth quarter as I said was just a great quarter. I don't think on a go-forward basis we are going to be seeing $0.61 or $0.60 kind of numbers, given the softness in the marketplace. I think we are probably going to be looking at $0.40 to $0.45, somewhere in that range perhaps in the first quarter of 2004. Prices as you know, have regressed sharply. Although I think our selling values in relation to that of our competitors has developed rather well.

I think the principle softness has been in the hot-rolled side of our business. Not necessarily in the cold-rolled and coated product side. We still have a rather robust demand there. So the softness of pricing has impacted hot-rolled much more than it has at this point of time finished product. But with scrap costs moving up, we will be in margin squeeze as prices are moving down. And I think certainly we are not going to have a $0.50 or $0.06 quarter on a go-forward basis.

I think last year, the first quarter of 2002 we earned $0.04. Certainly if we can achieve $0.40 to $0.45, our earnings would be ten-fold that of what they were in the first quarter of 2002. With some sort of pickup in the marketplace, we could achieve, I think, similar earnings in the second quarter and hope that we could set some new records in the third and fourth quarter on a go-forward basis.

I think looking at it from next year's perspective. I don't believe we will have any worse year than we had this year. Although the economy could sour even more so than it is. And certainly it's possible that we could have a worse year. But right now, our crystal ball doesn't show us that. And I believe that we could perhaps achieve the same level of earnings in 2003 as we did in 2002. Perhaps even achieve 2002's level of earnings.

I think as all of you know, we put a little better foundation under our house in the fourth quarter. In that we had a hundred million which actually in the [indecipherable] $115m Convertible Notes offering. The coupon on that is 4% and I think it's increased to a 7-year term I believe on those Notes. Is that correct? 10-year term on the Notes. So I think that puts some subordinated instruments in place beneath the trade payables and obviously the secured creditors.

As you all know that's not treated as equity. That's the level above equity if you will. So it occupies a position somewhere between our high yield financing and our equity financing. SDI continues to look at other financing opportunities that might become available to us in the year 2003. We believe our balance sheet is in pretty good shape. We are starting to achieve our target goal of no worst of 50% debt, equity long-term debt. We are really very close to that at this point in time.

I think our balance sheet is healthy. We haven't tapped into our revolver and so we have had an awfully good year, an awfully good quarter and I think it's a structural business. Hopefully we will see a pick-up in commercial industrial activity and continue to make progress there and our losses associated with structural continue to come down month-in and month-out. And I think Dick and his team still believe that they can achieve profitability perhaps by the third quarter, sometime late in the third quarter of the year 2003.

So I will now turn the conference over to Mark Millett for a word or two about the flat-rolled products position. And then over to Mr. Teets and then we will have Tracy give you some of the financial highlights. Thank you.

Okay Keith. Comprehensive as always. Not a huge amount more to add. I think the financial results speak for themselves. We had a wonderful year. Strong market obviously principally supply side driven. But again I would like to credit the Butler's team. There's probably not an organization in the industry today in America that exploded the logic behind [indecipherable]. They continue to demonstrate, I do believe, an ability to penetrate value added markets, like [inaudible] electric [inaudible] and have incredible ability to put their [inaudible] technology. As importantly I think the record achievements established with the best safety record in our industry. And we would hope that would continue this year.

2003 I think will see us continue to focus on value added opportunity. We have got that successful direct supply arrangement with GM for this year. We are starting our model on penetration. We will commission the [paint] lines in August, which will expand our market diversity. And we hope to increase our pickled capability in our [inaudible] this year.

We are very excited. We had a hell of a year last year. And the team is ready to outperform that in 2003.

Thank you Mark. Dick?

Thank you. I'm pleased to report that the production in shipping tonnages continued to increase on a monthly basis to the efforts of the Columbia City team. Product offerings increase almost weekly as new sections are successfully rolled. Our cost returns continues to decrease as operating efficiencies are gained with the ongoing equipment commissioning efforts and of course our higher production levels.

I am extremely pleased with our sales and marketing efforts as we expand our customer base and our order size. In the first quarter we plan to continue rolling new wide plant sections, both wider and larger than we currently roll. And in the second quarter we plan to commission [indecipherable] melt shop and the railroading equipment in the mill area. We are on schedule to ship the initial rail products in the first half of 2003.

Dick do you want to talk a little bit about productivity?

Sure, we've made the set gains each month that we basically started production trials in July 2002. And by the end of the year we had achieved numbers in the mid 20s. As you pointed out this month in January we are on track to produce around 40,000 tons, which is a great milestone for us. February, as you pointed out will be a short month. But included in that 39,000 or 40,000 number this month we have had some commissioning efforts of equipment.

We still plan to take at the very end of the month a day or so to work [indecipherable] some equipment. February will be basically focusing on commissioning new sections and improving our efficiencies. And in March again we will go back in and take a day or two buying equipment. But we are on track of our production levels.

Annual volume?

Well annual volume for 2003. We are still on track for believing that 600,000 to 650,000 tons are doable.

Thanks Dick. Tracy?

Thank you Keith. I'd just like to share a few statistics in no particular order. But I want to start with the balance sheet. Year-over-year our receivables you will note are up almost $37m. I would like to point out that our fourth quarter revenues were up about 75% in the same period. Yet our receivables were only up about 45%, which obviously signals an improved aging and indeed that is the case. Over 98% of our receivables are inside of 90 days, which is not exactly where we want to be. But certainly a tremendous progress from the depressed market conditions we saw at the end of 2001.

There is a fairly large increase in the other asset line on the balance sheet. That relates predominately to our additional debt issuance cost that took place during 2002.

The flat-rolled shipments by product are as follows for the fourth quarter of 2002. We had hot-band shipments of 227,000 tons. Pickled and oil shipments of 67,000 tons. Cold-rolled shipments of 75,000 tons. Hot-rolled galvanized of 93,000 tons. Cold-rolled galvanized of 70,000 tons. And our post [indecipherable] product of 20,000 tons.

That all averaged together for a price improvement over the third quarter of about $9 or a blended average of $406, as opposed to the $397 in the third quarter. And our scrap costs were moderate. The increase was moderate in the fourth quarter. It was only up $1 to $127 in the fourth quarter.

Our liquidity improved slightly by the end of the year. On a year-over-year basis that is and it's right in $100m as at the end of December. Predominantly obviously from the cash on the balance sheet but also our $75m revolver that remains undrawn.

Capital expenditures for the quarter were almost $34m. Predominately at the structural mill that was about $34m exactly to be offset by some of the adjustment to the other areas.

The projections for 2003. Capital expenditures are just shy of $100m. Almost half of that we would expect is going to come down with the new Pittsboro facility that was acquired in September of last year. And the balance being split almost equally between structural mill and the flat roll mill.

Start-up costs for the year were just a tad over $13m and I think we disclosed in the fourth quarter that that number was about $213,000. The EBITDA calculation I would like to share with you for the year was about $219m. That was calculated by adjusting the [indecipherable] back for interest exclusion of about $30m. And depreciation and amortization of about $65m.

In the quarter that EBITDA was about $75m. The interest adjustment there was about $10m and the depreciation and amortization was almost $18m.

I think that's all I've got for right now chief.

Thank you Tracy. Now pricing during the quarter as was mentioned earlier was up about $9 on the average. And costs were up $4 to $5. Driven mostly by lower volumes. Lower volumes in the fourth quarter were seasonally normal. We had a maintenance outage during, we had a large one during that timeframe and we have a number of holiday related shutdowns that occurred in the month of December, which caused the fixed overhead to be divided by slightly fewer tons. And had it not been for those outages, I don't think our cost structure would have changed hardly at all. As Tracy indicated scrap was up about a dollar a ton.

I might venture on a go-forward basis, I think scrap costs are going to be up another dollar, perhaps down a dollar to breakeven, somewhere around a neutral position for the first quarter of 2003.

Scrap costs have risen sharply recently in both the price of bundled [inaudible] grade have been up over the course of the last two months, $25. We bought a lot of scrap early on and some of that is now washing through the system. And early January/February we will see some higher priced scrap into February and March. But overall, on a quarter-to-quarter basis, we should see a large increase in scrap costs. And as I said perhaps no increase at all to down a dollar, up a dollar, somewhere in that area. Although I do think we will see that impacted as whatever it might average out to be, somewhat more dramatically in the second quarter on a go-forward basis.

Before we get into the Q and A. I might have John Noland just comment a little bit on the marketplace as he sees it today.

Good morning ladies and gentlemen. The market is a little difficult to read right now. As Keith pointed out, some of the inventory overhang from last year, we think is coming down. But the order activity at least as we expected 6 to 8 weeks ago, hasn't really materialized.

I guess the operative word for me this morning is curious. And we follow it. I think it will develop in the next couple of weeks as inventory plays out. And there is a more clear indication as to where we are going in the Middle East and what the economy might do as a consequence.

Thanks John. Phil we'll turn it over to you now and entertain questions.

Thank you Mr. Busse. For the Question and Answer session will be conducted electronically.

And our first question comes from Brett Levy with Royal Bank of Canada.

Thank you and congrats on another strong quarter you guys. A couple of questions. First up, on the power side. Can you talk in rough orders of magnitude you know how much more you are going to be paying in the first quarter, versus say the fourth quarter or the first quarter of 2002?

I don't think it's going to change a lot Brett. We have a contract which still has 5, 6, 7 years to run at Butler. And this year's costs maybe up a tenth of a penny. So I don't know what we are operating at but we are operating at $2.8 and $2.9 sense. To have a stable power environment in our Butler Division. Dick is certainly more exposed to the open market, but given the capabilities of his melt shop, which are nothing short of awesome to date. He can, while he is going through the learning curve anyway, he can melt as much steel in off peak hours as is needed by this mill, I believe in the year 2003.

Because I think he is at his full potential there so obviously he has access to very cheap power at night and on the weekends. And that's when they do most of their running. If they see an opportunity during on-peak times during the week, they do take advantage of it. But I don't think that they are going to hamper any of the learning curve and output initiatives of the mill. And I think there will be very little cost impact. Power has spiked with the cold weather we have had. And we have chosen again to run at night and on the weekends and with very little impact financially on us.

That's excellent. In terms of the structural mill. Can you talk in approximate terms where the EBITDA loss was for the last quarter? And then also can you talk about kind of the qualification of rail products with the railroads and sort of what the timetable is at this point to that?

While the financial people are looking up the answer to your question, I'll let Dick talk about the railroads.

Sure. From the qualifications perspective that we have had ongoing discussions with all the class one railroads. We are on track to supply approximately 15,000 tons of rail products in the year 2003. Those are specifically for trial purposes, in-line track opportunities. Where they will be observed by the railroad engineers and right away personnel. And then we look at it that based on our expected performance in those and we will be qualified to begin bidding on rail opportunities in the fourth quarter of 2003 for shipment in 2004.

Brett, the EBITDA at the structural mill and the quarter recent fourth quarter was about $2.7m. That by the way was on an operating loss of about $4.6 or $4.7m.

Alright, last question and then I'll get back in the queue. Can you talk about kind of whether or not the percentages of hot, cold, galvanized and the yield etc would change significantly during the course of 2003 versus where you were in the fourth quarter?

I think they are going to change as Mark indicated. We are going to make certain adjustments in our product mix at Butler to drive more products towards the state line. He has it in mind to either pickle locally or to address that from an engineering point of view. I think you are going to see something of a reduction in our exposure so to speak in commodity hot [indecipherable] between now and the end of the year.

Can you quantify that a little bit?

It's kind of hard to put a dot on the board this time. Possibly by next call we'll have a better feel for that.

Alright thanks very much guys.

Next we will hear from Mark Are(ph) from Mcdonald Investments.

Good morning guys.

Heh Mark.

I had a couple of questions. Keith, could you talk a little bit and John maybe this is for you as well. What you are seeing as far as base prices for the first quarter relative to the fourth quarter for hot roll?

There's not of a myriad transaction prices out there at the moment Mark, depending on the circumstances of that particular producer. I think that's one of the reasons why the market is sitting back at the moment. I believe that there is demand there, it's just a question of when buyers are comfortable providing orders to mills on an other than opportunity basis. I would say that in the domestic spot market, numbers in the 280, 290 base range are I think reasonable for January. I expect they are going to up as a consequence of some of the things that Keith expressed earlier on our expectations that the economy will come back at least in terms of expectations for the second quarter forward before the end of March.

Mark, I think that we will still achieve a hot rolled number of in excess of $300 a ton. Perhaps $305 to $310 would be a number that is achievable for us in the first quarter. As John said, maybe a little sloppier in the early part. [indecipherable] but most of that is already booked. So I think we've got a pretty good handle on that number at this point in time. So up sharply from the highs of mid-year 2002, but still above the current stock market pressure.

How much of a change, I mean let's say that you did $310 for the first quarter. How much of a change would that be from what you realized in the fourth quarter on hot roll?

Tracy's looking at it.

$343.

We achieved £343, about $33 decline.

Okay, alright. Okay-

That's only on part of our business.

I understand.

I said earlier we have not seen those sorts of declines on the value added side of the street. So that number only impacts part of the tonnage.

Okay, alright. As a point of clarification. When we were talking about 2003 earnings being in line with 2002. We you talking about net income or earnings per share? You know given the fact that you have got the new shares out for the convertible offering?

I guess I haven't thought about in terms of the new Convertible numbers. If they are included on a diluted basis I don't know that they are. Tracy could speak for that. I was thinking about the kind of shares we have outstanding today. We should be able to achieve a year that's as good as this year if not better than this year.

Yes Mark. I would agree with the chief. I think we are talking both earnings per share and dollar amounts because technically the converted shares are not calculated within the diluted calculation yet because of the price of stock.

Okay, because of the price of the stock? Okay. Alright. And then one last question. Keith you've talked, I know on several occasions that you thought that the structural mill would be capable of achieving breakeven, maybe even making money at 50% capacity utilization. That 40,000 ton production number you are talking about for January would be at least on paper would seem very close to that? I mean is there a potential here for the structural mill to have a positive contribution in the first quarter?

No. The 40,000 tons probably will not be re-achieved in February. It may well be again in March if not exceeded. But that's only 40% of our capability, not 50% or 60% as I believe I said when we talked the numbers out. 50% maybe a stretch but somewhere north of 50% approaching 60% we should be able to do. But we are not quite there yet. Our losses, you know compared [indecipherable] and I think Dick and his team, this is probably the best month they've had since they started up.

Well you guys keep doing these close record numbers in this kind of an economy, I can't wait to see what kind of money you earn when the economy picks up. Congratulations.

Well thank you very much Mark.

Next we will hear from Wayne Atwell with Morgan Stanley.

Thank you. And congratulations on a good quarter. Just trying to go over the detail work on the modeling. Depreciation was $60m. What should we look for in 2003?

Thank you Wayne. I meant to mention that earlier. I think that the depreciation, amortization numbers are going to be up from what I talked about earlier. Primarily because the amortization of the financing costs. The depreciation we still expect to be around $70m for 2003. And it's going to be fairly tight. It's going to start around $15m in the first quarter I would guess. And end the year around $20m per quarter.

Okay.

Amortization though is up a little bit and I would suggest that we should expect a little over $10m in 2003.

In amortization?

Yes sir. And it's going to be right around $2.5b a quarter.

So it would be $70m in depreciation and $10m in amortization?

Yes.

Now if I did my math right your structural shipments were 51,000 in the fourth quarter is that right?

That sounds high, hang on. You are not taking into account the elimination. Structural shipments were actually more like 46,000 in the fourth quarter.

Okay and do you have an estimate for the first quarter?

We are looking around 90,000 tons.

And flat roll. What should we expect there in the first quarter?

Well I guess we're going to see something between 550,000 and 570,000 tons.

Okay. Now your start-up costs you said were $200,000 for the fourth quarter?

Yes sir.

So that implies that you are now booking the structural mill as an ongoing business?

Oh we have been since we simply started up on July 1 or effectively July 1. The start-up costs that we are incurring right now are associated with the rail mill.

Okay. Is it possible you could give us an estimate of what the structure mill did in the fourth quarter in terms of profit or loss?

Yes I just mentioned-

That was on an EBITDA basis-

I gave the book price. On an operating income it was about $4.6m, $4.7m.

Operating income?

Yes, that's before interest, yes.

Okay, so that's a positive?

No that's a negative.

A negative okay.

I'm sorry negative $4.6m or $4.7m.

Okay. An operating loss of $4.7m in the fourth quarter. And what would that have been in the third quarter?

What was it in the third quarter, I don't know that. Hang on I'll have to look that one up.

Heh Wayne, what I can add while Tracy is looking that up. I said about 90,000 tons in the first quarter. And I would like to think that that's going to be broken. But it is conservatively stated because we are not sure of the amount of, we sort of have rail commissioning scheduled for this timeframe in March. And if we go through with that, it will be 90,000. If we push it to April because we want to commission more sections in the [indecipherable] then our tonnage will be slightly higher than the 90,000, maybe 95,000.

Okay. And your first commercial rail shipment should be late in the first half?

Late in the first half exactly.

And any thoughts on what you might ship in the second half in oil?

About 10,000, 12,000 tons. Again minor because it's basically an intra-trial opportunities that we are pursuing.

Okay.

And Wayne I'm told I mis-spoke about the start-up costs in the fourth quarter. Those are not the rail mills, I should have said that those were the Pittsboro facility. The operating income in the third quarter was about $7.5m negative, loss.

Okay. So it looks like something bordering a $3m improvement?

That's right.

And any thoughts on the first quarter?

Yes. I would guess that what we are going to see in the first quarter is going to be not quite as dramatic an improvement from the fourth quarter, but we are going to see around $3m or so.

So you go from a $4.7m loss to a $3.0m?

Something like that.

Loss.

Loss, right. And these are operating profit numbers?

Yes, sir.

The only thing missing from that calculation is interest basically.

And then lastly. We didn't talk too much about structural pricing. Have they gotten any worse? About the same? How would you characterize structural pricing?

They have been basically the same since the fourth quarter. Officially the list price on many products has been reduced by all of the suppliers. But the realized price has been basically very stable.

So basically the last few months structural price is more or less flat?

That's correct.

Thanks so much.

Aldo Madafero(ph) with Goldman Sachs has our next question.

Hi Keith.

Hi Aldo, how are you?

Doing well. On the export sales that you had. You mentioned that you were achieving a better than you saw in the market. I guess that would work out to something like a $330 FOB? If that's true, could you say what the net to the mill might be after your additional transportation expense?

Well the FOB to the mill, then that would be the same as you just stated. But let's just say it's above these flat market pricing that John had indicated was in the marketplace today. We don't care to disclose the exact number Aldo.

Are you able to ship steel then for export at prices that are above the US price?

Yes.

And that's including any transportations borne by the buyer?

Either number we are quoting you is FOB the mill. So transportation wouldn't really enter into the picture. That's to the buyer's account if you will. But we wouldn't be shipping to China quarter inch material at about domestic spot prices. And I think we said very clearly earlier, our light gauge capabilities have given us an edge and that particular product mix is delivering a better number that the current spot market prices.

Great. And if I could follow-up Tracy with just a quick one. Tracy on the scrap cost that you quoted $127 or so. Is that the purchase price, rather than the yielded costs that you were, I think the third quarter you kind of stated about $132?

No, that's the yielded number.

Yes that is the yielded number.

That is the yielded number. The yielded number and the third number it's about $126, about a dollar difference.

And although that's yielded, that is the scrap cost in the mill shop as it comes out of the [indecipherable].

Okay. Alright thanks.

Once again, if you would like to ask a question, please press *, 1. Moving on, we hear from Michelle Applebaum with Salomon Smith Barney.

Hi. I got a lot of nitty gritty questions, but those questions have been answered. But I did have a question on all this consolidation that is going on right around you? What do you think it means for the business long-term?

Well, I think it gives some of the players better market pricing power or capability. It doesn't mean that they are going to use it, but I think to provide an atmosphere were there is more disciplined pricing. I think one of the things that we fail to achieve every time we have these huge plans and a lot of problems, for many of the buyers is one day they are pricing their product to their customer based on the lows that we saw at the end of 2001, early 2002. And they are either pocketing the difference or giving it away to be competitive. And the next minute we are in a totally different market environment, where the price has arisen $150 a ton and they are screaming bloody murder because of how fast they ratched it up and then it ratches back down. And maybe if nothing else it would provide the producers an opportunity exercise better discipline in the marketplace.

I guess that being uncharacteristically vague, is this a positive thing for you guys?

Well I think it's a positive thing for everyone including us.

Okay. Well some people are saying that if you get lower cost producers, that's a bad thing for low cost producers. You don't agree with that?

I think being more globally dependent is just a good thing. I think there was a wide disparity that existed. I don't think that kind of disparity in the new world of steel making as you look forward here is still going to exist. I think some of these consolidations will produce entities with a better operating cost structure than they were previously able to accomplish. Bringing their numbers closer to what the many mills were capable of achieving. And there were those that would probably argue that if all of us collectively have a better cost structure, it might result in lower market pricing. And I'm not telling you that couldn't happen, but I still think there will be good margins there because you are talking about people with superior cost structures.

Okay. Thank you.

You're welcome. Thanks Michelle.

We will now hear from Michael Gamberdella(ph) with J. P. Morgan.

Yes, good morning and congratulations on your quarter.

Thank you Mike.

I have a question Keith on the contract pricing that you do? First of all I haven't heard you talk too much about like hot rolled contract pricing, beyond since 6 months, maybe to a 12 month period. But did you lock in any of your sheet business at contracts say near the peak back in August? When pricing was about 25% higher or so. And what is the status of those contracts? Has anyone come in to renege on the contracts now that they have seen spot pricing drop?

Michael, this is John. We didn't lock anything in that early 2002 year. Most of the deals that we close with the exception of General Motors of course, which was done on another basis, were done probably in the September/October timeline. So we believe that they are relatively solid as we look forward to 2003. I would tell you that no one at this point has reneged or pushed back on any of the multi contracts that we did.

Some of that pricing we did was occurring at a time when the market was coming off of a bias.

Okay. And then in the bean market. Who are taking share from right now?

Well there is only import, 2 to 3 answers there.

I would say really imports and probably a little bit maybe from GSI and [indecipherable] new opportunities on our regional markets present itself.

I think that's right John. That we are focusing mainly on our regional area, where we are because of freight opportunities. We should be the supplier of choice. I would tell you that there is a realignment going on. Maybe not a rapid paces, but even small occurrences in the structural market have, I think, pretty profound effects. And when a small producer like G & L Structural goes out. They were the supplier here in the Mid West to the modular home business and manufactured homes.

And needless to say, their demise then creates opportunities for other producers who maybe more focusing on that, but now shift their production into that arena to realize operating efficiencies and then there is again a shift amongst the medium section metals. I would tell you that imports, activity [inaudible] low and I think to the dollar it's actually improved that. Meaning even lower on a go-forward basis. So I'm very optimistic that we are taking imports, seeing economy pick up and not really at tremendous expense at the two other competitors other than regional.

Right. And on the import front, I notice that the AISI data, I guess [inaudible] for all structurals, you know light, medium and the heavy ones that are the more profitable, is down substantially already. I think like 10% market share. So you really can't get too much share gain out of import. On a going forward basis, you still have a lot of volume to ramp up. Who do you anticipate taking the share from? I mean would it be both other producers, new core and Texas Industries equally? Do you think you can get more from Texas Industries at their Virginia plant? Where do you see the biggest gains coming from?

Mike, this is Keith. I think to some extent that you are correct. A lot of wind is out of the sails on the import opportunity. There probably is still some wind in that sail. Some ability to penetrate that market or show off-shore tonnages back off-shore, if you will. But more importantly, I think we are starting to see sort of a new millennium segment of our business. We are seeing a lot of engineering activities today that we didn't see in the last 2 quarters. And a lot of projects produce [indecipherable] a lot of it driven by insurance issues related to terrorism, etc, etc. And a lot of that is coming back to life. So if we can just get some resurgence in the commercial industrial segment, hopefully that will provide opportunities for everyone out there in the marketplace. If the economy remains as flat as it is, any increase in volume that will benefit SDI will obviously come from other producers, small ones as well as large ones such as [indecipherable[.

Okay. Thanks a lot Keith.

Moving on, we'll here from Peter Marcus with World Steel Dynamics.

Yes, hi gentlemen. I wonder Keith, are you able at the current level of scrap prices to give us a general feeling about your operating costs and produce hot rolled band, let's say with or without depreciation? And if you could let us know what that depreciation would be?

Well Peter, I don't think about operating costs. I think about full loaded costs. You and I have had that discussion I think about a thousand times. I factor depreciation and interest in all considerations into my thinking. I think we are still some $240. Obviously if the scrap environment changed radically in the moving forward timeframe, that number would change. As I said, I don't see our first quarter 2003 being radically different scrap cost wise than our fourth. But if the [indecipherable] goes up $5, the number would change by $5. But we are soft at $240 I do believe all in.

Okay thank you very much.

And we do have a follow-up question from Aldo Madafero(ph).

On the pricing on hot rolled. There is some speculation that prices are going to rise and you did mention it yourself. I am wondering how quickly would you have to see your audit book pick-up and pricing pick-up for you to avoid getting squeezed by scrap, say by the second quarter? Where would your lead times be right now for incoming orders I guess?

[indecipherable] the quarter, so we are talking about being locked down at this point in time [indecipherable] 2,000 tons here and there. We are pretty much done with this quarter. I think there is ample time for that recovery to positively impact us in the second quarter.

Do you have a feeling now like how much your scrap cost is going to up in the second quarter from the first?

Well I don't have a crystal ball that big. Now on another quarter, I think we're going to be accurate at zero to up a dollar, down a dollar in the first quarter. And that could change by as much as $10 in the second quarter negatively. But then again, it could change by $3. I mean it's pretty hard to call that one that far in advance.

Right. I appreciate that. Alright. Thanks Keith.

And we do have a question from Charles Bradford with Bradford Research.

Good morning. A question about scrap. Because the [indecipherable] is worth now over $170 which is kind of unusual. Do you think that's not going to have an influence of sucking scrap out of the US? It seems to already be doing it on the West Coast?

I think it's completely down the West Coast and the East Coast, I think that's exactly right. I think the only good news out of that is the products out of $170 scrap won't find a way back into this market because it would be cost prohibitive. So I will tell you all that is going to [indecipherable] for the demand equation that exists over there today. It represents a very interesting opportunities for Iron Dynamics today. But no, you are right, scrap is [indecipherable] off the West Coast and the East Coast and that's exactly what has pushed the pricing up during the past couple of months.

Without that activity which was already out there, scrap wouldn't have went anywhere. I think scrap is going to go up another $5 this month. And what I am hearing already is a back-off in the March timeframe. And it's pretty [indecipherable] not the guidance supply us principally, was able to get hold of a forecast from another rather large provider of scrap resources and interestingly enough from February forward through the year perspective, they didn't see the price changing over $3, $4, $5. Which is [inaudible] when you measure that specific timeframe.

And with Venezuela having their price problems with a million [inaudible] iron prices going up. Does that impact you other than scrap?

It does not, Chuck. We were fortunate to have bought quite a bit of [indecipherable]. And looking at it just this morning, I think we have enough [indecipherable] iron to go through September at this point in time. I think we are in good shape for many months to come on [indecipherable] iron.

It sounds like some of your other competitors are going to have a problem?

Well I don't know that, but that's the plan [inaudible] such is life.

Well thank you very much.

Okay.

Before we get the next question, if there is one. I wanted to, Peter Marcus if you are still there. I looked up the numbers that you were after. And certainly I would agree with Keith that our hot rolled cost is up $240. But extracting scrap in the fourth quarter from that, we operated on a converging cost if you will, for hot bands as we did all year long below $100 a ton. And I did a quick and dirty calculation of the depreciation on the cost centers on the hot side and that worked out to about $12 or $13.

Yes, we do have another follow-up question from Peter Marcus.

Hi. In fact I was coming in just on that. So if depreciation was $12 or $13, the interest expense I know is running in the fourth quarter about $10m. So you probably have another $10 a ton of interest?

Ballpark yes.

So if we take, I guess a number of $238 minus $23 we'll say, that would give you an operating cost for hot rolled band an EBITDA kind of cost of only we'll say $215. Which would be an unbelievable number. Is that maybe approximately correct?

I think it's that [indecipherable] better figure.

Okay, that's why I held back. Thank you.

And Mr. Busse it does appear that there are no further questions at this time. I will turn the conference back over to you for final and closing remarks.

Thanks. Well I think in talking to you we had quite a lot of listeners on the line and we do appreciate your interest in Steel Dynamics and look forward to speaking to everyone in 3 months from now if not sooner. So thank you very much for joining our conference call today.

Thank you. That does conclude today's conference. Thank you for your participation.