Steel Dynamics Inc (STLD) 2003 Q2 法說會逐字稿

Good day everyone, and welcome to today's Steel Dynamics second quarter earnings conference call. (CALLER INSTRUCTIONS).

Joining us today are Mr. Keith Busse, President and Chief Executive Officer;

Mr. Tracy Shellabarger, Chief Financial Officer;

Mr. Mark Millett, Vice President;

Mr. Richard Teets, Vice President; and Mr. Fred Warner, Investor Relations Manager.

For opening remarks, I will now turn the call over to Mr. Fred Warner.

Please go ahead, sir.

Good morning, and thank you for joining us for this July 22nd, 2003 conference call covering Steel Dynamics' second quarter 2003 financial and operating 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 that could cause actual results to differ materially from forward-looking statements made today by referring to our most recent annual report on Form 10-K as filed with the SEC.

Specifically, please refer to those sections in the 10-K regarding forward-looking statements and risk factors.

This 10-K annual report and other reports we file with the SEC from time to time are publicly available on the SEC web site at www.SEC.gov.

Also, our SEC filings are now available on our Steel Dynamics web site.

And now, I'd like to turn the meeting over to Steel Dynamics' President and Chief Executive Officer, Keith Busse.

Thank you, Fred.

Good morning, ladies and gentlemen.

It's good to be with you again, and to be able to share with you our results and our feelings about the immediate future, if you will.

As you can see from the press release, SDI earned 11 cents per share in this quarter, which I think was consensus, and was in line with, I think, our April projections that we made back in Q1 earnings conference call.

As you compare our second quarter of '03 to '02, and then compare the first quarter of '03 with the second quarter, the reasons for the decline are interesting.

And, in comparing the second quarter of this year to the second quarter of last year, we didn't suffer much of a price decline, about $5 as you can see in the press release; yet scrap costs were up approximately $25 a ton from Q2 of '03 to Q2 '03.

Whereas, in comparing the results from most immediate quarter, the first quarter, to those of the currently being released second quarter, the price was the major reason for the decline in earnings.

Price was off, on a composite or consolidated basis, about $28 a ton, whereas scrap costs in the quarter were up $8 a ton.

So one being the principal driver in the year-to-year comparison, and so, that being scrap, and price being the principal driver in the quarter-to-quarter comparison.

As you can see, the consolidated shipments were very consistent.

They were 4 percent higher than the second quarter of '02, and about 1 percent higher than the first quarter of '03.

Production did increase, primarily due to the -- our new structure division, with 720,000 tons in the quarter compared to 600,000 tons in the second quarter of '02 and 685,000 tons in the first quarter of this year.

Structural prices, as you can see from the text, were up, whereas flat-roll prices were down.

So if the consolidated number is $28, that would tell you that the decrease in pricing we experienced in flat-rolled in the soft markets of the first half of this year were higher than, obviously, $28;

I think specifically, very close to a $35 a ton decline in pricing, offset by an increase of $18 a ton in structures, netting out to $28.

We are not satisfied.

Like I said in the text, we are satisfied -- I'd say that is kind of a misstatement.

We're not really satisfied with the results, but I think we're doing fairly well by comparison to our peers in the industry.

Our operating profit was $29 a ton, and that was achieved in light of the fact that we have a number of start-ups underway, all of which are going very well and we will comment on shortly.

When you look at just the results of the Flat Roll Division at Butler, in this very dismal market, we still turned out an operating profit of slightly in excess of $50 a ton.

As I noted earlier, scrap costs were up about $8 from Q1 to Q2.

When we look forward, I think that scrap costs will probably, in the third quarter, be anywhere from down 2 to up 2, so probably sideways, in terms of our results in Q3 would be what we would expect to see.

The Butler operating unit continues to do very, very well.

As you can see in the text, we did -- have I should report, start a very successful production at our Jeffersonville, Indiana galvanizing plant.

In fact, it went extremely well.

And they are running very well after operating for only two or three days, but I will let Mr. Millett comment on the results at Jeffersonville a little later on here this morning.

The new paint line is on-schedule.

They will start commissioning it in late September.

We shouldn't expect to have prime product until sometime in October.

But it is on-schedule as promised.

As it would regard our products division in Pittsboro, Indiana, work is proceeding very well there; there is only a little a limited amount that can be done without an air permit in hand.

So what can legally be accomplished is going extraordinarily well.

And it regards the air permit, which doubles as the construction permit, we think things are going very, very well.

It is entirely possible that we may have the air permit in hand by September first, and be able to start constructing the foundations for the new rolling mill equipment at Pittsboro.

Everything is on-target, on-plan, and on-budget there.

It is possible that, given that we get our air permit by September one or sometime in September or late August, or whenever it might issue, barring any unforeseen circumstances, it is not impossible to think about rolling large bars there by year-end, or at least commissioning the mill in late December.

Most of the production, on a go-forward basis, as it relates to merchant shapes and rebarred (ph) boxes, products of that nature, small SVQ (ph) bars, will not be forthcoming until the first quarter of '04, as promised.

So, our start-ups are really doing extremely well.

Dick continues to make very good progress on our new structure division.

Production was up slightly from quarter-to-quarter.

But more importantly our shipments increased over 40 percent.

From the first quarter to the second quarter.

And I think they will increase by that much again -- I will let him comment on that -- from the second to the third quarter.

So, we're making nice progress there.

I will let Dick talk a little bit about our rail project and the progress we're making there.

But things are starting to shape up at the structure division.

And, our operating results, I think, were dramatically improved from those in the first quarter.

And you'll hear more about that from Tracy Shellabarger.

I don't really have any other further comments.

We will get into a lot of excellent dialogue as we proceed with this conference call.

I will tell you, I think I've given what guidance that we could give, on a go-forward basis.

And as we did in April, we will provide our outlook of the near-term future.

The market is strengthening.

Our backlog is in very good shape at Butler.

And prices in hot-rolled and pickled (inaudible) are moving up.

The market for coated products -- I wouldn't say is soft, but we have an extra month to feed now down at Jeffersonville.

And we are not seeing a lot of price movement there, although we do believe that that will be forthcoming in the fourth quarter.

So, very positive trend line at Butler.

A very positive trend line at our new structural division.

And, we are excited that bar products is making the progress that it is.

I would guess that our earnings, in the third quarter, will be somewhere between 15 and 20 cents.

And that we will guide you to the lower end of that range -- is our current thinking.

As we look out to the rest of the year, I think our earnings are going to be sharply improved in the fourth quarter, and could be in the 35 to 40 cents arena, which would probably bring us in pretty close to $1 share this year, which, I think, as I think back, in spite of a pretty soft marketplace, would be our third best year, from an operating perspective than would have been accomplished in the face of multiple start-ups.

So, I think things are going very well.

We are pretty pleased with the progress we're making.

I'm going to turn it over, at this point in time, to Mark Millett, and let him tell you a little bit about the events at our Butler operating unit.

Good morning, everyone.

Against the (inaudible) is an incredibly solid performance, I think, at Butler.

The same effect that we maintained shipping levels in a very soft market, and our (inaudible) production is primarily a squeeze on -- from scrap and product pricing.

Actual conversion costs are relatively stable for the quarter, especially compared to our peers.

Our energy costs, again, AP (ph), our product contract, which goes through December of '07, is essentially a fixed-price contract at 3.2 cents.

And our hedging strategy for natural gas, I think, has paid off handsomely.

We are still hedged through June of 2005, over (ph) 85 percent our current consumption at around about $4.35 at the deckerville (ph).

So I think these things have paid off very well in the quarter.

The paint line, doing very, very well.

Again, it's an expansion of our value-added product line.

It is going to be able to furnish the plant's level quality of material.

It's going to be the only paint line in North America that is owned and located and operated by a steel mill, which is going to give an incredible enhancement of cost compression.

It makes the transfer freight from the mill to coater, it's about anywhere from $12 to $20 a ton -- significantly reduces the supply chain cycle time; so it's going to compress inventories, again, saving carrying cost of inventory.

And it is going to exploit our existing infrastructure of maintenance, engineering, administration, sales and marketing.

So those dynamics, along with our operating culture, I do believe, will put us in the lowest cost position in North America, when it comes on-line in September, October this year.

Jeffersonville has done extremely well, I think, seeing we only set eyes on it in January.

We closed on the facility in March.

And as Keith said, we started up the first of the evening.

It's actually averaged about 250 tons per shift, around about 2000, 2500 tons so far.

In fact, last night, hey ran 340 tons in the shift of 015-gauge product, which for the first time start-up curve is quite significant.

We spent $17.5 million on it with $1.5 million (indiscernible).

That included the whole facility and also included a $1.3 million bond.

So, it was a reasonable acquisition for us.

Prime shipments actually started out the door yesterday from Jeffersonville.

So, positive news.

Looking good.

Thank you, Mark.

Before we move on to Dick, I failed to talk about Iron Dynamics.

Progress toward our re-start is going very, very well.

And our cost estimates, I think, have probably even improved by about $5 a ton.

We have to realize them as we actually operate the facility that we think things are proceeding, very, very well there.

We, as most of you know, are involved in Masabi Nugget project; and progress at the Masabi Nugget on the iron range, has proceeded extremely well at the pilot plant.

We are pretty excited about those results.

I might also mention that New Millennium Building Systems, which, in this economic downturn in commercial/industrial activity, went from a profitable operating unit to a non-profitable operating unit, will be in the black, we do believe, the rest of the year.

And so, very pleased about the progress at New Millennium Building Systems.

Dick, I will turn it over to you to talk about the structural effort.

Thank you, Keith.

Good morning.

I'm proud to report on the efforts of our team in Columbia City.

We recently commissioned about a dozen new sizes, including many of the Canadian sessions.

Rail trials have been successful to date.

We have got all the equipment in and are finishing the installation check-outs.

But we did run the rail sections through the breakdown mill last Wednesday, and we are very pleased with the results.

And our intention is to run it through the tandem mill now, and the rest of the finishing equipment in the first week of August.

The sales have continued to support our production and shipping goals, which you've commented on, have continued to increase.

And yes, we look for another 40 percent improvement quarter-to-quarter.

We plan to take the mill down for about a one week's span at months end, spanning both the end of July and the beginning of August, to fully commission the automation and do some routine repairs.

But I am happy to say, in light of this downtime, we will continue to increase our shipping and maintain our production numbers.

So, I think a lot of good things are happening in Columbia City.

Keith.

Thank you, Dick.

I think we said in our press release that we believe we can become cash-positive by year-end in the structural business.

It is not entirely out of the question that we might not even be GAAP accounting standards profitable by year-end.

So, we're really pleased with the progress there, Dick.

Thank you.

Tracy?

Thank you, Keith, and good morning, everyone.

I would like to just rattle off a few of the statistics if you would like to try and record some of these.

First of all, the shipping by product at the flat roll mill is as follows for the second quarter.

Hot-rolled shipments were about 286,000 tons; pickled and oiled, 61,000 tons; cold-rolled, 57,000; hot-rolled galvanized, 79,000; cold-rolled galvanized, 54,000; and our post anneal product, about 13,000.

I think Keith and Dick mentioned that the structural mill was over 90,000 tons for the quarter, which was a nice improvement -- 40 (ph) percent improvement or so over the first quarter.

The -- let's see... the CapEx numbers for the quarter were almost $24 million.

That was primarily at the flat-roll mill associated with a little bit of Jeffersonville, but primarily with the paint line going on.

And then it was cut sort of evenly split after that between Pittsboro, a little bit of work that we are doing down there, and some ramping up at Columbia City at the structural and rail mill there.

The Senior Credit facilities were broken out as follows.

We did pay down a little bit in the Term B (ph) -- it was just the normal amortization there.

So we're left with about $164 million outstanding at the end of the quarter.

And then our two note issues -- the 9.5 percent notes at 200 million and the 4 percent converts at 115 million, both fully outstanding.

Our revolver is undrawn at the end of the quarter.

Combined with our cash, obviously, leaves us with almost $90 million of liquidity that we are very comfortable with, going forward, given our cash flow generation abilities.

Because of the timing of CapEx, primarily at Pittsboro, we do expect that in the third quarter, by the end of the third quarter, we're going to be showing you an outstanding balance in the revolver.

We don't know exactly what that number is going to be, of course.

It would suggest that that could be in the $20 million range, though.

And speaking of that cash flow generation ability, we are pleased with our ability to continue to generate EBITDA.

And our margins have fallen off from what we would like to see around 20 percent or so down into the mid teens.

We expect we are going to see that obviously for the second quarter; but, again in the third quarter, before returning hopefully back up around 20 percent or so in the fourth quarter.

The interest expense components are as follows.

The gross interest expense was almost identical to the first quarter of $10.6 million.

We were required to capitalize a little bit more interest in the second quarter -- 1.7 million versus the 1.4 in the first quarter.

That generates what appears to be a better interest number then of 8.9 versus 9.2 in the first quarter.

I would suggest that the 10.6 number, of gross interest number, is a fair estimate for what is going to happen for the last two quarters of the year, taking us in at about 42, $43 million of gross interest expense for the year.

The capitalized number on the other hand is going to start coming off a little bit, as the paint line primarily starts up.

And so that capital number is probably going to be just a little over $1 million each quarter for the next two quarters, yielding a net interest number, then, for the year, of something less than $40 million -- 37, $38 million, something like that.

We were able to achieve our long-term debt -- long-term debt and equity ratio of -- 50 percent, again, in the quarter.

We improved ever so slightly, but we are dancing right around that 50 percent number, and would expect that we are going to be able to maintain that posture -- no significant improvement nor deterioration, the remainder of the year.

Depreciation and amortization, as you saw, was just under 17 million for the quarter.

It will be going up as some of these facility start up, and would suggest that it's going to be around 19 -- excuse me -- $18 million in the third quarter, and $20 million in the fourth, which would bring us to a total, for the year, of $70 million.

I wanted to emphasize what Mark said, there is a lot been mentioned about electricity and gas costs.

We have gone to a great extent to try and hedge our exposure to those costs.

He mentioned that our flat-rolled mill electrical contract is firm through the end of 2007, and that we are approximately 85 percent hedged in the 4 to 4.50 (ph) range on natural gas.

The same sort of thing holds true on the natural gas scenario at Columbia City.

It is a little bit more difficult to predict a percentage, given their start-up, of course.

But they are focused on that same sort of range, and are in that same kind of range, in terms of the cost.

So, we feel like we don't have a significant exposure to gas or electricity.

The other thing, the last thing I would like to point out is what I'm going to call the operating cash flow from Columbia City.

I am defining that as the cash flow at the start-up facility, exclusive of the changes in working capital.

That is the builds in inventory and receivables that naturally happen in start-up.

They have improved, strictly on that basis, quarter-over-quarter, from about a $7.5 million loss in the first quarter to about a $4 million loss in the second quarter, which we believe is a nice improvement, of course.

And, as Keith pointed out, we do expect that to continue to improve for the remainder of the year.

And, to the point that we should be positive sometime during the second half, and, with some assistance from the markets, even GAAP-positive profitability posture by the end of the year.

Keith.

Thank you, Tracy.

I guess the other thing I'd like to say in closing before we get to the Q&A is the Company continues to perform extraordinarily well through thick and thin.

In brisk markets, SDI has continued to set industry record after industry record after industry record. for productivity, profitability.

I think it's -- I believe it's a well-managed company.

In the dark and difficult times, we still, obviously, do very well by comparison to our peers.

So, I am pleased with the team's extraordinary performance, especially in light of all the growth projects that we have on-hand.

So, at this point in time, I would like to turn the -- Brisha (ph), I'd like to turn it over to you and we can get involved with the Q&A.

(CALLER INSTRUCTIONS).

Brett Levy (ph) with Royal Bank of Canada.

Congrats on a strong quarter in an otherwise very difficult time.

Can you talk a little bit first on the beam mill?

There has been a little bit of publicity around the inventory issue.

Sort of who is and isn't participating in the price increase.

And then also, I would note that your competitor to the east or one of them to the East has gotten kind of big in sheet pilings; and I was wondering whether or not that is a market you guys could address as well?

Dick, do you want to tackle that?

Sure, I will chime in.

Sure, from a pricing standpoint, I would tell you that we have successfully, as an industry, put out for and received the benefits of two $15 a ton price increases since the first of the year.

And that is solid.

I would tell you that recently, there had been another attempt by TXI (ph) to try to recoup some additional costs in the scrap end energy world.

I would tell you that we have not recognized it and neither has some of the other competitors.

I am not going to say they are not in spot places where it is being seen.

But, in whole, I don't think the community, in large, has accepted.

And, we definitely have not proceeded on that manner.

I would tell you that the sheet piling to the east, I am happy they are concentrating in sheet piling.

It is a very limited market. (indiscernible) Motto (ph) also produces hot-rolled sheet piling.

We have the technical capability to.

It's a long development product, and we are going to focus on many other products, mostly the rail, and then we have some other products associated with channels, M-section beams and so forth that we have on our plate before we consider going into the sheet piling.

But hey, anything that takes off and takes some tons away from the white flange (ph), that's okay with me.

Brett, this is Keith.

You had a question about the inventory situation.

Much of our ramp up -- I lot of our ramp up in inventory was due to the learning curve, that you can't effectively add efficiently learn how to produce this broad array of products without building some inventory.

Some of it, obviously, is market-related, as well.

But, we see that tapering off.

We've built inventory again in this quarter -- built more inventory, actually in flat rolled than we did in structurals.

But, we see that tapering off in Q3 and Q4, and basically being flat to perhaps even down in the latter half of the year.

As regards to piling products, you should know that -- how would you classify that -- desperate acts of desperate men, I suspect.

But, these products generally are being sold well under cost of production.

It's not a market, that at its current pricing level, we would want to participate in.

We doubt that, with some of the numbers we've seen, there is anybody that can produce steel at those numbers.

So its' just a losing share proposition.

We're doing very well in the wide flange arena at this point in time, and have our hands full with commissioning the learning curve on rail products.

And one kind of bigger picture question --I guess it would be for Keith.

Obviously, you've got about five different projects that are in some phase of ramp up.

At this point going forward, are you looking more towards building or buying for your next project?

Well, we are not looking at building right now, or buying.

As we said earlier, we are taking a little bit of a rest in putting the balance sheet -- not that the balance sheet was bad -- but putting it in better order, reducing our leverage.

The start-ups are, as I said earlier, just really going extraordinarily well.

We're very pleased with bar products and its progress.

Dick is making good progress.

We think IDI is going to perform very well.

Of course, in light of tight metallics (ph) marketplace, IDI could be a very important restart for us.

We are pleased with the Nugget project, although we don't have any money in the Nugget project; we just have time and personnel.

As you heard, Mark said paint land (ph) is going very well, and Jeffersonville is up and running.

So one of those things that perhaps the market was worried about in start-ups is pretty much behind us.

Jeffersonville has been an excellent start-up.

I think the others will be as well.

Adam Graf with Bear Stearns.

Good morning, gentlemen.

I just want to talk a little bit about scrap prices.

Obviously, I realize prices in the quarter were quite high.

But, we've seen prices taper off, and that we're, you know a bit into the third quarter (inaudible) you guys buy ahead.

Can you give us an idea of what you guys expect to see for realized scrap prices in the third quarter?

Yeah, I think I read in one of the communications -- it might have been from Goldman this morning that they believe our $8 transition from Q1 to Q2 was somewhat related to the aggressive strong buys we made in the earlier part of the year, when scrap prices were a little bit lower.

And that is a factor.

They did rise here in the second quarter.

We did see some mitigating; but then again, with the -- alvication (ph) outages in July, the prop scrap, as you know, does not flow as heartily at this point in time.

And scrap prices moved up again this past month.

I cannot really tell you where they're going to go.

I've heard anywhere from sideways to up $5 in August.

I don't have a crystal ball any bigger than that.

Although, I do believe they are quite high and could mitigate, somewhat, in the September time frame.

As I said earlier, it is hard to know exactly where the numbers are going to be.

But, anywhere from -- best case, probably be down $2 in Q3 to worst-case, being up $3 or $4.

Chuck Harris with Salomon Brothers Assets.

I guess this might be for either Tracy or Keith.

Can you help me understand some of the progression in the numbers?

If I look at this, overall production numbers were 720,000 tons, roughly, versus last quarter, Q1 of 685,000 tons.

Your cost of goods number is virtually flat.

How much of this is a mix -- what did you do -- I mean there something here you did significantly right, and I'm just trying to understand that.

I'm not sure...

I mean, the overall cost per ton if you look at it that way, you know...

I don't have the numbers for Q1 to Q2 (multiple speakers).. .

I actually did look at cost of goods sold from a Q2, '02 to Q2, '03 perspective, and I can tell you that the 4 percent increase in shipments caused about $7 million of the cost of goods sold to increase.

And scrap, by itself, cost another 16 million.

So, you can easily, just intuitively, get from 161 million up to 183 million.

I did not do that same exercise from Q1 to Q2...

Because you have 185 in Q1 -- 186, really, in Q1.

Basically 187 -- it is effectively flat.

I think we shipped, well, a lot more hot-rolled in this quarter (multiple speakers).

I just want to point out, yeah, it is flat, but as a percentage of the sales number,...

Percentage of sales, it's different.

But you also have -- but that's pricing.

I'm just looking at it from a volume perspective. (multiple speakers) production was 720 versus 685, sequentially.

You know, (multiple speakers) very huge mix change going on here somewhere?

Yeah, we shipped a lot more hot bands, and obviously, more structural products.

And the standard cost of those products are much lower than the value-added.

As I listened to Tracy rattle off the value-added, we really didn't have that great of a quarter in the coated arena.

I think our shipments were actually down in the galvanized product field and cold-rolled.

And so, (indiscernible) Tracy.

But I suspect it's a mix thing.

Any other comments?

I think that is true.

I think as a percentage of sales, obviously, it increased in the most recent quarter, I think.

And that is primarily reflective of the scrap costs.

And so, I would attribute it mostly to that.

And I think the conversion costs stayed fairly -- fairly constant.

In terms of the mix, I would have to take a look at that.

I don't know that there was a dramatic change there; there was a little bit more emphasis on hot-rolled in the second quarter -- 286 versus 276 in the first quarter.

But, shipments were obviously higher in the first quarter.

So, yeah, there was a little bit of a richer mix in the first quarter.

So, that obviously had an impact, as well.

The shipping tons really didn't change a heck of a lot.

The price didn't.

That's why it's -- obviously, the net sales declined from quarter-to-quarter. (multiple speakers)

Right.

I understand.

Cost of goods sold stayed the same.

There could be some mix factor here.

But it's probably not a big thing one way or the other.

The other thing we are neglecting, and I apologize, is our structural mill.

We love them!

But we're not used to thinking about them.

Obviously, their cost structure on a per ton basis is less than anything that we are doing at the flat-rolled mill.

So that does tend to -- when we're talking about mix, that does tend to sort of drag the mix price down a little bit.

Actually, that's what I was kind of getting at was -- as the shipments move up on the structural side, is that going to change sort of the overall way this thing is going to balance out?

Yes, it absolutely should.

Because the flat-rolled mill is fairly it obviously fluctuates.

But its fairly well maxed out in terms of its shipping volumes.

We should enrichen (ph) that a little bit with the paint product and the galvanized -- incremental galvanized products out of Jeffersonville.

But clearly, the structural and rial mill will be a more than mitigating factor to those guys.

And last question, which is on structural.

About 40 percent, Q2 versus Q1.

Was 40 percent where you wanted to be?

I'm trying to remember whether it was -- I thought it was -- I was thinking it was going to be more than that.

I mean, can you give us a refresher on what the expectation was there?

I think the expectation, as I recall, was about 50 percent (multiple speakers) between 43 and 44 percent.

Okay.

So just a little shy, but not enough to matter?

Every little bit matters.

Okay.

We do expect we are still going to be in the range of 500,000 tons or so for the year, as we had projected originally.

Michelle Applebaum with MGA (ph) Advisers.

I wanted to ask you a question about pricing in the flat-rolled market.

You are saying that the coated product is having a little bit tougher time.

Is that specific to Steel Dynamics?

Michelle, I don't know.

I don't think so.

I think coated products will show some signs of life, on a go-forward basis but will lag behind hot-rolled.

Hot-rolled and hot-rolled P&O (ph) are stronger products from a supply/demand perspective at this point in time.

Of course, we do have a bigger mouth to feed now, as I said earlier with Jeffersonville.

But our people are telling us that they are not going to see the same kind of ability to increase price there, at least as rapidly, as we did in the hot-rolled side of the business.

We are starting to see a little strengthening in actual order rate on the coated side.

And obviously, with some of our peers consuming hot band and converting that.

As the price of that product goes up, I think you will see the coated product come up a little bit too.

Okay.

Yeah, I mean, usually that is the way it works.

Another question.

Can you tell us how full -- you are saying your backlogs are getting a little bit better.

It was a little vague.

Can you tell us how far out you're booking by product in flat rolled?

We (inaudible) October in hot-rolled.

On coated, we still have sometime, I think, in September.

And, what is the price that you're booking, if you took an order today for October, on hot-rolled?

Currently, we are not taking orders in October.

Oh.

Now, this price increase August first -- I don't recall seeing you announce a price increase August first.

I don't think we've ever announced a price increase.

You don't announce them.

We just don't announce it.

I would tell you this, our numbers are above the industry talking numbers.

We are pricing our product a little more aggressively.

So, like, if I ventured 300 as a guess?

That's a nice guess. (laughter)

And that would be kind of your most recent price?

Yes.

October will be higher?

No, I would not tell you that.

We will see what the market holds.

Okay.

Moving to the contract pricing -- what is your sense of what -- I mean, you're becoming bigger every day in automotive.

What is your sense of what you be able to get from automotive for the coming year?

Well, unfortunately, we are not armed with Mr. Nolan today.

And I don't know that I can adequately answer that question, Michelle.

Let me just -- Dick Wardrop, on the conference call last week, said that, you know, was very negative on the prospects.

Would you expect prices, incrementally, to be up or down?

I think some of the products that we were qualified on and the automotive community is buying had actually price escalators from year to year to year, and firm pricing in them.

So I see them increasing modestly from period to period.

That's more of a function of our contract than it is the real market.

Yeah, what were the escalators -- based on cost or market?

Or were they just locked in going up?

They were just locked in going up, I believe, Michelle. (multiple speakers) my point is, I don't know that you should take that comment, or our escalating comment as indicative of what the market is or is not.

Okay.

Because my understanding was that your escalators were based on scrap prices.

No.

Wayne Atwell with Morgan Stanley.

Thank you.

Just a couple of quick questions.

I wanted to do some housekeeping here.

Depreciation and capital spending -- you said depreciation this year would be 70.

What are your thoughts on capital spending for this year?

And how about next year?

Thanks, Wayne.

I didn't speak to the balance of 2003.

We still believe that the total for the year is going to be around 130 million or so.

And that will be almost equally split between the third and fourth quarter of around, you know, 33, 34, 35 million per quarter.

In terms of what's going to happen in 2004, I don't know that we have looked out that far.

All we're talking about is going to be the tail of the Pittsboro construction, the rail welding facility at Columbia City.

And I'm not aware of anything significant going on in the flat-rolled mill.

So, I will try to speak to that in a second.

We will try to pull that together for you.

But, as we sit here today, we are not sitting here looking at, you know, $100 million of CapEx in '04.

And depreciation might be 80 million next year?

It could be, yes.

I think that is a good guess.

Wayne, we might expand our presence in New Millennium Building Systems.

But those just aren't huge dollars.

We can build another facility or two there for $20 million -- if you built two of them all in one year, which is unlikely.

But we don't want to lead you to believe we're not going to grow in some aspects of our business.

I didn't mean to imply that; we just don't have anything on the board at the moment.

Okay.

Big mill projects on the drawing board.

Okay.

And then guidance -- do you have a thought on pricing for the third quarter and total volume?

Volume... in terms of shipments, should be...

What is he asking for...

I'm sorry -- third quarter.

Third quarter...

That should be right.

I guess, if structurals were up 40 percent, that would be 40 times 90, which would be about 35,000 tons more.

So 35,000 tons higher -- is that reasonable?

Well, I think flat rolled products is going to be up 50,000 tons, as will structural products.

So, our shipments from the second quarter to the third quarter are probably going to go up in excess of 100,000 tons.

Pricing, as you heard us talk about, is strengthening a little bit.

You are going to see most of that at the tail end of the third quarter, which is going to help earnings, but a lot more of it, I think, in the fourth quarter.

Dick spoke to a structural price increase that Chapparral tried to initiate.

I don't know in time that we all wouldn't want to follow that with the strengthening market.

Right now, we have seen no real signs of huge movement in demand.

So, therefore, the clientele may not accept it no matter how much we all would like to strengthen pricing in that arena.

But it is not out of the question that we could have another price increase in structural products by year-end.

Yeah, Keith, let me just add that TXI isn't the only one wishing and hoping or working towards that.

They are not alone in that.

But we also -- I think the good news for SDI is that we will have a product mix average of a price increase as we bring on more large sections.

We have to finish commissioning some of those and we're working out the bugs in that.

But the third and the fourth quarter, especially the fourth quarter, is where we will see the improvement from a pricing standpoint -- a realized pricing standpoint on a per ton basis.

So, would it be possible to see maybe a $5 increase between the second and third quarter?

In structural?

Realization across the board.

Oh yeah, I think so.

I hadn't really looked at it.

But I know structural will be at least up by that much, if not a little more.

Structural is probably -- looking at the numbers -- structural is probably in that range, Wayne.

And we would hope to see something a little stronger in flat roll.

New Millennium is seeing some strengthening too, as Keith mentioned earlier.

So, on a mix average basis, we should be very much more than $5.

Right.

It appears that flat-rolled could be up $10 or so.

Maybe a little more than that.

Okay.

Did I understand that the structural mill lost 4 million in the second quarter?

No.

That's not what he said.

What I was talking about was my own definition of cash flow for the structural mill, which excluded working capital items.

That was negative $4 million.

That is just from operations.

It does not include the normal inventory build and receivables build that you would expect in a start-up.

They almost cut their operating cash losses in half in this quarter, Wayne.

Okay.

Refresh my memory.

Where was it -- in the first quarter?

Pardon?

What would it have been in the first and where did it end up in the second?

I think Tracy said on an operating basis, it was around 7.5 million; and this quarter was 4 million loss.

Again, as I just said, they almost cut their losses on a cash basis in half.

Right.

So that's how you have been defining it, on that basis, so...

No -- that was a different presentation.

All right.

Lastly, you built some inventory, I guess, you said that related to the start-up and the fact you have to run certain products before you can -- to get them broken in before you really get a market developed to sell them.

So you tend to build some product in the start-up phase --

We make every product before we offer it for sale.

We want to make sure that there's no bugs in the system and we don't leave a customer high and dry.

Okay.

And lastly, what is the capital cost of the paint line?

Right about 27 million.

Great.

Thank you, very much.

Wayne, before you go, let me quantify some of the things I said.

On a GAAP basis, the losses at the structural mills have improved from about 10 million in the first quarter to about 7 million in the second quarter.

The CapEx for next year was scrambled around -- and looked at what we said -- looked at what we've got on the board and they are the projects that I mentioned to you before.

And, you know, Keith's qualification is we could always decide to do something later on it, but we don't say anything big.

I would tell you, that as we sit here today, our CapEx for next year is in the range of $60 million or so.

60 million?

Right.

Okay, great.

Thank you, very much.

Michael Gambardella with J.P. Morgan.

Good morning.

I was wondering, what did you do on exports in the quarter and where do you see them in the third quarter?

Well, we finished exporting all orders in the quarter -- I cannot remember how many tons, but, Mark might.

But, we have no orders in hand now.

Although we understand the Chinese market is strengthening daily, again.

And, there are some request for quotation that are out there that we are looking at.

So, it is possible that we could rejoin the export business here in the third or fourth quarter.

But, right now, we have nothing on the books.

And then in terms of the mix going forward into the third quarter -- you mentioned an increase of 50,000 on the flat rolled side.

What flat rolled products are you going to see the majority of that coming from?

Value-added.

I think hot rolled is basically going to be flat to down a little.

And obviously, as we push more tons through the coating lines at Butler, plus the Jeffersonville operation, that the increase is likely to be all in value-added products.

And, are you looking at the increase from the shipments in the third quarter on both flat and beam as a reflection of increased demand?

Or are you gaining share?

I think -- that is really a hard call.

I think the industry has been a little more disciplined.

We've again lost a little bit of capacity that has not come back.

I really don't see demand hugely changed from Q2 to Q3.

Although, some sectors that we sell into are reporting some strength.

As it regards structural, I really think it's more market penetration.

Although, our New Millennium Building Systems division, which briskly quotes commercial industrial jobs in the marketplace, is reporting increased activity -- substantial increased activity -- in their quotation level, and obviously it's going to be reflected in their operating results.

And those are the same markets that the structural products fall into.

So, even though you don't quote people that are building the buildings, when you sell them to the fabricators and the service centers, I do believe there is some increased activity there, as well as a good bit of market penetration.

But what's your sense on the beam side, where you are gaining share?

Who are you taking share from?

I don't -- I don't know that I could tell you that, directly.

I think TXI, Chapparral, has been doing a lot of business in Eastern Canada, which is a very difficult market, from an imports perspective, where -- that's a little further away from us.

And, we do more business in Ontario and Saskatchewan.

I'm sure that what is unaccounted for by increased demand is probably affecting other players equally.

I couldn't tell you whom we are taking market share from, directly.

I really don't know Nucor's operating rate at Blytheville and I don't know the operating rate at the Texas plant.

And the final question on scrap.

Where are you positioned on scrap right now in terms of the inventory?

Our inventory is fairly significant at Structural Products, and is a little lighter than what we normally carry.

And, I think that was due principally to weak prime scrap flow in July.

We're hoping that that picks up in August.

And we might see a little bit of inventory build in the August, September time frame.

But we are historically carrying a little bit less inventory in flat-rolled.

Mr. Gambardella, are you done with your question?

Yes.

Mark Parr with McDonald Investments.

Good morning, guys.

Keith, I was wondering if you could give a little more color on the changes at IDI that have resulted in the reduction in, at least a reduction in your expected operating costs?

Well, I don't know -- I don't have them in front of me.

And Mark would have to speak to that.

I think is just refining the numbers relative to recovery rates on zinc and gas consumption, etc., etc..

It's just 30 cents here and 40 cents there(multiple speakers)...

The things relative to our original projections (indiscernible), Mark, basically the inclusion of other waste streams, and not a total reliance on iron ore (ph).

So the incorporation of mill scales (indiscernible) those sorts of things into the raw material input.

When do you expect to start-up IDI again?

Has there been any change in that?

We expect the start-up -- the reduction side -- sort of September/October time-frame, and be producing liquid pig iron in November.

Thank you very much, and congratulations on your financial performance.

And also, it seems like you guys are very upbeat today, which also is a change from some of the other calls I been listening in to.

Well, we are.

We're feeling pretty good about our progress in most of these projects.

Andrew O'Connor (ph) with Strong Capital.

Good morning, Keith.

Morning, guys.

I know is kind of late.

I had a question related to structural and rail.

What percent of capacity or percent utilization you guys anticipate for the third quarter and the fourth quarter -- fourth quarter -- what is commensurate with your earnings guidance, Keith?

Well, if you consider that capacity is somewhere between a million and a 200,000 tons -- 90,000 tons is sort of a fair estimate on capacity.

And, Dick will probably average 50,000 tons or so.

So, he would be beyond 50 percent of his capability.

I think there is a good chance that he is going to be at 60,000 tons in September, which would make it two-thirds of his capability, at this point in time.

Okay.

And then what percent utilization do you guys need to turn cash positive, then?

Oh, I think that'd do it; if we could produce and ship 60,000 tons, I think we would be there.

Okay.

Fair enough.

Thanks so much.

Leo Larkin with Standard & Poor's.

Thanks.

My questions have been answered.

Aldo Mazzaferro with Goldman Sachs.

Hi, Keith.

I was wondering, if you take a look out in 2004, as you start Pittsboro, and, as you start up IDI later this year, could you give us some kind of a ball-park as to what kind of start-up cost you might expect?

I don't really have that.

You know, we incur start-up costs with IDI just by carrying it.

And I -- obviously, those are going to worsen a little bit in the fourth quarter when you begin production.

But, if my memory serves me right, in the first quarter, we expected to actually -- for that to be less of a millstone.

It's not going to be making a profit, I wouldn't tell you, in the first quarter.

But the carrying cost of it will be less than it is on a non-operating basis.

Bar products -- I don't have the forecast in front of me.

I think Theresa just went down to perhaps snag that and give you some color on where we expect the start-up costs to be in '04.

Maybe while you're waiting I could ask another one.

On the revenue line, you know, I was wondering if you could give us -- you know, you started breaking out those tons of the other products, New Millennium and stuff.

I wonder what the average selling price, ball-park, might be on those tons?

Well, the New Millennium tons, the combination of joists and deck are in excess of $600 a ton, or say, in that range.

Right.

Okay.

And since you acquired the, you know, the minority interest in that facility, how many employees did you inherit, on a consolidated basis?

I am thinking it's pretty close to 200 people.

It's short of 200, but it's not for off of that.

So they were reflected in the second quarter?

Yes.

Those are all in there.

Okay.

We have a population now that exceeds 1000 employees.

I think Mark has 600 and some;

Dick has 300 and some.

I think, collectively, they are 1000, and New Millennium, a couple of 100, would be 1200 people; and a few people at IDI.

And of course, they're building a team down at bar products.

By, you know, by the end of 2004, we will be approaching, I think, 1400, 1500 people.

Right.

Another question, Keith, on the last time China got hot, the scrap prices shot up and the flat-rolled price here in the U.S. was actually falling.

I think we have a scenario today where the flat rolled is already down and scrap is already up.

If China gets hot again, how do you see the spreads between scrap and selling price on flat-rolled developing?

Well, I think that China, you know, shipments fell off faster than the purchasing side.

So I think what's added some strength to the scrap market has been the consistent purchasing of scrap and resource material, globally.

I think the global markets are showing fairly strong signs almost everywhere.

Surprising strength in China.

I think the Russians are keeping a lot of their scrap at home these days, in a better economic climate.

I think -- someone said they picked some of the low hanging fruit, and stuff they are processing now is what we traditionally do here to recycle those materials.

Pig iron prices are extraordinarily high, I think driven principally by Chinese demand.

But all of that has kept scrap prices here higher than what I believe they normally would be in a soft marketplace.

The marketplace is strengthening, I think, little by little.

They are not quantum leaps.

I don't think you are going to see pricing get out of hand as some would claim it did in 2002.

In talking to the scrap people, they're telling us look for a sideways to up market in August followed by perhaps a down market in September/October time-frame.

All-in-all, I don't expect scrap prices, when you consider going up and going down and going sideways are going to change a whole heck of a lot from where they are.

So we're certainly not going to get any relief there;

I think it's going to come on the price side if anywhere.

Do you see interest on -- from buyers and traders that would be selling to China that are at prices that you like at this point?

They are never at prices you like, I guess.

But the Jeffersonville could avail itself with some product right now at current -- current prices -- yeah.

(CALLER INSTRUCTIONS).

Charles Bradford with Bradford Research.

Good morning.

Or maybe it's afternoon by now.

(laughter).

I think where you are, it might be, Chuck.

It's still morning here.

I would like to get to the marketing side a bit more.

It is pretty clear that most of your products are construction-related.

You've got some more automotive coming.

You've got pipe and tubers.

How much of your direct sales would go to service centers?

Still, the preponderance go through service centers.

I would tell you probably still 75, 80 percent.

Any idea how much would go to pipe and tubers?

Not a lot.

Very little, Chuck.

Probably, directly, probably about 2 percent of our output.

And your talking of automotive product, although a lot of it goes through distribution about 32, 33 percent of our total output last year went into automotive applications.

But it was through service centers?

No, not all of it.

Not all it -- the majority of that.

(inaudible) the Metal Service Centers (inaudible) Institute (ph) has their new survey on the market, and they are showing a much higher proportion for their industry than they have ever shown in the past.

I'm just trying to verify whatever we can.

Much of our proportion going into automotive from (inaudible)?

No, into service centers as a percentage of the total market.

They're showing over 50 percent.

Okay.

And that would sort of correspond with what you guys are saying.

But it's obviously a lot more than the integrated guys are saying. (multiple speakers) how real their numbers are.

What are you hearing about your customers and their inventory levels?

Regressing slightly.

Okay.

But still on the higher side?

I would characterize them as still slightly, you know, if you gauge everything by zero to 100, I'd say they're still slightly above 50 on terms of the high side.

They're slightly above average, Chuck.

But interestingly enough, because they have not been buying for some time, the usefulness of some of that inventory, and the turnover of that inventory is low.

And so, we are finding that (inaudible) -- common gauges are in demand.

Yeah, I think that's a good point.

The inventory on-hand may not fit the buying curve buying patterns.

So it may actually generate some demand.

That is pretty helpful.

When do you expect to start supplying rail to the railroads for qualification purposes?

In the third quarter.

Do you think it will take six months?

It depends on the application.

There are some that won't require that long.

We've already had a lot of dialogue with the customers.

It depends of they're regional or mass transit versus class ones.

But, we're focusing mostly on class ones; and I think we've gotten a good reception, and they are going to place some trial orders with us, and take a good, hard look at our product fairly quickly.

Sounds good.

Thank you, very much.

You're welcome.

Adam Graf with Bear Stearns.

Thank you.

Just a quick question, gentlemen, for my own purposes.

Could you give us a little color on the premium that you're receiving over hot-rolled for pickled and oiled, and at the same time, the premium you guys receive for cold-rolled coated over cold-rolled?

Hello?

Yeah (laughter)...

I guess we could tell you those things;

I think we probably better not.

You can't give me an idea of the average premiums?

I think we quit speaking to pricing specifically here a while back; did we not, Tracy?

So, I think we would prefer not to disclose that.

All right.

Thank you.

It appears there are no further questions at this time.

Mr. Busse, I'd like to turn the conference back to over to you for any additional or closing remarks.

Thank you, Rochelle.

Ladies and gentlemen, as always, it's been fun dialoguing back and forth with you.

I think your questions are always excellent questions, and hopefully we have done the best we can to answer them as accurately as is possible.

So, thank you for your interest in our company.

And we look forward to continuing dialogue with you.

And that concludes today's conference call.

Thank you for your participation.

(CONFERENCE CALL CONCLUDED)