Steel Dynamics Inc (STLD) 2003 Q3 法說會逐字稿

Good day everyone and welcome to today's Steel Dynamics Third Quarter Earnings Conference Call.

As a reminder, today's call is being recorded.

Joining us today are Mr. Keith Busse, President and Chief Executive Officer, Mr. Tracy Shellabarger, Chief Financial Officer, Mr. Mark Millett, Vice President, Mr. Mr. Mark Nolan, Vice President Sales and Marketing and 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.

Before we begin this morning's management discussion, we have a couple of announcements.

In the past we have sent out notifications of our quarterly conference calls by fax and email.

We are discontinuing the fax notices.

For your convenience, we now publicly announce the call schedule plus dialing information on our Website as well as on numerous other financial Websites.

If you are on our email list, we will continue to send email notices.

If you wish to be added to the list, go to our Website under investor info to register.

Our Website is www.steeldynamics.com.

Note that we have expanded the investor information section to include more types of current information about SDI, including our SEC filings in an easy to read format that can be downloaded and printed, that is in a standard format more readable than the EDGAR filings.

Also starting in 2003, audio replays of these quarterly conference calls are archived for a year on our site.

We're happy to hear from you with any comments or suggestions about our Website or our disclosure and IR practices.

Next, I would like to read a brief cautionary note about any forward-looking statements that may be made by our management during today's call.

Today's discussion may contain statements or projections about future events and results.

Actual results and events may differ materially from the plans, projections or statements made today.

You may obtain additional information concerning a variety of factors and risks that could cause actual results to differ materially from the 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 these 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 Website, www.sec.gov and on the Steel Dynamics Website.

Now I would like to make a brief statement regarding a significant recent milestone for Steel Dynamics.

In September 1993 Keith Busse, along with Mark Millett and Dick Teets, founded Steel Dynamics.

During the just completed third quarter, Steel Dynamics reached the tenth anniversary of its founding.

On behalf of over 1,200 employees and numerous other well-wishers, we would like to publicly salute Keith, as well as Mark and Dick, for their difficult gutsy decision to leave promising careers at Nucor and set out on their own.

They established the first new American steel producing company in 100 years to be started up without a preexisting business or a financial track record.

In that ten years, Steel Dynamics has grown from its startup of hot band flat roll steel operations early in 1996, to a multi-division, multi-plant public corporation with estimated 2003 shipments approaching three million tons and 2003 sales approaching $1 billion.

We salute these three senior managers seated at the table here today, Keith Busse, our President and CEO, and Mark Millett and Dick Teets, Vice Presidents of our two steel producing divisions.

We thank them for their commitment and their willingness to accept the risk of starting a major new company and for their being talented and successful risk takers.

Their entrepreneurial pursuit in forming and building SDI has proved to be very beneficial to so many people.

In the same vein, we can't forget SDI's early stage investors, lenders, suppliers and customers, as well as the communities in which we have located and the numerous early employees of the company, all of whom believed in this management team.

We thank all of you.

Now it is my pleasure to introduce this morning, Steel Dynamic President and Chief Executive Officer, Keith Busse.

Well, thank you, Fred, and thank you for that plug.

I guess in that you were a little bit windier, I'm going to have to be a little bit shorter in my comments.

But, thank you for that unexpected tenth anniversary greeting.

Good morning, ladies and gentlemen.

Steel Dynamics, as most of you can see from our press release, had a little bit better than expected quarter, I guess is the best way to put it.

I think we had talked about earnings in the range of 15 to 20 cents and we came in on the high side, where we had guided to the low side.

So I guess in the difficult past environment that we've all operated in for the past several quarters, it was a good performance by the team.

Steel Dynamics' shipments were at record levels in the quarter.

Specifically, Flat Roll shipped about 613,000 tons and I think Structure was about 130,000 tons, so both of them up significantly.

I don't know if that will add up to the consolidated number, because other numbers enter into that figure.

But the consolidated shipments, as you can see from the press release, were 745,000 tons, which was 14 percent higher than the second quarter of '03 and 25 percent higher than the third quarter of '02.

As I said, Structure steel shipments increased sequentially each month, reaching about 130,000 tons of production in the quarter, or of shipments in the quarter.

Our production by all of our steel operations was 787,000 tons, up about 23 percent.

Certainly we can note that the quarter turned out a little better than perhaps we had thought it might, yet at the same time, down from our peak earnings periods of the third and fourth quarters of '02.

Although I do believe that on a go-forward basis that we'll do a little bit better in the fourth quarter, followed by continued improvement in the first quarter and more significant improvement in the second, third and fourth quarters of 2004.

I think on our previous call we talked about, we thought pricing was going to be up in the quarter and it was slightly.

I think flat roll pricing overall was up about $7 or thereabouts on all mix--for our mix of products.

And Structure and Rail pricing was up around $11 in the quarter.

And I think there's a very good chance that Structure pricing will be up as much as $20 in the fourth quarter and Structure and Rail pricing will more than likely be up probably about $15 in the fourth quarter.

So there's some positive news there.

Although, as I shared with you in our press release, I think the heaviest or peak impact of scrap having moved up will be felt in the fourth quarter of '03.

I think that the range I gave you in our conference call for the second quarter was that scrap would--and that was early on, an early call--anywhere from down $2 to up $4 and scrap costs were up $3.

So we were inside the prediction gate, with not a significant impact in Q3, but I do believe our scrap costs will likely be up probably $12 would be my best guess or thereabouts.

Could be up 10, could be up 13, 14.

It's going to be somewhere in that range.

I think there were some fairly heavy movements in the market in the months of, per delivery, in the months of August and September, which is going to impact for the pricing.

On a go forward basis, as we look at all the projects that we're involved in, and talk a little bit about our products division in Pittsboro.

We did receive our air permit back in September timeframe and moved aggressively forward with removing foundations and reconfiguring the mill.

That's really going very, very well.

I think we will be in a position to start melting.

We have rebuilt the electric bar furnace.

We've rebuilt the ladle furnaces, rebuilt the gasser, rebuilt the casters.

The roughing environment, not a lot of change.

We decided to make sure that everything was in good working order.

But, tore out a good bit of the finishing train and are replacing it with eight or nine new finishing stands.

We did keep some of the Cox blocks equipment for SBQ bars in place, both in the front end and the rear end, put in new cooling beds and new saws.

So I think it's just going to be a wholly different looking mill than it was.

And as I said earlier, I think it'll be one of the finest small-shapes mills or medium-shapes mills in the world.

It will have a range of products anywhere from one inch angles up to three inch angles and round bars anywhere from, you know, three-quarter up to eight inches.

It'll produce a variety of angles, flats, channels and rounds and we'll engage early-on in the production of SBQ bars.

A good bit of the finishing equipment will not be here until March and, therefore, anticipate a second quarter startup on smaller shapes, if you will.

But we should be in a position to manufacture larger shapes early in Q1.

So we actually plan to start melting and casting and oiling in the month of January of next year.

So, things are just going very, very well.

As with regard to the startup of Jeffersonville, that's proceeding just very, very smoothly.

Volume is ramping up.

That facility has a good backlog.

And I think importantly cited that in the fourth quarter it will already, as a brand new operating, unit be in the black.

Mark will talk to you a little bit about the paint line and about Iron Dynamics as we move forward.

But some good news, as with regard to our new paint line and the restart of IDI.

But I'll let Mark speak to that in his piece of the presentation.

At the Structure mill, things continue to improve.

We have one of the largest backlogs we ever have previously experienced.

We are just in the process of entering into the trials on the tandem mill for Rail products and Dick will expand upon those thoughts.

We have the equipment that is necessary to produce larger beams.

It's now in-house so we'll be trialing 33 inch, 30, 33, 36 inch beams shortly on the mill and don't really expect to see any problems in that regard.

I think pricing will be up there, as I said earlier, perhaps as much as $15 going into the fourth quarter.

So, a very positive set of circumstances as we move forward.

So at this point in time, rather than being lengthy and windy and saving a little bit more time for the Q&A, I'm going to turn the call over to Mark Millett, and allow him to tell you a little bit about what's going on at Butler.

Thank you, Keith.

Well, as you said, I think Butler is cruising along in great shape.

We had record shipments, record production for the quarter.

As you look through the facility we had many, many crew development line records through the month.

It's looking very, very well.

And the exciting part is that the crews are convinced that they can do better and better.

Conversion costs were well managed and remain in a stable condition.

We had one [floortime] work accident, which was somewhat minor, fortunately.

And the Esprit de Corp of the place is very, very strong.

Butler is working quite well.

The paint line, there was a lot of excitement there this past weekend.

We ran our first coil.

We will take probably another one to two weeks to finish commissioning the line.

And we'll turn out the shipments for the next month, for November.

As we tour the facility with our customers and some industry experts, I think they've been more than impressed with the line.

It's fully equipped, state of the art, thin-line tension labeling, with setup intelligence.

We have color picturing and clean* air [airducts], so we have the ability to supply a range of products, from building construction product through HB-AC, panels for garage doors and plants grade material.

So, it's looking very, very, very, very good there.

Jeffersonville, again, a super start-up.

They started production in late July, around about 13 or 14,000 tons in August.

And then about 16,000 tons in September.

And all I see, the only hold-back there is me.

I haven't been able to keep enough tons in front of them to keep the [night] running.

We have a strong backlog.

They could have produced in excess of 22,000 tons last month, if they had the [sub-strength] to do it.

That work in process inventory is now in line and we should be able to get up to 20, 24, 25,000 tons in the months ahead.

We had a little bit of a learning curve on the temper mill there.

That's been overcome and we're now providing ample* quality products [inaudible].

On Dynamics, the schedule slipped by like two weeks in *in all honesty.

We had two companies become insolvent and gave us some problems with equipment delivery.

And we scrambled to fire the hot furnace up at the end of this month and may get HBI product pretty early in November.

The equipment* before the IHF core grinder of all grinding and all the new *equipment has been fully checked out and it ran briquettes and had the quality that we initially anticipated.

So it's been checked out.

All we need to do is finish the installation and we'll fire up November 1st.

Mark, how many tons do you anticipate you might ship in November, off the paint line?

Any thoughts?

At least 5,000 tons I would say.

Obviously, the ramp up there is going to be probably a little bit like the rail mill, to some degree.

There will be some commercial grade product that we can obviously run immediately.

Some of the high quality applications will need certification, color matching until we run finals in early November.

But fortunately, we're in great shape for the '04 contracted.

As Mark indicated, they've had a good start up in the briquetting end of Iron Dynamics and a little timing setback, relative with the earlier hearth furnace.

But as he indicated, we'll be producing hot briquetted iron by month end and hopefully in November, be producing both hot briquetted iron and liquid pig iron at IDI.

So, this was very positive about our ability to not only achieve volumetric success, but also deliver a product that will be of benefit, considering the pricing environment that's out there for scrap resources as well as pig iron, it provides a positive benefit to the company.

With that, Dick, we'll turn it over to you and let you talk about the structural world.

Richard Teets, Jr.: Okay, Keith, thank you very much.

Good morning, everyone.

I'd like to acknowledge first, the tremendous efforts of all the employees at Columbia City, because during the past three months we've broken the previous month's record in both production and in shipment.

And so, we're very excited about the progress that's being made at Columbia City.

As Keith mentioned, we also have a record backlog and have seen a steady rise in realized pricing.

I'm real proud to announce that last night we successfully moved our rail for the first time, through the tandem mill within dimensional tolerances and we will continue to develop that product in our efforts to ship our rails for evaluations to some of our early customers.

We also plan in the fourth quarter to round* out our original wide planned product mix, by bringing, as Keith mentioned, the 33 and 36 inch products to market, as well as we haven't rolled the 6-inch yet, just due to time constraints.

But we will bring that to market also, in the fourth quarter.

Now lastly I'd like to say that I'm happy to announce that we kicked-off our ISO 9000 program and will strive to be registered during the first half of 2004.

Keith?

Dick, I think it's also important to note that you turned a nice cash profit in the third quarter, ahead of our expectations.

And I know we've talked about this on the conference calls before, we do expect that you will earn a GAAP profit.

We're thinking you're going to in the fourth quarter.

And we think that's just very good news in the face of a very difficult market place that's existed for the past two years in the building products environment.

At this time, I'm going to turn it over to John Nolan, so he can just give you all a little bit of-give you his view of an improving marketplace.

Clearly I think, Keith, the market is improving, but I would say there is still some cautious optimism out there.

I think that best describes the circumstance.

The fact of the matter is that in September there were another 29,000 manufacturing jobs lost.

And for those of you who follow those statistics from the BLS, that makes 42 consecutive months since the peak of employment in 2000.

Now, what's positive about that?

Well, first it was less than the last 12-month average, which was about 54,000.

And most of the easing occurred in the durable goods industries in September.

So those are all positive signs.

And they reflect, to a certain extent, the reality of our customers who see economic activity, probably consistent with the Bureau of Economic Analysis' recent publications of about 75 percent.

The point of all of this is that I find inventories in the marketplace probably as low as they've been, in some cases, 10, 12 years.

For the most part, what we find are customers are giving us orders as they get tangible orders from their customers.

And frankly, I find very few people right now, hedge buying in the face of price increases in December and the first quarter.

Very unusual, but clearly the picture points, if you look at our order book, to improving economy and improving market for us in the first half of next year.

Thank you, John.

Before we get to Tracy, I usually make the comment, on a go-forward basis, I think I mentioned to you that I think pricing is going to be up $15 in case the structure, maybe $20 in the case of flat role, and I think that's the relevant ranges, I guess.

And mitigated by scrap costs going up perhaps $12, so you would conclude that there ought to be some margin gain.

And clearly I think there will be.

Although, I think that's going to be mitigated by lower production volumes and shipping volumes in the fourth quarter, due to a planned outage, principally in December.

And as most of you know, December tends to be a fairly week shipping month.

People usually hunker down in that month.

So I expect that we will not be at our third quarter peak, which may mitigate a little bit of margin gain.

I think our earnings are going to be in the 20 to 25 cent range in the fourth quarter.

And again, we'd very definitely guide you to the lower side of that.

We over-achieved a little bit in the third quarter, but I would guide you to the low side of those numbers in the fourth quarter.

So with that, I'll turn the mic over to Tracy.

Thank you, Keith.

I hate to start with an error correction, but I need to, for the benefit of those who are really studying this a little bit.

In the second paragraph of our press release we disclosed the third quarter production of steel in tons of 787,000.

That number should actually be 762,000.

It was disclosed properly a few pages back on our supplemental information.

I just wanted to point that rather minor error out to those of you paying attention to that number.

As usual, I want to go through, with no particular order, a handful of statistics for you and I'll start with the shipment at the Flat Roll Division by product line.

Starting with the Hot Band tons, there were 284,000 tons for the quarter.

Pickled and oiled was 66,000 tons.

Cold-rolled was 50,000 tons.

Hot roll galv 104,000.

Cold-rolled galv 78,000.

Our post annealed product at 22,000.

And Jefferson Mill shipped a little over 8,000 tons for the quarter.

That totaled about 613,000 tons.

As Keith pointed out earlier, the Structural Rail Division almost did 130,000 tons.

I think he also pointed out, that pricing at Flat roll Division was actually about $7.50, versus the second quarter where Structure was up $11.

And while it's very minor, we saw a healthy increase also at the New Millennium Building Systems Division, a healthy increase in their pricing as well.

The depreciation as you saw in the press release for the third quarter was about $17.5 million.

We project that the fourth quarter is gonna be about 19, which will bring us in at 69 or right at the $70 million that I've been talking about all year long I believe.

For 2004, I would expect that that's going to be approaching-pardon me, I would expect that's going to be approaching $90 million of depreciation.

Utilization at the Structural Mill, in terms of production, continues to climb.

And I don't know that anybody's talked about that specifically, but we were below 50 percent in the second quarter.

We were above 50 percent in the third quarter, which is right on target with what Dick had projected us to do and, of course, we're projecting it to continue to increase going into the fourth quarter.

I think Keith pointed out that the scrap prices were up by about three bucks from where we were in the second quarter.

That's right within the range, although obviously, on the higher side of the down two to up four that he predicted in the second quarter conference call.

In terms of liquidity, our $75 million revolver remains un-drawn, despite my prognostication that we be into it in the third quarter.

That's primarily from timing of CapEx, yet again.

And I'll go through CapEx numbers here in a minute.

So that 75 million remains available to us and coupled with the 22 million of cash on hand, gives us just under $100 million, which is very consistent with the end of the year and up some 10 or $12 million from the second quarter liquidity level.

CapEx for the third quarter, as you saw, was almost $29 million, versus our $35 million estimate.

The fourth quarter estimate, I will tell you, is going to be about 40 to 45 million, probably closer to 45, bringing us for the year at 134, $135 million.

We would expect 2004, again, just to be the finishing-up the projects that we have in tow that you're all aware of at this moment, I think, and that would come in about $50 million.

Our tax rate remains in all periods presented at 37.5%# percent and I think the last thing I'd like to point out before I giving this back to Keith is that-note that our long term capitalization ratio has been trended down again and we're now about 49 percent, versus slightly over 50 percent at the end of 2002.

So, we've met that target.

Keith?

Thank you, Tracy.

Annie, I guess it's time for the Q&A.

Thank you.

Today's question and answer session will be conducted electronically.

If you would like to ask a question, please press star, one on your touch-tone phone.

If you are using a speakerphone, please make sure that your mute function is turned off to allow the signal to reach our equipment.

We will pause just a moment to assemble our question roster.

And our first question comes from Michelle Applebaum.

Go ahead, please.

Ms. Applebaum, your line is open, go ahead.

Let's move on, Annie.

We will take our next question from John Tumazos, with Prudential.

It's John Tumazos.

Thank you, Keith.

I may not have gotten all of the details the first time.

Could you repeat what your scrap costs has been each quarter this year and how much you expect it'll be in the fourth quarter?

I think it depends on-everybody looks at it differently.

I look at it principally on a net ton charge basis, which I think is the way some of the competition reports their numbers as well.

We were at-if look back in time, in the first quarter of '03, we were at about 117, in the second quarter, I think we're about 125, and in the third quarter about 128.

So, up to $3 and we had talked about and we said we think we'll probably be up $12 in the fourth quarter, so it would be somewhere around $140 net ton charge.

Most of that related to the premium grades still.

The preponderance of what we're buying will be premium grades going into the Butler facility.

Keith, I wanted to make sure I heard you right, you said 117 first quarter and then 125 second, 128 third and you think up about 12 for the fourth?

Yes.

Is it possible, I noticed for nine weeks the integrate has operated in the mid-70's.

Is it possible to get insulated rail cars, torpedo submarine cars of molten iron into your furnaces economically?

And wouldn't that-something like 10 percent molten iron increase your through put about 10 percent since it shortens the tap to tap time?

Well, no.

They're too far away, John.

But that's exactly what's going to happen, you might say, with Iron Dynamics.

We'll be-we'll be running liquid pig iron in the-in November and December and transferring the materials directly into the electrics.

To your point, it will cause the tap to tap times to go-it will take under 40 minutes and improve the economics on the Flat roll side of the street.

Hey, John, before you get away, I want to, for everyone's edification, I'm sure you understand.

But, Keith did give you the charge for net ton and the reason we started doing that directionally rather than giving raw numbers is because it doesn't fit models well.

You can't plug in, for example, that $128 into a number and add conversion costs and have it work out to total costs.

And the reason we stopped doing it-you know, we used to do that-talk about costs per hot band ton produced, which would allow you to build the model.

The reason we stopped doing that is because of the start up of the Structural Mill that now blends all of that and makes it impossible to do anymore.

So I just wanted to point out that directionally is really the more significant number, I think.

Amy?

Thank you.

Our next question comes from Aldo Mazzaferro, with Goldman Sachs.

Go ahead please.

Hey, Tracy?

Good morning, Aldo.

Good morning.

How are you?

Great.

I just wanted to go over-I missed some of the numbers on the product mix a little bit.

And then what is the CapEx number you gave us, that 50 million, was that a fourth quarter estimate?

No.

The fourth quarter estimate was 44 or 45 million.

The 50 million number, was for 2004.

And obviously, the third quarter number, actual number, is about 29 million and I compared that to our estimate of 35 at the second quarter call.

So 50 million is total CapEx for 2004?

Correct.

As we know it right now, we don't have any projects until-that we've got to share with you.

That does represent our latest thinking from our budget cycle that we've just completed.

But there are no big projects.

There's no new mill or anything like that going on.

But that is a thought through number.

So that doesn't include too much from your Pittsboro?

That's mostly included in this year?

No, Pittsboro represents probably almost $40 million of that $50 million.

Okay.

And I wonder if you could just-I got the mix all the way starting from the Hot Band out.

Could you give us the ones above that maybe?

Sure.

The Hot Band number was 284,000.

Okay.

Pickled and Oiled was 66.

Cold Rolled was 50 and you got the rest, I believe.

Right.

Okay, thanks.

I'll let somebody else take a shot.

I'll come back.

Thank you.

Very well.

And our next question comes from Charles Bradford, with Bradford Research.

Go ahead please.

Good morning.

Hey, Chuck.

Could you talk a little bit about what's happening in the market these days?

I keep hearing hot band in the 300, 310 range.

Some people seem to think it's up closer to 350, I'm talking currently.

And where do you see it going?

For example, I understand US Steel raised its prices $30 for, I guess, January 5th.

Do you see that sticking?

I think the realized numbers in the fourth quarter are closer to the 310 kind of thing.

Maybe we'll realize as high as* 315 for Hot Bands in the fourth quarter and I do believe with the announcements that are out there as well as our own game plan, that it's likely that Hot Band numbers are going to be up.

And the 315 that I'm talking about is with extras.

You know, base price was closer to 305, 310.

I think the base price would be closer to 325 in the industry in the first quarter, based on the announcements I'm seeing, plus extra.

So, you could postulate if that stays together that with extras the industry could be at 330, 335.

I'm not hearing anything about 350 at this point in time.

Okay.

And our next question comes from the Bruce Klein, with Credit Suisse First Boston.

Go ahead please.

Hi, good morning.

Just if you can give us some more color on in the scrap market what you think is driving this and how sustainable that is?

Clearly, I think the weakening dollar and the Chinese appetite had an influence in the Spring and early Summer.

I think those appetites are abated to some degree.

I think the market has peaked.

Scrap went sideways last month.

I probably think it's going to go sideways again this month.

It could surprise us and be down five, could surprise us and be up five.

But I don't think it's going to move much.

If you get a little bit of movement in the December time frame, it tends to be the holiday season and not as much scrap flows until people get back to work in January.

In the winter months I would expect it's going to go up $5 or $10 potentially.

It might not.

I think that's going to abate in the Spring and come back down 5, 10, $15.

So I think-what I'm telling you is I think the market's peaked.

It could have little movements up and down, but I don't think it's going to have any erratic movements one direction or another.

Now, it could end up differently than I perceive it is, but I think metallics are going to be under a little bit of pressure on a go-forward basis.

Although I don't agree with Peter Marcus, relative to the kind of pressure he thinks the market may be under.

I think the recovery rates are better.

I think there's not as much export demand presently out there.

And a little bit of it will depend on what kind of a winter we have.

But in an expanding economy where you get more prop scrap flowing, we actually could see the market abate a little bit.

Is China appetite, you think that has peaked or slowed at all as well, or not?

Well, if you look at the number of boats leaving the East Coast and the West Coast to China, they're down.

The Chinese, they tend to buy in large volumes and then they go away.

So I don't know when the next round will descend upon us.

Hey Bruce, for others on the call I'd like to clarify something Keith said.

When he was talking about scrap pricing stabilizing here going into the fourth quarter, and yet we talk about our pricing being up $12 a ton, that's clearly because of the FIFO costing that we have.

So the cost that are going through in the fourth quarter are the ones that we just saw in September and to some extent in August as well.

Yes, I think we'll reach our peak in Q4 and based on the fact that I think it's going to be a rather stable market may not change a lot in Q1.

And your next question comes from Ken Silver, with CRT Capital.

Please go ahead.

Hi.

Keith, you threw out a lot of numbers a minute ago about pricing.

What's the base price increase that you were talking about for January, that you think it's going to be in the markets?

We haven't decided about our number yet.

And we don't announce it.

We just go out with the number to our clients, to our customers.

We rarely ever make a pricing announcement.

No, I'm not saying your price increase, but you said a number for what you thought the base price in the industry would be up and I just didn't write it down.

Yes, I think you could see base pricing in the first quarter being at the 325 plus extras kind of thing.

So, versus 305, 310 in the fourth quarter?

Plus extras, right.

Okay.

I just wanted to make sure I understood that.

Alright, the second question-this is more of a review.

Can you just talk about how much rail you expect to produce once the mill is up and running and the timing of that?

We're really going to be in position for the '05 bid market.

We're going to do a lot of testing in the early part of '04 and be well positioned for the marketplace.

I think the bids usually occur in the August-September timeframe.

And so I think we're going to be in good shape.

I think we'll sell into limited market applications throughout the early part of the year.

But should we be successful in time with our effort, the mill could produce-we're thinking around 300,000 tons of rail.

Okay.

And then again, this is probably review for a lot of people.

Are you going to produce head-hardened rails?

Yes.

Okay.

Thanks.

And our next question comes from Ashland Cushman, with Morgan Stanley.

Hi, good morning.

I didn't quite catch what Mark said about the Iron Dynamics delay.

Could somebody repeat that?

It was just the off-gas system.

We had some suppliers that fell down.

They actually went insolvent and we had to seek alternative solutions.

And so the off-gas system is delivering late and being installed.

But we should be ready to go here in the next week or so, producing hot briquetted iron.

All the equipment is now on site.

The installation is being finished off and commissioned.

Okay, thanks.

And our next question comes from Mark Parr, with McDonald Investment.

Please go ahead.

Hey Mark.

Hey, good morning.

I was curious if you had any goals or outlook for output of IDI in November and December?

I think we'd like to see 10-15,000 tons of HBI in November.

And probably a few tons of liquid pig iron by the end of November.

Probably 10,000 tons of HBI in December-10-15.

And probably 5,000 tons of pig iron.

Hopefully by the first quarter the inverse of that will be true and I think we would tell you it would be.

It will be mostly liquid in the first quarter and just a little bit of HBI.

It just will do a complete flip.

At those levels of production, is there a net benefit to the bottom line for Butler Works?

I think so.

I think we can reduce it well below perhaps today's premium grade resource cost for scrap.

But more importantly, as you know, the pig iron market went ballistic this year and freight costs went up delivered pricing for pig iron, my goodness, is over $200 a ton.

So IDI could be a comparable benefit to us if it works out fine.

Okay, just another follow-up on raw material inputs.

I realize this is kind of a minor issue.

But could you give us an update on your natural gas hedging activities?

Well, Mark and Dick will both have to speak to that and they will.

We're currently hedged, Mark, through June of '05, around 87% of our consumption.

And it's a little seasonal, a little less in the winter, a little more in the summer.

And that number on a delivered basis is, I think, around about $4--4.25 or thereabouts.

Richard Teets, Jr.: At Structural Mill we're hedged out for another 30-months on an average and our price is about 4.75, a little less than that.

Okay.

Just one last question related to Columbia City.

Dick, did you give any indication on what you might expect as far as rail shipments in '04?

I mean, do you have any "guesstimate" that you could share with us at this point or any goals?

Richard Teets, Jr.: What we've modeled is between 40 and 50,000 tons of shipments and that would be primarily for-a small amount for valuation, but mostly for project work with local and regional railroads.

Okay, terrific.

Hey, congratulations on a great quarter.

And our next question comes from Wayne Atwell, of Morgan Stanley.

Go ahead please.

Thank you.

A couple of quick questions.

Could you give us your average scrap costs for 2002 and then could you tell us about your order book?

Could you give us some details on how your order book stacks up for the Flat roll Division?

Don't have all of 2002 here, but I do have a little bit of history.

On a net ton charge basis.

It was about $117 in the quarters I have and I just don't know what it was for the year though, Wayne.

Okay.

So the 117 was for which?

That was for the first quarter?

First and second quarter of '02.

Second half '02.

I don't have the first half and I'm unsure of the history back that far.

And can you tell us about the order book for Flat roll, how it stacks up?

I mean, are you sold out for November, December, January?

We haven't opened the books for January yet and are sold out through December.

And when do you think you might open up January?

Shortly.

Probably any day.

Maybe today, I don't know.

And then, of course, you'll make some sort of a decision on pricing, but you don't think you'll announce that?

We never do.

Okay, thank you.

And our next question comes from Peter [Marcus], with [World] Skill Dynamics.

Go ahead please.

Yeah, hi.

It's Peter Marcus.

I have two questions please.

First regarding the Iron Dynamics and the Mesabi Nugget, it's my understanding at Mesabi Nugget, they heat the process up and get a little puddle of iron and a little puddle of slag and that this process could be looking very good.

I'm wondering if you would be able to adapt that system to your IDI system at * Butler and how much it might cost to put it in?

Peter, it is looking very good and Mark will update you.

He just came back from there yesterday.

He made a trip to Minnesota.

Generally speaking, the process is running very, very well at the plant and achieving its goals.

It is an exciting and promising technology that could, from a cost of production perspective, perhaps beat IDI by 5, $10, maybe $15.

Who knows.

It's pretty unpredictable at this point in time.

It's not likely we would modify Iron Dynamics.

It would take a fair amount of money to do that.

But giving our growing iron needs, it certainly is conceivable that with the further consistent achievement of success that we could build a Mesabi Nugget Plant.

Mark?

Yeah, well, Peter, unfortunately we were under a confidentiality agreement with our partners, so I can't say too much, other than the process or the technology itself in my mind is well-proven there.

The facility is running at about [inauadible] back up time.

It's very, very controlled.

And they're in a plan to focus on the cost structure.

But it is an incredibly exciting opportunity.

Okay, the question I had and your ownership of the Mesabi Nugget is how much, please?

It's right around 18-16 to 18 percent.

Okay, and then the next question is, I know is Steel Dynamics able to serve* the automobile industry to a greater extent with your various Flat roll products and to what degree would you be willing to make one-year contracts to sell to that market?

I don't think that we're having trouble with contractual length, Peter, and have offered pricing, extended pricing to that market for some time.

In fact, we've done it with escalators for a three-year period.

So it's not a period of time.

And I think the terms that broadly our product horizons, we've got a lot of products that work very, very well in that community.

I prefer to achieve further penetration.

We're gonna have to make a decision to put in a back to vacuum de-gasser.

And that may well be on our shopping list for next year, which would be additive to the capital needs that Tracey spoke to earlier.

But that's not a current approved project within the company, but it would give us the ability to dramatically cut back nitrogen content and achieve some of the more specific automobile chemistry targets.

And it's a project that we are looking at with great favor at this point in time.

Mark, do you want to add to that?

I think our product mix, Peter, is evolving and we obviously had [unintelligible] starting up and the [unintelligible] starting up.

I think it's a matter of just waiting a few months to see where our opportunities lie and whether we need to increase our *one month exposure.

Last year 32 percent, I do believe of our product mix ended up in the automobile field.

It was a little hard to hear you, Mark.

I said, last year 32 percent of our product mix ended up in the auto world.

Wow

Principally Ford and Chrysler and a little bit to [inaudible].

Okay.

Thank you very much.

And as a reminder to the listening audience, if you do have a question hit the star, one on your touch-tone phone.

We will take our follow-up from Aldo Mazzaferro with Goldman Sachs.

Please go ahead.

Hey, Keith, how are you?

Hey, Aldo.

I was just wondering if you could give us a look into the future of once you get the paint line fully running, once you get Jefferson City fully running, I'm wondering what percentage of mix those product lines may make up.

They look potentially to me to be, you know, approximately as much as 10 percent or more of your product mix.

I mean, is that accurate do you think?

Well, as it is I'd have to add up the tons here in front of me.

But looking out in to '04 , give me a second, it appears it could be in the 400,000 ton range or better just in '04, which is over and above what we've previously achieved.

So that's going to shift a lot of product out of Hot Bands and TNO and so on and so forth and into higher margin products.

It does make a big difference on the average price.

Now obviously, the cost structure also moves, but as I've looked at it on a go-forward basis, if you're looking at a $30 increase from year-to-year just moving within the product mix could potentially add another $30.

But again, there are costs associated with that.

And you think a good roll up of those costs were about half of the price impact?

Well, I don't know that we could commit to that, but we believe there are broader margins available on those products.

Yes.

Well, congratulations for growing at a rate that's faster than China.

And our next question comes from Adam [Graff], with Bear Stearns.

Please go ahead.

Good morning, gentlemen.

Good morning.

Morning.

Good morning.

Just in regard to China.

I know in the past you guys have sold significant tonnages to China on and off.

I wanted to know if you sold any production to China in the third quarter and if so, how much?

Just a smidgen, John Nolan tells me.

They've sort of been out of the market.

They haven't been as big a shoppers and perhaps the domestic opportunities, as they're improving, have provided a better opportunity for our company.

John, do you want to add to that?

I think, Adam, that captures it.

We have one customer who is prominent in the Chinese market and very much involved in their hydroelectric projects.

We make a product that's been excluded from the Chinese safeguards and we've been shipping that product to China through that customer.

He handles all the transactions.

It's just like a domestic transaction to us.

That's the only one of significance that we have at the moment.

Is that the specialty thin gauge you would--.

Exactly.

By 16 gauge or 055, 059 hot roll black, for that project.

All right.

Very good.

And then on a separate subject, is it true that the-if I recollect correctly that the scraps you use or plan to use for the structural products are typically less expensive scrap, and as you ramp up your structural mill, do you foresee scrap pricing on a per ton basis going down?

Well, if scrap prices remain absolutely stable, if they didn't go anywhere, yes, that would be true.

We're going to be introducing more and more less premium grades of scrap into the total pool of scrap, thereby it could pull the average down if the pricing didn't change from this day forward, a year, a year and a half, it would actually have an average input to all the furnaces, that's down.

Could you quantify if you're running the structural mill, like you're at expected full capacity the approximate contribution or lower decrease in scrap costs per ton?

No, I don't have that number.

I can tell you that Dick's running right now at a 500,000 ton pace this year, kind of thing, producing a little bit more, but shipping at about that level.

And next year, you know, plans to be 8 to 900,000 tons.

We're just getting ready to turn in this budget, so that's a fairly sizeable increase, not doubling it, but it's pretty good tonnage and that tonnage will come in at a little over scrap selling values than the mix of scrap that Mark uses above it, which is going to be fairly consistent.

And then as you get-on the same line, as you farther along in IDI to production, approximately at what point in-at pig prices does IDI kind of break even?

Well, IDI, I think can break even at easily $150 pig iron prices, which we haven't seen for quite some time.

And that would mean like--because it's $150 in Indiana.

That means like $130 in Nolan.

And we're a long way from that market.

And Iron Dynamics, its mission statement is to replace our pig iron buys on the open market.

That's its first mission.

And right now, that market's in la-la land, as you know, up around $200.

So what kind of--so you guys are seeing about a $30 per ton shipping costs?

It's about $20.

About $20.

Yeah, to get it from New Orleans up to Indiana.

Thank you very much.

You're welcome.

And our next question is a follow-up from Mark Parr, with McDonald Investments.

Go ahead, please.

Yeah, thank you.

Keith, could you give us an expectation for shipping volumes in the fourth quarter, please?

Well, they're gonna be down.

I think Mark's gonna be down about 15 to 20,000 tons in the fourth quarter, and he was at about, you know, 613.

So Dick could actually--actually, is probably gonna be up.

But, the margins there, as you know, are pretty thin by comparison to Mark's margins.

So, he has a much bigger impact on us.

OK, thank you.

Thank you.

And we will take a follow-up from John Tumazos, with Prudential.

Go head, please.

I don't want to disparage your question or suggest any doubt on Iron Dynamics or Mesabi Nuggets or any new process, but I'm very interested in the ability to bring molten iron from under-utilized Integrated's, New Core, yourselves or anyone else.

It would lower everyone's scrap cost and break the bubble on the scrap price, so to speak.

Could you elaborate as to how blast furnaces are too far away to supply Butler, or probably less so, Whitley County or Pittsboro?

Well, I'll let Mark get into the specifics of that from a metallurgy perspective.

But, my personal opinion is, if there was excess blast furnace capacity that could be utilized, where the cost structure is equal to or better than the scrap pricing environment, we'd love to talk about it.

But, I think it has to be in the form of a solid.

But we'll let Mark talk about why you can't torpedo something from Cleveland to Fort Wayne or Detroit to Fort Wayne.

John, I think practically, you never say never, and yeah, you could get it down here.

But, you'd have to go through a couple different railroads.

The iron movements up on the lakeshore are a single, defined railroad system and they've got a variety of approvals.

The--for instance, you know, ISG taking it to Acme.

That's a kind of a confined line.

But, above and beyond that, you need infrastructure within the plant.

You know, a torpedo car arrives*, you've got to able to turn that and pour that into a ladle for transfer to the hot furnace and we just don't have that infrastructure.

How long would it take to have a pouring station?

I don't know, John.

You got a business proposition you want to make us, we'll be happy to talk to you about it.

I just know about under-utilized blast furnaces lying around.

And, you know, people like your partner in Cleveland Cliffs, would love to sell ore.

And, you know, Fairfield is an hour away from Decatur and Fairfield doesn't have very good rest of the plant to take iron for example.

John, this is Dick Teets.

I know I don't--have never looked into it, but I can share with you the one time in my previous career when I bought used torpedo cars that had solidified.

And to move them into the Pittsburgh area, I had to take them by way of--I mean, hundreds of miles out of the way because of the weight.

The total weight of the cars was so significant that the infrastructure of the railroads weren't designed in most cases to handle fully loaded torpedo cars.

We used to ship them from Pittsburgh Works when I worked for J&L, back 20-some years ago, from--between Pittsburgh and [unintelligible].

So again, it was a single haul and everything was anticipated for it, it was designed for it, but I'm not saying--again, as Mark says, nothing's ever impossible until you look at it.

And there's always a cost associated and a timeframe, but it would be a massive undertaking.

I would just anticipate the finding.

Right now, these people have their own enormous pressures to deal with.

You know, coke is in short supply, which would imply that most people are struggling to find their equilibrium in terms of raw material inputs.

So we running an Excel spreadsheet from an office building may not be aware of the capabilities of the railroad industry that you managed to overcome to make steel every day?

I think Dick--well, I never even thought about it, the fact that a lot of these movements are pretty much internal.

It's some pretty significant weights.

It would be a big deal.

And they were actually, I mean, amazingly slow trains because of the liquid metal when we shipped them in the Pittsburgh area.

And they had to be all planned with all the other commuter trains and freight trains to make sure they were in a pull off spot.

But, it was a very short haul, so therefore, the temperature wasn't as big of a deal.

They still put insulators on top and so forth.

But, it was an extremely well coordinated move and that was a matter of just a couple miles.

And you've got to remember, John, should there--God forbid--should there ever be an accident with those things, maybe you bring a bridge down and they fall in the river, buddy, you're gonna have a nuclear explosion, something just short of a hydrogen bomb.

So, there's just a lot of things associated with moving hot metal, but caps are not desirable.

Thank you.

And we will take a follow-up question from Wayne Atwell, with Morgan Stanley.

Go ahead, please.

Thank you.

Are you exporting much steel at this point to--I guess not too much to China, but to Europe or anywhere else?

No.

I think one gentleman just asked that question, and John Nolan said we have one customer whose pretty steady with us who--it almost represents a domestic transaction.

We sell it to him and he takes it to China.

Oh, OK.

I'm sorry.

I thought that was just China.

I didn't realize that was everybody.

Yeah, and that's about the only exporting we're doing.

Oh, OK.

And--but with the currencies, one would guess currency changes, one would guess that would become a bit more attractive business.

It's not there yet.

Well, yeah.

I echo John's thoughts.

The currency's, you know, softened a little but you know my feeling about that, Wayne.

I really think that's one of the key economic drivers is a continued weakening of the dollar and getting these folks to stop manipulating currency abroad and/or untie the R&B or Chinese One from its fixed position to the dollar and let it flow to the market.

I still think we have a ways to go there.

And Wayne, if you take a look at a market basket of currencies, pick any 10 or 12, and include Canada and the EU, I think what you're gonna find is that, really, the dollar is only down about 8%.

So, yeah, there may be a spot or two.

I think New England fabricators would tell you that the strengthening of the Canadian dollar has changed their reality significantly.

But, you know, we're still talking about, you know, predominantly North America.

Well, if you look at the Euro, actually, the Euro today versus the average last year, the Euro is up 28%.

I know a lot of that's just recent, but it's a pretty--.

Well, yeah.

I--.

The Euro is one of the currencies that's getting punished because of the Chinese problem.

That's correct.

Right.

And then start up costs.

Did you have much in the way of start up cost in the third quarter and what about your thoughts in the fourth?

And would Iron Dynamics immediately be in the black, or what's going to be the profile there?

The start up costs were about $2m, as I recall in this quarter.

And we'll let Tracey speak to next quarter.

He's looking it up right now.

It's not going to be material.

Wayne, we do not--unlike others in the industry, when we start a facility up, it's started.

It's no longer in a start up.

When it's running, it doesn't matter if it's losing money, it is no longer a* start up.

It's reported in the operating income or deficit of the company.

And so we have no real projects--and Iron Dynamics was a started project--will not come back to you as a start up.

We might be able to tell you what we lose in the first quarter.

We're not gonna do that on a go-forward basis.

But, we would not classify it as a start up.

OK.

And would you think that Iron Dynamics would be a positive contributor to the first quarter when it's back up and running?

I don't think the volume's going to be significant and, obviously, there will be--if you will--start up costs associated with that.

So, it's not going to earn any money in the fourth quarter at all.

I mean, it may well have a chance to earn a penny or two by the second quarter of next year, but I--or a few dollars or whatever--but I would guess it's gonna get itself closer to a breakeven in the first quarter and maybe it'll generate some earnings, we think it will, and in the later part of '04.

Wayne, the start up number in the third quarter was, as Keith said, $2.2m and, the fourth quarter, we're estimating that to be right about $3m.

And that is almost exclusively Pittsboro.

Oh, Ok.

Great.

Thanks.

And due to time constraints, that concludes today's question and answer session.

At this time, I'd like to turn the call back over to you, gentlemen, for any additional or closing remarks.

Well, Amy, thank you very much.

We have no additional comments or remarks and we thank everyone for their interest in our company on a go-forward basis.

Thank you.

And that concludes today's conference.

We do appreciate your participation.

You may now disconnect.