Steel Dynamics Inc (STLD) 2003 Q4 法說會逐字稿

Good day everyone and welcome to today's Steel Dynamics fourth quarter earnings conference call.

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

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

Mr. Tracy Shellabarger, Chief Financial Officer;

Mr. Mark Millett, Vice President and General Manager, Flat Rolled Mill;

Mr. Richard Teets, Vice President and General Manager of Structural and Rail Mill and Mr. Fred Warner, Manager of Investor Relations.

Now for opening remarks, I would like to turn the call over to Mr. Fred Warner.

Thank you.

Also with us this morning is John Nolan, our Vice President of Marketing.

Good morning and welcome to Steel Dynamics February 5, 2004 conference call, covering our fourth quarter and fiscal year 2003 annual results.

Management's opening discussion in today's conference call, as well as responses to questions, may include forward-looking statements.

Any statements about expectations or projections of events, market and cost trends in the Company's future operating or financial results are tentative.

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

You may obtain additional information concerning a variety of factors and risks that could cause actual results to differ materially from today's forward-looking statements by referring to our most recent annual report on form 10-K, as filed with the Securities and Exchange Commission.

Specifically, please refer to those sections entitled forward-looking statements and risk factors in our 10-K report.

This 10-K annual report and other reports we've filed from time to time with the SEC are publicly available on SEC web site -- www.SEC.gov -- and on Steel Dynamics' web site.

During today's question and answer session, we ask you to keep your questions (ph) (technical difficulty).

We would like to continue with today's conference call with remarks by Keith Busse, President and Chief Executive Officer.

Thank you, Fred.

I hope that we got through all of your preliminary comments before we lost our line.

At any rate, ladies and gentlemen, welcome to our fourth quarter and annual review conference call.

We're pleased you could be with us this morning.

I am going to attempt to spend most of my time talking about the future and many of the projects which we have successfully implemented or given rebirth to, etc., etc., rather than do a lot on history.

But as you can see, Steel Dynamics reported earnings of 34 cents in the fourth quarter and 98 cents for the year.

It wasn't too hard for all of you to look at the extraordinary gain that we had on the extinguishment of debt, which amounted to about 17 cents.

And so that would, as you subtract that 34 cents, leave you with a number of 17 cents.

What you could not see and what we did not elaborate on or talk about at any great length is there were some other non-recurring charges, if you will, or unusual items that will not in effect reappear from quarter to quarter that I would tell you amounted to about 4 cents.

So when we were looking at fourth quarter earnings through the best binoculars we had the last time we spoke to the issue, we were talking about 20-25 cents and I think I guided everybody to the absolute low end of that range.

If you have add back 3-4 cents, that is about where it came out as I see it on an ongoing operating basis.

Now, this was the 10th anniversary of the Company and we issued shares of stock to all of our employees celebrating that event.

We had some refinancing that had not been contemplated at the beginning of the period that was executed during the quarter that had an impact.

We also, in expanding our storage yards at Columbia City and moving all of the product, decided to take care of a lot of finished goods sitting out there that had got damaged, if you will, in placement and/or transit and we cut up a fair number of beams which caused us to have somewhat of a write-down that would have been related to the entire period of time in which Dick operated this facility, and there's just a lot of little things.

But if you add them altogether, to my best estimation, they were 3-4 cents, which put us pretty much on top of the numbers as most of the analytical community was expecting.

As you can see, we had an operating profit in the fourth quarter of $34 a ton and $37 for the year.

This was not clearly our best year.

I think the best is yet to come, quite frankly.

I think we're going to have a very good year in 2004 and the way it is looking early in the year. 2003 was our third strongest performance at 98 cents.

And I think overall, it turned out not to be a bad year.

The economy as you know and the steel marketplace was extraordinarily weak in the early part of '03.

It strengthened certainly in the latter half of the year, but at the same time, we were all of us in the steel business, whether you're electrics steelmaker or an integrated plant that uses scrap in their BOF (ph), for instance, I think in increasing amounts these days, we all faced horrific cost increases, in terms of raw material costs or scarp cost increases.

And I had I think specifically thought that our scrap cost would surge by $12-$14, as I said to everyone in our last call, and as you know, they were up about $18.

I think that is about the same amount of money that Nucor (ph) reported their scrap costs were up during the quarter.

Obviously, we would like to be able to say that in the first quarter, but we're not going to be able to say that.

Let me suffice it to say they're going to be up outrageously from quarter to quarter; that is the bad news.

The good news is that selling values are outpacing the cost of resources at this point in time and I think we're going to see some margin gains in the first quarter and throughout the year and as a result of the stronger marketplace that exists out there today.

The activities at various sites around the Company were well executed, I would tell you.

Our bar products division started up way ahead of schedule.

We had told most people that perhaps a mid-first quarter startup for that division, we actually affected a mid, if you will, December startup.

We started melting and casting in mid-September and actually got product through the rolling mill and out the door by year end.

So we were, you might say, we were 60 days ahead of schedule in commissioning the bar mill in Pittsburgh, a very excellent effort by Glen (indiscernible) and his team.

At this point in time, the product range is limited.

We can run big bars and there's quite a demand for big bars, both of the MBQ variety as well as the SBQ variety, and we're now producing both MBQ and SBQ bars in the 3-9 inch range down at Pittsboro.

As I recollect, the old Qualitec (ph) facility, I don't think production ever got beyond 12,000 tons a month for an entire month.

And as you know, we're expecting annual outputs of 500-600 thousand tons, which would imply up to 50,000 tons a month, somewhere in the 40-50 thousand ton range.

Glen in January melted 8000 tons, rolled 5000 tons and shipped 3000 tons.

Obviously from a forecasted perspective, we're expecting any shipments (ph) until February.

So progress is moving smoothly there.

A lot of the equipment that allow us to produce smaller rounds, angles, flats, channels, products of that nature, will not arrive until February or March, and therefore we will not be able to install and commission that equipment until the second quarter, but hope to have small bars being shipped to our customers by late second quarter.

So just a tremendous effort by Glen and his team.

I think this month, they feel like they will be able to melt 12,000 tons, perhaps roll 8000 and ship 5000.

So things are going well down at Qualitech.

And I think Glen expects to be, as we told everyone, in the black in the second half of the year.

And the way it looks, he will be there on time.

The progress that Dick has made at the structure division I think is remarkable in light of a very weak construction market that all of us in this business have faced for the last three years.

The non-residential commercial construction market is gaining a head of steam.

We're very thankful for that and we are operating better.

We have commissioned most of our product line and more importantly, we reported to everyone that structure division had achieved a cash profit in August and we're pleased to note that Dick reported a GAAP profit in November and doubled that profit in December on a GAAP basis and we believe will remain profitable throughout the year.

So I know there's a lot of anxiety about the timing of this mill and its ability to perform well, given the weakness in the marketplace and the perceived overcapacity, but I think Dick and his team have done an outstanding job, the product's being well-received.

We've virtually had no quality problems throughout our limited operating history and we have yet to commission 6 in. and 36 in. beams, but we will do so shortly.

The flat rolled division, Mark and his team have successfully coated or painted (indiscernible) steels, cold rolled steels and galvanized steels and we are not in full production on the paint line because we have acceptance issues to deal with, but they are making excellent progress every month in terms of the number of tons and we coat and ship on a direct basis.

Technology is performing well.

We will let Mark speak to that issue a little bit later, but he is doing well and the new galvanizing plant down in Jeffersonville, Indiana has a very large backlog and is operating at full thrust at this point in time.

I guess one of the things we are really very excited about is Iron Dynamics coming back.

I know a lot of people have written that project off and believed it would never see the light of day again, but we in our first month of startup, which was essentially December, we produced 15,000 tons of briquettes.

We did not produce any liquid pigiron.

We have a bigger appetite for the ability to consume more briquettes than we had initially thought and we're going to push that to the limit until we flip it over to liquid pig iron.

But we expect on a briquette basis, we're going to get to 30-35,000 tons of production a month just in briquettes and could in theory consume most of that material direct in the electric arc furnace.

Although it does have a substantial productivity impact on our ability to produce on the SDI side of the street, the product does work extremely well and as you know is a low residual resource.

Obviously in today's very high scrap prices and very high pig iron costs, it would not be difficult to assume that this thing could make a meaningful contribution in the short run to SDI's aligned.

We do believe that the Iron Dynamics is -- the briquetting costs could be in the $135 range, maximum 140 given today's cost of inputs, which when you measure that again scrap or pig iron is an outstanding number, but you have to understand that the iron content here is only about 82 percent, whereas pigiron is closer to 98 percent -- 97 or so number.

The new project we're involved with in Minnesota, Masabe (ph) Nugget (ph) we do believe is about 98 percent pure iron.

So when you think about the cost structure of the pits at IDI, it will get mitigated for the iron unit impact, if you will, and one has to consider the productivity impact on the SDI side of the street.

But nonetheless, it is shaping up to have a very good cost structure in the $135 when it is at full capacity range.

When you're talking about liquid pigiron as opposed to briquette, we're probably talking about $185-$190 minus certain credits that we get to enjoy as a cost benefit because it is liquid iron.

And I think Mark's estimation is that our cost structure is somewhere on a net credit basis, $155 or $160.

As a company, we are working with other partners in developing a new technology that the street has learned a lot about called Masabe (ph) Nugget.

We believe that is an extraordinarily viable technology and believe that it would be a preferred technology in our opinion to Iron Dynamics.

It does not make Iron Dynamics a bad technology, but we think there would be a cost benefit to the Company if it were to in the future pursue the construction of what we call nugget facilities.

The test results on this product have been absolutely excellent to date.

It is a pilot project and it is running extraordinarily well, reducing green balls in a rotary hearth environment to pure iron nuggets.

We have the ability to actually separate the gang from the iron in that process, or the team does, and we think it is an exciting and extraordinarily valuable technology.

The Company is going to at our February board meeting seek approval for the construction of at least one battery in the state of Indiana.

And at the same time, we with our partners will pursue the construction of a commercial battery in Minnesota.

So we are very excited about the Masabe Nugget technology and its potential cost structure, which I think Mark told me he believes is somewhere between 150 and $160 max all-in cost here in Indiana.

It would be even cheaper if we were to do it in Minnesota and not have to transport moisture and oxygen, if you will, in the product when you're thinking about actually manufacturing the product in Indiana.

But an exciting technology that could conjunctively, along with Iron Dynamics, put the Company in a very excellent position from a resource cost perspective.

The capacity that we hope at IDI is in the 400,000 ton range eventually, somewhere in that range and we believe that we could build commercial facilities with the nugget technology in the $4-$500,000 range.

If the Company is to embark upon a new venture with its partners to build several of these, then it is not impossible to about think SDI within a year or a year and a half to have potentially 2 million tons of very low cost, very pure iron units at its disposal.

And in this helter-skelter we're all facing today, that would be extraordinarily valuable resource to the Company.

So when you think about it, the Company could use 5 million tons of raw material inputs to reach its capacity of over 4 million tons of production, then this could play a very major role, a million to 2 million tons of iron units.

And I cannot tell you where that number is going to land, but we are excited about it and we are going to ask our board for approval in the near-term to construct one of the first commercial batteries relative to new technology resource cost inputs.

So that is kind of a review of how the divisions are doing.

On a go-forward basis, I think our margins will be expanding in the first quarter.

And it is a tough call, because resource costs change daily, not weekly, not quarterly, not monthly, almost daily.

And they have escalated rather dramatically in January, February, and March.

I think all of you know that we are surcharging much of that material to our clients and out of necessity, unhappily.

We believe the market has moved well beyond the ability to sustain itself.

I would tell you that the prices being quoted today, there could be as much as $100 (indiscernible) in this market, the drivers of which would be increased resource usage in the integrated community and overseas demand driven by a weaker dollar.

But I think that tends to be more of an excuse than a reality.

Historically, we've exported 12 million tons, 14 million tons of scrap from our shores in this nation, and I think it had gotten down to about 8 million tons.

It's probably open the 10, 11, 12 million ton range.

So it's within the range, but I think you have some rather buyers in other parts of the world who are paying extraordinarily high prices for these raw materials and people that process and purchase scrap either need to pay more for the resources to garner the scrap and/or receive the kind of value they are receiving for exports.

So I think much of what happens is they know they can export it for X and I think scrap isn't quoted on an as-needed basis as it used to be.

I think it tends to be a waiting game between the mills and the providers and the providers are outweighting the mills and people are panicking and paying some strong prices for scrap resources, but scrap is not the only commodity under attack.

Alloy costs have went crazy, iron ores went up substantially, coke has gone up substantially, so it is no picnic out there.

By necessity, we're passing these costs on to our clients.

I believe we're probably going to be, if I haven't mentioned it, in the 35-45 cent range in the first quarter.

That is quite a broad range, but it is the best we can do right now.

You can read that to mean 40 cents.

I would not tell you that.

I don't think it's an unachievable number certainly, and I think a lot of people on the street were looking at our quarter and saying it was 17 cents or as I just told you earlier, I think it was closer to 20 or 21.

I think a lot of people were thinking it was going to be 20-25 cents.

So I think there's some good news here.

We've had 60-cent quarters.

It's not going to be a 60-cent quarter.

At the same time, if you try and measure it against the fourth quarter, it is probably going to double almost.

And so our margins are coming back.

It was a tough year in '03 in many respects.

As I said earlier, a very weak market in the first part of the year and extraordinarily strong resource costs in the latter half of the year, which we had trouble as an industry passing along to our clients.

But I think '04 generally is going to shape up to be a good year for the Company.

I think each quarter at this point in time could get a little stronger.

We certainly don't know that at this point in time, but I think each quarter could get a little stronger and it could shape up to be a pretty fair year.

So at this point in time, I would like to have the operating managers talk about their areas of responsibility and give you a little more background detailed color on what's going on.

Mark?

Thanks, Steve.

On a global basis, just got a few additive thoughts, I think.

The flat-rolled division sustained its high operating rates in the fourth quarter.

We actually finished with a record production year exceeding 2.4 million tons, which I think was an outstanding achievement by the team.

Shipments in the fourth quarter started out a little slow.

We built inventory in October and November, but the shipping team did a marvelous job in the end and we ended up with a record shipping year also.

We exceeded 2.3 million tons in shipments.

The cost structure itself remained stable in the most part throughout the mill.

A couple of the lines actually lowered their cost structure.

And so the year-over-year financial report performance is really directly related to the compression of spread between scrap and selling price.

That was I think an outstanding year by all.

The (indiscernible) is doing well, as Keith suggested, about 5000 tons in December, the quality is excellent.

We have been loading the male with purling (ph), lighting fixture stock and some building panel material, plus we go through the color matching sort of approval process for the raised garage door.

That is going well and we expect to get into the garage door business here this coming month.

Jeffersonville, we are at full thrust there.

We did suffer a couple of issues in the fourth quarter.

We had an inconsistent rail supply in the supply chain from Butler (ph) down to Jeffersonville.

We may have increased our whit (ph) to overcome that issue.

And we also struggled a little with throughput through the cold reversing mill with the light gauge products.

We were typically running at about 60,000 tons a month, and we've made some changes and exceeded 72,000 tons in January.

And I think we will approach the 80,000 tons necessary to fully exploit our downstream activities here in the next month or two.

Quality there has improved dramatically.

We have made some modifications to the cleaning section, and that mill now can provide prepaint (ph) substrate without any problems.

So Jeffersonville is going to be a big contributor in the months ahead.

Iron Dynamics produced 15,000 tons in December.

We were able to consume that in an electric arc furnace in through a couple of changes we've made from prior campaigns.

We changed the coal supply to a lower sulfur material, which eliminated any sulfur problems at the electric arc furnace and at the (indiscernible).

The only real issue is one of productivity currently with the HPI material. (multiple speakers).

We should be able to run we have actually had some sustained runs at Iron Dynamics in excess of 1000 tons a day.

It has demonstrated the productivity capability as we have projected, and also quality and cost.

Metallization has been running in the 85-90 percent range, carbon in excess of 2.5 percent and sulfur is in a range that we can tolerate from the arc furnace.

The problem price or cost of (ph) material, about $135 yielded up about $160 a ton or thereabouts.

It's a very, very competitive material for the present market.

Masabe nugget, not much to add there, other than the plant has been running very consistently.

We've actually received 4300 tons of nuggets from that facility over the last few months, which is outstanding when you consider that the facility only operates at about a 2.5 ton per hour rate.

It's a very reliable process at this point in time.

We have a third campaign starting in the middle of this month to verify different ores, different coals and to further improve the natural gas consumption.

That is again a very, very exciting opportunity for us.

Thank you Mark.

As you said, all of the employees at Columbia City (ph) are very proud that we became a contributor rather than an a distracter to the bottom line.

And so it has made a lot of people with high opportunities and looking forward to 2004.

We continue to, as mentioned, finishing up the commissioning of the structural sections with a 6-inch and a 36, which we should do those this month in February.

As we continue to ramp up our productivity in shipping, the sales department has done a great job providing us with a solid backlog on a go forward basis.

From a rail perspective, we have been commissioning that, trying to take it through one workstation at a time which is basically one workstation each month.

We recently have gotten through the rail successfully through onto the cooling bed, it looked good.

Attempted to run it through the straightener, had a couple of little issues.

Those were mechanical in nature and it solved those.

So in February, we look to run rail again and take it through the straightener and onto the test units and once through the test units, into the finishing.

So we're very optimistic about having finished product here in March or April.

So things are going well, we're excited and we look forward to 2004.

Glen Push (ph) is the manager of our division in Pittsboro, Indiana, is not with us today.

But as I highlighted earlier, Glen expects to ship somewhere between 15 and 20,000 tons of product probably in this quarter.

And I know some of you again will ask what we expect to do for the year, and that is probably in the 240 or 250,000 ton range as we gain competency in all areas of this new business.

We have a substantial backlog already at Pittsboro and it will grow as we introduce other products to our plate if you will.

When you consider the Butler operation, which could be 550,000 tons, probably fewer shipments in the first quarter.

We had an extended maintenance outage in January and dealing with other issues, a tough winter and scrap issues.

But it could produce 590 and ship 550.

We will build some inventory in that business for both Jeffersonville and our paint line and the 590 is an unyielded number. 590 really on a yield loss basis throughout the system is 570.

So there's not going to be a lot of inventory build, but we could build 25,000 tons of inventory.

Dick is probably going to produce in the 185-190 range, I would guess somewhere in that area and ship 180, somewhere in that area 180, 85.

So we could be in the -- a little over 800,000 tons of production at these mills and 750, 60,000 tons of shipments in the first quarter.

So I think that the quarter, as I said earlier, is going to be a brighter quarter than the past several quarters have been for the Company.

It is going to be nice to have every division we have hitting on hopefully all eight cylinders.

Certainly by the summer, I think every single operating unit we have, including Iron Dynamics, could be profitable.

And that is a market change, given how much activity we had on our plate the past couple of years, kind of (indiscernible) we were dragging on our back or had on our back during that period of time.

So hopefully, we're going to start to enjoy the fruits of our efforts.

Before we open it up to q and a and what not, there are two other gentlemen I would like to have speak, and that would be Tracy and John Nolan.

Maybe we'll let John go first and talk to you a little bit about what he's seeing in the market, because I think one of the questions will have to do with surcharges and I think John is prepared to answer that.

Thank you, Keith, and good morning, everyone.

Let me make 3 quick points about the market.

Demand is strong.

Circumstances out there are very challenging right now for both producers and customers, and I will tell you we're meeting those.

Talk about surcharges for a moment.

I think the best way to sum this up is that all of our contract customers have either signed and returned a surcharge consent document or agreed to supply (indiscernible) scrap at delivered prices that support previously agreed contract pricing and margins.

I want to emphasize that point, except one customer.

Currently, we have that customer on credit hold and we're in negotiations to resolve that issue.

Thank you, Keith.

Thanks, John.

Tracy?

Thank you, Keith.

I'll try to be brief with a couple of comments.

Our start-up costs for the quarter and for the year are reported in the press release, and so I just wanted to give you what guidance we have for 2004.

And I am pleased to tell you it's almost impossible to know.

It is almost impossible to know because the guys down at the bar products mill are exceeding our expectations, so is hard to see with any clarity what is going to happen there.

But what little bit of guidance I could give you would suggest it is probably less than $5 million in 2004 in the first half of 2004.

Cash, taxes in the fourth quarter were $23,000, and for the year, were $7.5 million.

The cash interest was 10 million 700 (ph) in the fourth quarter and 42.3 million for the year.

The difference between that cash interest and the net interest recorded on the balance sheet is the interest would require -- or on the income statement is the interests we're required by GAAP to capitalize associated with our construction projects.

I'd like to point out, I'm not sure it was said, the capacity utilization at the structural mill continues to get stronger each and every quarter.

This time last year, they were operating at about 30 percent.

Fourth quarter of 2003, they were somewhere between 60-65 percent.

So continuing great effort there.

I would like to point out also our liquidity position has improved in the quarter.

Our revolver of $75 million remains undrawn.

And as you can see, we have $65 million of cash to yield $140 million.

That compares with $100 million in the third quarter and about the same at the end of last year as well.

Capital expenditures you will see in the fourth quarter were about 47 million.

The only reason I point out the obvious is we're proud to finally get a number there.

We keep guessing it was going to be higher.

We told you 44 million in the third quarter call, so we came awfully close.

Projections for 2004, we previously guided about $50 million.

For reasons Keith suggested a little bit earlier as well as a couple of others, we will likely be adding to that number, but we don't have a firm number for you yet as to what that is going to be.

Just be aware that it is going up and it could possibly approach $100 million for the year.

Eric, with that I think we were ready to open it up for questions.

(Operator Instructions).

Mark Liinamaa, Morgan Stanley.

Thank you.

I missed how you got back up to 21 cents, the additional 4 cents to take from the 17?

We had a number of things that I would call unusual or non-recurring or items that just were recognized in a quarter and did not occur in a quarter.

We had a lot of inventory at Columbia City that was damaged inventory over the course of time as we were learning how to handle product of that nature and made a conscious choice to scrap it.

So therefore, it needed to come off of the books at one figure and go into the scrap pile at another.

It was our 10th anniversary, we issued stock to all of our employees celebrating the event.

We had refinancing charges and sundry other small things that will not on a quarter to quarter basis, be there that were what I would call things that we had really contemplated at the outset of the quarter when we were talking about 20-25 cents.

We talked about -- the reason we would not have achieved 25 cents really was largely due to scrap costs.

Scrap costs were $6 higher than we had contemplated and lucky we could all hold it to within that range.

But I guess all I was saying is you got a gain that would march the number down to 17 cents, you've got other items which are sort of out of the ordinary or however you want to look at it that was worth 3-4 cents.

You mentioned some operating problems with the stock from Iron Dynamics.

If you increased non-scrap metallic units, how much of an impact would that be on operations?

It's hard to tell you at this point in time.

We don't have enough history.

What the HBI does, because it contains a lot of gang and ash and other inert materials, it takes a little longer to melt it in and it lowers our yield.

So if you have a -- pick a number, a 94 percent yield, it's going -- using a lot of that product could drive your yield down to 92.5 or 93 or a number like that which has some sort of a cost impact, and then it takes a little longer to melt in the neats (ph) because it is not all pure iron.

So there's just issues with melting the HBI.

You end up with a lot purer bath, obviously.

It is a nonresidual type input to the furnace, a very valuable input at today's market prices.

But it does have somewhat of an impact.

And I think Mark indicated to me that when we're running really wide on the caster, we like not to use a lot of HPI because it jacks up our melt times and then the furnaces have a little more difficulty keeping up.

So we're going to use a more natural product, pigiron, what we're historically used to, which we have a good supply of when we are going out wide.

If you're going narrow, the furnaces can keep up.

It's really just an issue of it takes longer to melt a lot of inert material that is in the HBI product.

When we flip this over to liquid pigiron, obviously it goes just the opposite direction.

So if your furnaces are turning every 42 minutes or 45 minutes and HBI causes them to turn -- I will that Mark speak to that -- in 50 minutes or some number, 46, the liquid product takes you the other way (indiscernible) heat in the 32 minutes with liquid.

So we have yet to get to the liquid phase.

Mark, you wan to add to that?

(indiscernible) would have about a 15 percent productivity gain when utilizing liquid pigiron.

And when using HBI, you have, on a specific basis, probably a 10 percent loss in product productivity.

By utilizing in a prudent fashion, when we go narrow, we have an overcapacity of melting (indiscernible) currently, so we use more on narrow products and we will come off it on the wide part.

Great, thank you.

Michelle Applebaum, Salomon Smith Barney.

I wanted to ask you -- I'm trying to reconcile John Nolan's comments and (indiscernible) comments, which both talk about successful pass-through of surcharges with the comments from the blast furnace mills that they're not able to pass in every case.

And it doesn't sound real optimistic.

Can we speak specifically about automotive?

Is that the variance here?

Are you being successful with automotive in passing through the surcharge price?

We're not going to speak about any one client directly, Michelle.

And the audience we play to may well be different.

I think in the case of the integrated community, they may well not be able to pass through the surcharges there, but I can't speak for them either.

I think Nucorp (ph) said it was 100 percent.

We would applaud that.

I think John Nolan said we have 250 or 300 customers, and we're only haggling you might say with one at this point in time.

Everybody else has signed the consent and we are surcharging those items.

So we have had a very positive experience with it.

You don't want to disclose what industry that one customer that's on credit hold is in?

No, we don't.

And as John said the other way that we've mitigated it is people are furnishing resources at the -- call it historic high level.

And at that point in time, we can maintain a price.

But we're getting a resource under today's market.

Now it may not be tomorrow's market, the market may fall apart.

And the scrap could come down $100 or $150, who knows, and the deal is off.

But at this point in time, we have found I think innovative ways to deal with each and every issue.

On the issue of contract sales, how much of your tonnage was contract last year, and how much of your tonnage will be contract this year?

Not much.

I would say, again, there are two types of contracts, Michelle.

You have one that fixes volume and price and one that fixes volume with a price that floats in the market relative to our cost or relative to --

I mean price fixed, (indiscernible) concerned about volume.

Price fix arrangements is probably, I'm going to guess maybe 15 percent.

And I don't think it's going to grow that much from 15.

I would have thought it was 10.

I have to make sure the denominator is correct.

Are you answering corporate or flat rolled?

I am answering flat rolled.

A-ha.

We have no such arrangements at B (ph) mill.

SO you can both be right, correct, 15 and 10?

We're right, correct.

We anticipate having some of us arrangements at the bar mill (ph) going forward, especially when we further penetrate the special bar quality market.

But (MULTIPLE SPEAKERS) present time there.

We will worry about SBQ when you get there.

Given the history of that mill, that rings a bad bell.

We're talking 12 months on all of the contract arrangements?

No, that is not the case.

Actually in today's market, I define a contract as anything 90 days and longer.

Okay.

Our spot actually now is month-to-month and we're anticipating possibly in April opening the first half of the month and the second half of the month possibly at different spot prices, depending upon where resource costs go.

Thank you.

Wayne Atwell, Morgan Stanley.

Thank you and congratulations on a good performance.

Can you share your thoughts on the changes in scrap price and maybe product price between the fourth and first quarters, how much might your scrap price rise, do you think?

That's difficult, Wayne, which we're not all there yet throughout the quarter.

Scrap (multiple speakers) (inaudible).

As you know, scrap went up I think $30 I think it was last month, and this month, it's going to go up 40 or 50, it sounds like.

So in two months, it's 70 and December was -- I forget what December was, $20 or whatever, I can't remember -- 30.

So it is up rather insignificantly.

Not all of that is going to flow right directly down to the bottom line, and of course you have to multiply that by 8, 9, 3, (ph) so on and so forth.

We have old scrap coming in and scrap that you're purchasing in March will really be used in April, and it's -- right now, it's so wild out there, it's hard to give you a number.

I suspect it could literally go up in flat rolled by $70 in a quarter, it's possible.

It's just as hard for us when we're on the outside and you're on the inside, so any thoughts on your pricing, what the average rise in pricing might be?

It is dramatic, Wayne, and again, it is all over the place from not being covered in the fourth quarter to being limitedly covered in January to being totally covered in February of March, and it is all over the place.

The prices, as you can tell, are going to rise faster than the resource cost inputs.

Some of that is a little bit of a catch-up, if you will, from not being able to get there in the fourth quarter.

But prices, my gosh, at the beginning of the fourth quarter were, I forgot what they were, $290, $300, something like that.

Today, they're well over $400.

Could you give us a little bit more feedback on Masabe nugget and what the capital cost might be and the building period capacity again?

The capacity is thought to be between 4 and 500,000 on a commercial battery.

Construction period, probably a year.

Cost, probably $90-$100 million when you look at all of the working capital and startup costs and the whole nine yards.

The absolute capital, hard capital, is probably in the 70-75 million, $80 million range.

And we would not underwrite certainly all of that risk or gain ourselves because we're partners and they would be capital participants in any project that we did locally and/or in Minnesota.

I think one of the reasons why we believe that it is important, or one of the reasons why we are thinking of starting the first one in Indiana is because the prorating process in Minnesota is absolutely horrific.

And they will take two years to affect, whereas very stringent up there as you know, whereas down here, it is probably a six-month process or thereabouts.

So we actually can react much quicker in Indiana.

The product would have to ship from Minnesota to Indiana anyway, but there probably is a $10 or so difference between operating up there off of western coal and operating down here off of other coals and so one and so forth.

We may be, who knows?

In the Indiana project, we could be half the cost, which would imply responsibility for $50 million.

I did not say equity, because you could obviously finance a good bit of that activity as well.

Up in Minnesota, I think we said earlier in the last conference call, we have probably a different ownership perspective, more along the 20 percent vein.

So if you say each one of these things are $100 million with working capital, then you have a $20 million bet you're making in Minnesota and maybe a $50 million bet you're making in Indiana, ex-anything you lay off on financing.

So none of those details are really decided, Wayne.

So don't take this as the gospel.

It could be anything that is negotiated amongst partners and we really don't -- have not defined the hard capital inputs to the degree that they will be in the short run.

Thank you.

Charles Bradford, Bradford Research.

The morning.

I have a couple of questions regarding lead time.

How far out is your order book?

We're not letting it go very far out.

I think right now, we're closed through the quarter.

Closed through the quarter, Chuck, and we'll probably open April 1 through 15 in four weeks, would be my guess.

It's not that we couldn't sell it, Chuck, we just don't quite know what price to sell it at yet with resource cost going ballistic.

I understand some of your competitors have gone much further out much to their chagrin. (multiple speakers) Question on the Masabe nugget.

Obviously, you have a partnership with (indiscernible) currently.

Are you looking for new partners?

We are not.

There have been some people alluding to wanting to join the partnership.

You may have hard that on their conference call.

Currently Chuck, we have a very good partnership with Kobe (ph) and Cliffs (ph) and (indiscernible) Metrics (ph).

And at this point in time, to keep suggestion, we are percent further partnerships for a facility here and in Minnesota.

And at this point in time, we are all on board and we all want to go forward with it and probably would not need another partner.

In the future, Chuck, as you know, it is the intent of the group and we would have ownership and (indiscernible) would have ownership and Ferro Metrics (ph) would have ownership and Kobe (ph) would have ownership to sell these batteries on a commercial basis.

Obviously, they won't be offered for sale until they are commercially not on a pilot project.

I think the pilot project's pretty much there.

It is an extraordinarily positive experience on a pilot type basis.

Once we prove it out commercially on a $400,000 facility, I think that team, all of us collectively, would be interested in marketing the technology.

Are there any restrictions on marketing the technology?

Is somebody going to do it in the U.S. and somebody else in Europe or whatever.

Kobe owns the technology itself and has the ability to go sell these facilities elsewhere, yes.

Thank you.

Mark Parr, McDonald Investments.

Hi, thank you very much.

I had one question regarding trying to get a handle on the profit ramp-up at Columbia City.

I was wondering if you could share with us approximate, what the EBIT per ton performance is for Columbia City compared with the Butler Works operation?

Mark, I don't have that right here.

I will try and see if I can put it together and answer that in couple of minutes, but I don't have it in front of me.

I don't think it's something you've done before, but I just thought it might be helpful to understand -- to give us a better sense of how well that facility is progressing, particularly over the next couple orders as you're moving into the black.

We'll see if we can get you something that would give you that kind of idea.

All my other questions have basically been answered.

Congratulations on the quarter.

So I look forward to better news next quarter.

Thank you.

(indiscernible), Prudential.

Congratulations on all of the progress.

In terms of scrap and other metallics costs, I am a little confused at what the scrap price is.

If you go to the American metal market page for consumer buying prices, they say number one heavy melt is 132 in Houston and Pittsburgh number one busheling is 232.

And the man that complies it admits that in Portland, there is one consumer, one dealer and one export and he hasn't updated those prices for over a year, which is why they are $100.

So I am relying on things like their web page -- very confused.

And when they report that an option of about 10,000 tons goes up $38 for February, when Nucorp (ph) buys 1.6 million tons and you are buying a quarter-million tons a month, I don't know how meaningful any of these prices are.

That has been a real problem in the industry, the lack of transparency or the lack of real numbers.

And I would tell you that the guesswork that these people use is extraordinarily erroneous.

They call a few scrap guys and they call a few buyers and they try to make some sense of it, then they index it to previously aired history.

So the numbers in certain markets have never been real numbers for 20 years.

They're artificial; their argument is, well, the market went up $20 bucks we moved our number $20.

Well, what the hell does that mean?

It's still a bad number.

And the market is moving so fast today, it is extraordinary.

Nucor shows Chicago shredded for other than sheet products and Chicago number one busheling for sheet.

I think we did too.

I think we actually suggested that those were the right products to pick for flat-rolled and for bar products, etc., etc., and Chicago tended to be I think the more realistic American metal market publication, if you will.

I think that whole mess needs to be rethought.

I have been told something incorrect by someone I was trade-checking with.

You're not using a number two grade, you're using Chicago shredded for long products and number one busheling in Chicago for sheet?

Yes.

So you're the same as Nucor?

Yes.

As it relates to the regional differential where Chicago $20-$34 higher for most grades of scrap than the averages of the various metropolitan regions, the AMM reports, you think that's just the regions are wrong?

They've never been right.

They just had a historical nature that goes back eons ago -- even the scrap people tell me that.

So whenever the bushelings -- and I just may well matrix averaging these things.

When bushelings average $27 more than 5-foot cut structural or $42 higher than number one melt, number one heavy melt, you would assign no significance to that?

I would not pay any attention to Pittsburgh or Cleveland or Detroit.

Personally, I think the Chicago one's half worthless.

But it is probably the closest one historically to reality -- we need a new indices and all of us in this industry are working towards that.

We're working with a company called Material Sciences that will aggregate and collect the buy data on an FOB basis mill by mill, which in effect, can be extrapolated into region by region and domestically, and we may not know the go-forward number, but we're all sure going to know what the change from month-to-month was and all of these commodities on a historical basis and put an end to all of this nonsense and chit-chat about what the market is.

So we do need a market that is more transparent.

Historically, as you know, John, that teeny little list in Chicago for some strange region unbundles, drives an entire market.

They put out for bid 5-10,000;

Chrysler is hidden, General Motors is hidden, the appliance industry is hidden, most of the OEMs are hidden.

Nobody puts their scrap up for bid.

So you have one little list and whatever happens to that list unsensibly drives an entire market.

And including the cut-rates (ph).

It's just sheer nonsense, because you could have a broker dramatically to positively or negatively influenced that market.

So it is not a transparent marketplace.

It's very difficult to get your arms around the numbers.

But the bushel (indiscernible), that was last month's.

This month's is --

They did not update it last week.

It's usually updated again -- it will be updated here shortly and you will find that number is probably up $40.

Just to ask another dumb question, because I never microanalyzed all of these spreads before.

In seven of the 14 regions they report, Nucor has no mill and three-quarters of Nucor's output is from three of their regions -- Carolinas, Birmingham and St. Louis.

I don't understand why, but those three regions have greatly lower prices, which would not be logical if that is where the consumer is.

They are not logical.

What I tried to tell you years ago is they were -- if you go back four years ago, you may find that that market was indeed under the Chicago market by X (ph), and all they have done is index be paying over time (multiple speakers)

They have not updated their numbers since Nucor (indiscernible) Arkansas and the Carolinas in the last 15 years?

They have taken a bad number forever and just moved it up and down according to way it (indiscernible).

It has no real relevance.

That is not what scrap trades at, I can tell you that.

Nucor will tell you that.

Thank you.

Andrew O'Connor (ph), Strong Capital.

Good morning.

I wanted to know, Keith, or Mark, does your liquefied HBI cost of $135 a ton -- does that account for or incorporate the 15 percent productivity enhancement you expect at the electric arc furnace?

It's not 135.

That was the HBI cost.

The liquid is 190-ish kind of thing, minus zinc credits and productivity credits to try and take -- I'd have to take a look at the net effect of the Company, and I think that's where it's around 155 or 160.

If you take the liquid pigiron production cost of $185-$190, we utilized or sort of disposed of the electric arc furnace dust (ph), which gives about a $25 a ton credit.

And then the liquid pigiron, because it is already liquid, it has a carbon content that is already hot, there's what they call a hot metal credit associated with that where it's about a $21 a ton credit.

So it brings you down to about $150-$160 a ton.

Plus, you get the productivity enhancement.

So that's on top of -- ?

Yes.

You may have stated this, Mark, but has the creation of fines (ph) been an issue thus far for the briquetter and with liquefaction beginning later on this month, when do you think you will reach full capacity?

Thanks.

HBI, I would hope to get up to about 30,000 tons in March.

We will fire the submerged arc furnace up again sometime in March, I would imagine.

We're not going to get the full capacity on liquid pigiron, I wouldn't think, until the middle of the year.

Tracy, swing in CapX, 50-100 million, that is related to Masabe?

It is related to unknown or unapproved projects as of late.

One of them we hope to be Masabe, as Keith pointed out.

There are a couple of other smaller projects that we might engage in as well.

So while I cannot give you any specifics as to the individual projects nor the magnitude of those, I really just wanted to alert you , Andy, that those things are coming.

Thank you very much.

Adam Graf, Bear Stearns.

Good afternoon, gentlemen.

Maybe I missed it, but I did not hear your sales volumes of breakout that you guys usually give.

Tracy did not give them, but he certainly would be pleased to.

Please.

Sorry about that.

Volumes in the flat roll environment; (indiscernible) bands for the quarter were about 276,000 tons; pickled in oil, about 56,000 tons; cold rolled full hard, about 5000; cold rolled fully processed, 32,000; hot rolled galvanized, 96,000; cold rolled galvanized, 111,000; post (indiscernible), 23,000; the painted was about 4000.

That should total about a little bit over 600,000 for the flat rolled and the structural shipments.

There about 12,000 -- this is per quarter?

Yes.

12,000 tons of piling and the balance being about 162,000 tons of structural shapes, (indiscernible) products.

Thank you.

That was 12,000 piling and 162,000 other structural?

Yes, wide flange shapes.

And that will sum up to your total shipments for the quarter?

There will be some minor eliminations that are going to happen, but that's going to get you real close.

That is the basis that we've given you before.

Alright.

At this point, are you guys willing to breakout an average realized price on structural and rail shipments?

No Sir.

Alright, thank you very much.

Chris Olin, Longbow Research.

Good afternoon.

Keith, I'm wondering if you had any thoughts regarding the amount of protection that the weak dollar actually provides sheet prices?

In other words, do you have an estimate as to the price level for say hot rolled sheet that imports could return to the market in North America?

Well certainly, I think it is at a price level where they could return, but the they are preoccupied right now in shipping to other geographies.

As you know, China has been just a huge consumer of resources for their growing industry and the needs that they have.

And everybody is anxious about when that bubble could burst and I don't think it is because a lot of Chinese product would sell to North America.

But you could get Russia product in European product perhaps, you redirect it.

But at this point in time with the economy being fairly healthy in Europe, we talked to our German counterparts just yesterday.

Nothing has collapsed there and Asia being strong and the dollar being weak, I don't see that imports are -- they're going to have a roll (ph) because we cannot produce.

If the economy demands 130 million tons of steel, the new steel industry, if you will, cannot produce 130 million tons.

It probably could produce 100 million tons, so imports could be 30 million tons of strong economy.

I don't think the economy is quite that strong yet and imports will continue to pass through the gate.

But I don't think they will pass through the date on an avalanche type basis.

Is it real estate to think if the economy is humming that hot rolled sheet could get up to the $500 level?

I think is very realistic to assume that, but that would be largely driven by inputs, not all by just demand.

If input cost, whether you're talking coke or ore or scrap, were to fall, I think the price would fall very clearly at that point in time.

I think the thing that the consumer is upset about, he's upset about the steel mills and they're upset at the mills back in the days of the 201 and prices never hit these lows.

The mills aren't responsible, certainly 201 is not responsible.

We have even higher prices, but that is largely driven by tight resource costs, whether -- and it doesn't matter whether you're talking about aluminum or copper or scrap or ore or coke or vanadium or columbium, the alloys, they're all (indiscernible).

It's an extraordinary marketplace we're all having to deal with and live with.

Thanks a lot.

(indiscernible), Morgan Stanley.

I had a quick maintenance question actually.

What was the amount outstanding under the term loan B (ph) at the end of the quarter?

It was $112 million.

Thank you.

Aldo Mazzaferro, Goldman, Sachs & Co.

Good afternoon.

I lost track in all of those wild pricing.

You remember back in the fourth quarter when you raised your price for the first time for January, could you tell us what that put the base hot rolled price to and where the base -- has the base changed since the last increase?

John can tell you whether the base has changed. (indiscernible) tell you what it has changed to, but back in those days, although I think going into January, we were in the 340 base range probably 350 somewhere in that area for hot rolled, and it has changed, yes, it has changed and now it has scrap surcharges on top of it.

John, I don't know if anybody knows where the real base is anymore.

In the stock market, Aldo, I'd tell you -- it is clearly a market will bear circumstance, and I am not clearly sure that I understand it, but I'm going to tell you it is north of $400 a ton without the surcharge.

Without the surcharge?

Without the surcharge.

Great.

Tracy, I wonder if I could -- I think it's really commendable that you issued shares to your employees on the 10th anniversary.

I was wondering if you could help us understand how that action impacted the income statement and what the shares are outstanding at the end of the year?

Before he looks at that, I want to speak to that issue.

The 35-45 cent range that I spoke of earlier is with 49 million shares being -- existing in reality.

We all know that there is a convert number that at some point in time, may have to be included in our numbers.

So the 35-45 is old basis.

I'm not trying to tell you, Aldo, that there is a new basis coming, but if the converts kicked in, we're going to be closer to 55 million shares or something like, but we're not there yet or we can't tell you whether we're going to be there or not.

But the number I gave you is on the old basis, okay, if you will, or the existing basis.

Although the number of shares that we issued were over 30,000 shares, and the impact of that would have been at the current market value, so there's a little over $600,000 that impacted the income statement.

Which is probably about a penny.

I would like to steal some of your time for a moment if I may and try and answer Mark Parr's question earlier about the progress at the structural mill.

It is a very difficult question to answer in that we had losses in the first quarter of '03, and as we pointed out to everyone, we became cash flow or EBIT even profitable in the third quarter, cross over right at the end of the second quarter.

And in the fourth quarter as we had already announced before, we were profitable.

So those percentages are kind of goofy to talk about.

But suffice it to say, we moved from a significant loss position to a very healthy income perspective on an EBIT basis in the fourth quarter.

And I can tell you that, as Keith already pointed out, it is tough to tell what's going to happen in 2004, but we're expecting continued improvement there.

On an EBIT basis, we could expect to improve another 40 percent over what we saw in the fourth quarter.

And with that, although I apologize for taking your time, but I will turn it back over to you.

No problem, that was helpful.

My final question was I know you don't want to break out by product, but how about on a product that you're not really in the market yet or getting into the market on the bar business?

I'm just wondering, there’s a wide range of SBQ pricing potential or MBQ pricing potential.

I'm wondering if you can just give us a ballpark as to what kind of selling price you have on those products?

Coincidentally, Aldo, I would tell, it's north of $400 a ton without the surcharge.

I think recently, there were some price increases announced by (inaudible) and I believe their prices were without the surcharge were somewhere right around $430 a ton.

That may be in yesterday's American Metal Market.

Forgive me for taking a moment to just double-check that.

Could you hear him okay?

Yes, I did.

Thank you very much and congratulations on the good performance.

Thank you.

Charles Bradford, Bradford Research.

I am a little confused, frankly, by some of what we're getting from the AISI.

Maybe you may have been better intelligence on what's going on.

But they're showing an operating rate in the industry of less than 82 percent.

A year and a half ago, it was 94 percent.

I'm having a little trouble on seeing where the tight market is with an operating rate this low.

Do you have any feel for what capacity could come back on?

Chuck, I would say the AISI people responsible for statistics have lost their way.

In all of the consolidation, the activity that has occurred, I don't tat that is a good number.

I don't know what the real number is, but I have long wondered how in the world you could have scrap costs go ballistic at these operating rates and that the same logic would apply.

So I would tell you, I don't think the operating rate is a correct number.

I'm with you;

I just don't understand it.

One thing I am seeing though is number one heavy melt going into Korea at 308 delivered.

That was a cargo (ph) off the West Coast, as I understand it.

And we're hearing about mushing pigiron at 317 (indiscernible) at 320. (multiple speakers).

Where are you seeing pigiron in the North American market these days?

Mark just bought some for I think about 300 or 305.

305.

Delivered.

There seemed to be some incentive that some of the integrated people would have some extra blast furnace capacity to start making some pigiron.

Any sign of that happening?

Who has extra blast furnace capacity when we're so coke short?

I don't know anyone.

Well, National has always had a problem of using all their blast furnace capacity, and you're saying the Great Lakes plant. (multiple speakers)

That's true -- they always have, but there is -- people are scrambling for coke.

It doesn't mean Great Lakes is, but they have always been reluctant to market that product to others.

They always told me they didn't want to help you guys.

That is the party line, I think.

Now they have new owners.

We're just going to help ourselves in the future.

Alright.

Thank you.

That's all we have time for questions today, gentlemen.

I will turn it back over to you for any comments.

Thank you Eric and thank you ladies and gentlemen for joining us this morning.

It has been an extraordinarily roller coaster ride, a volatile year.

It did not turn out too bad.

I think we're going to have a pretty good year next year.

Like anybody in this business, no one likes to see this kind of volatility.

Our customers don't, we certainly don't.

You can even argue that resource costs that that are this volatile, whether they are scrap or other commodities, can actually threaten a recovery.

So we're not happy about this, no one is, but there is some strength in the market and that is the good news.

And so I think we're going to have a little better year.

Thank you again for joining us.

That concludes today's conference.