Steel Dynamics Inc (STLD) 2004 Q1 法說會逐字稿

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

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

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

Mr. Tracy Shellabarger, Chief Financial Officer;

Mr. Mark Millet, Vice President and General Manager of the Flat Roll Mill;

Mr. Richard Teets, Vice President and General Manager of Structural and Rail Mill.

Also with us today is Mr. Fred Warner, Investor Relations Manager.

At this time, I would like to turn it over to Mr. Warner.

Please go ahead.

Good morning, and welcome to the April 15, 2004 conference call covering first quarter results for Steel Dynamics Incorporated.

Today's management's discussion as well as responses to questions may include forward-looking statements.

We caution that actual future results and events may differ materially from statements or projections 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 and Form 10-K as filed with the Securities and Exchange Commission.

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

This 10-K annual report and other reports we file from time-to-time with the SEC are publicly available on the SEC website www.sec.gov, and on the Steel Dynamics website www.steeldynamics.com.

Our 2003 Form 10-K is also included as a part of our recently published 2003 annual shareholders report.

Please note that Steel Dynamics 2004 annual meeting will be held in Fort Wayne, Indiana on May 20, 2004.

There'll be a live audio webcast of the annual meeting.

Details appear under Investor Information on our website.

To give us an opportunity today to respond to everyone's questions in the question and answer session, we ask you to keep your questions brief, and limit follow-up questions.

You are then welcome to ask additional questions later if time permits.

We'll now begin today's discussion with introductory remarks from Keith Busse, Steel Dynamics' President and Chief Executive Officer.

Thanks Fred.

Good morning ladies and gentlemen.

It's obviously a real pleasure to be reporting very positive results in a very strong market environment.

I know during the last, so many years, there were some concerns that Steel Dynamics was planting a lot of seeds in the ground simultaneously with the construction of our new structural mill.

With a work yet to be done at Iron Dynamics with the acquisition of the old Qualitech facilities, say old/new Qualitech facility that was in bankruptcy.

The acquisition of the Galvanizing facility at Jeffersonville, installation of new paint line and other sundry projects, I think there were those who perhaps worried, that we get all these projects over the ground successfully that they would commence on budget, in a timely fashion, and they would become profitable hopefully in the shorter order and I am pleased to say that we have almost all of our assets hitting on all eight cylinders and those who aren't will be shortly.

And so we've lot of millstones that have affected earnings, if you will, our burden

around during the course of construction, and the renovation of these assets, but I am pleased to say they're all functioning very, very well today.

And we're very pleased with the results, and they're contributing to the bottom line.

As all of you have seen in the press release, we earned $32m or $0.58 per diluted share, which now includes the convert shares.

If you look that on the old basis of results, about $0.65 -- one of our best quarters ever if you will, and I think more good news yet to come in the forthcoming quarters.

Our sales did increase in the first quarter by 63% compared to our first quarter result of '03 of 38% compared to the fourth quarter of '02.

We have near-record shipments at the Flat Roll Division and record shipments at the Structural Division and obviously we are very proud of the fact that we were able to get the bar mills at Pittsboro up and running sooner than planned and in a very effective fashion and they actually shipped 19,000 tons.

So, it was overall, as we said, a terrific quarter, with many of the seeds sown starting to pay off.

I think most of you noticed that not long ago, we put out a press release indicating that we are going to construct another New Millennium Building Systems Asset somewhere in the South East.

We are looking at sites right now, hope to have one chosen within a few weeks and be able to announce the start of construction there within this quarter, at least we hope to.

New Millennium is also one of our operating divisions that is performing very, very well and making money, and we are very pleased with this progress in today's market environment, which I think indicates -- I think the fact that they're doing well, as I said in the press release, serves as a positive indicator of improving non-residential construction activity today.

Scraps has been the subject recently of much conversation, having gone up over 100% in a four-month period of time.

As most of you know, it's starting to recede, to regress at this point in time.

In the press release, we had indicated that the surcharge mechanism had allowed us to recover most of the higher cost of scrap resources that we purchased and that is a true statement.

We covered about all of them at Structural and most of them at Flat Roll, due to delay in timing at Flat Roll.

So, the surcharge mechanism did not outrun the Scrap cost increase.

As I noted in the press release, our Scrap cost increased about $65 a ton from the fourth quarter, increased a little more than that at Butler, and increased less than that at Structural, and averaged about $65 a ton.

We will continue to drop the surcharge or change the surcharge, move it down as Scrap costs continue to decline.

I think we are in a very positive environment right now for that to happen.

These high prices have essentially caused the obsolete rates of Scrap to literally come out of the woodwork, and trucks are back up everywhere, trying to get into Scrap yards delivering obsolete material.

So, it has changed the supply demand equation rather substantially.

I think an improving economy is allowing some of the top Scrap to flow at a little greater rate at this point in time.

So, I believe you're probably going to see Scrap cost go down $20 to $30, some people believe it may be even more than that, but I think somewhere in that range is the best early indication or estimate that I can give anyone as to what will be happening.

So, you could expect to see move down -- see surcharges move down $20 to $30 a ton.

I think most of you've probably seen that when we announced a price increase, I am not sure we put that on the wire, did we Dick -- we did have an announced price increase in our Structural operating unit, $50 a ton yesterday, which we think -- and we take some of that into our forecast, probably not all of it, as you know, we increased base prices $40 a ton at Flat Roll here, not all that long ago, effective May 17, but I really believe most of that impact was believed actually in the June results rather than mid-May's results.

We have some hail.

Our order book is extraordinarily strong everywhere, at every operating division and all divisions are running very, very well at this point in time.

Our selling values, as you can see went up $121 per ton in the first quarter, they were higher in the first quarter than they were in the fourth quarter of '03.

Selling values at the Flat Roll Division were up more than $121 a ton, and selling values at Structural were less than $121 a ton, has happened to average about $121 a ton.

The Pittsboro facility is running very, very well with its limited capability, it can only run large shapes at this point in time and the market's only so large for that kind of activity and it probably limits what they can do to the 20,000 ton arena, which is certainly more turnings than -- 20,000 or greater, more turnings than Qualitech ever shipped in any one month that it was operating.

So, that team is doing very, very well down there.

The installation of the eight new finishing stands which will allow us to run products such as angles and flats and channels and rebar is installing as we speak and we should start to operate or produce small shapes in June of this year.

I believe that the Pittsboro facility will be profitable in the second half of the year.

That team would like to beat the Butler record that was established in 1996 when we started up the Butler facility and became profitable in our seventh month, and certainly that's the goal set.

I don't know if we will achieve it, but it will be a fantastic accomplishment whenever it arrives, and we think that in the latter half of the year as profits ramp up it will continue to improve our earnings outlook.

We are making pretty good progress at Iron Dynamics.

We've been using HBI in our furnaces, the fabricated iron for some time, and Mark and his team now are in the submerged-arc phase of the restart and have quite successfully restarted the submerged-arc furnace and are producing liquid pig iron and transferring it to melt assets at Steel Dynamics on the other side of the street, and he will talk to you more about that when I turn this component of this call over to Mark.

The Mesabi Nugget Project has been approved by our Board.

We have approval to build a nugget plant next to our Butler Works, and there is a great degree of likelihood that we will do that as soon as we receive an air permit.

We also, as you know, are participating as a partner in the Mesabi Nugget ongoing pilot project in Minnesota and plans are to build a commercial battery there as well.

It is possible that the Butler installation, if it goes forward could actually precede any installation in Minnesota, Minnesota's environmental review time is longer than Indiana's today.

We believe this a very critical technology whose time has come, and when you consider the volatility in the resource market place we believe it just offers the company an excellent opportunity to earn an outstanding return on the capital employed as well as deliver resources -- premier resources to our electric furnace batteries in Butler, extremely positive values in relation to the craziness of the market place today, you know, pig iron is forecasted anywhere from 350 to 380 a ton, and obviously I think it will come off its high shortly as well but as we said earlier, we believe that we can produce nuggets for somewhere in the $140 range in Minnesota, and it will cost more to produce than in Indiana by about $8 a ton due to the fact that we are moving the concentrate from either Minnesota or Quebec to Indiana and the concentrate contains oxygen and moisture, and that is what obviously will break the cost difference in production in one arena versus another.

It is entirely possible that we may only construct one battery in Minnesota as opposed to Indiana; all of these things, the details are yet to be worked out amongst the partners in this project.

But the pilot project is working extraordinarily well.

We think it's probably one of the premier iron reduction technologies to come along in many moves to come.

The Blast Furnace has served the steel-making community faithfully and well for many, many, many decades that this technology could replace that methodology of producing iron in the future.

It is entirely possible that it could.

So we are very high of these projects and believe that they will, that Iron Dynamics will deliver positive results in the near future.

Its volume will continue to ramp up, we believe in Q2, and we will consider the very valuable asset at this point in time with scrap costs being where they are.

As far as looking forward, our order books, as I said very sharp and in fact we only opened the book up basically on a month-to-month basis these days.

The price increased and we basically announced not all that long ago, has been well received.

There is no problem booking the mill.

People just want to know when we are going to open up the next month, and we no longer get the quarter or the month opened and it sold within hours.

So, we have very positive environment there at Structural Division down in Pittsburgh.

I believe that they're going to see margin expansion on a go forward basis in Q2, Q3, potential in Q4, potential, I think prices will likely move up sharply in the next quarter.

My comparison, we could be up another you know $70 to $100 a ton depending of which operating unit we're discussing.

I do believe scrap costs will -- you know scrap costs rose to these peak levels recently and much of that was in inventory and even with the price drop, scrap is very salty and therefore, when you look at the second quarter, scrap costs will be somewhere between $20 and $25 per ton higher than they were in the first quarter, but -- but trailing up sharply as you look at June of my comparison to April.

So, I think, we are going to have a good quarter.

My guess is that will be and it is -- and it is more difficult to make these guestimations or estimations, but I think it will be between $0.80 and $0.90 in the second quarter with possibly even more potential in three and four.

Now, I will turn the meeting over to Rich Teets for his comments about our structural operating unit.

Thank you Keith.

The first quarter was enjoyable in Columbia City as it continued to establish and then break records in both the shipping and the melt cast departments.

Part of these results was due to the fact that we had agreements in place to produce and ship blooms to the market.

We continued to ramp up our production capabilities in a rolling mill by working on new sections as well as rail.

It purposely took time away from our productions opportunities.

We made modifications to the mill for productivity improvements and to work on the rail sections, which later this month we expect to take completely through our process including testing.

And thanks to the efforts of both the sales and shipping team that we have a solid backlog as you mentioned and look forward to continue shipping at record phases.

Steve?

Thank you Rick, Mark.

Good morning everyone.

I think, it is safe to say that -- I think everyone in the team empowers on Niagra Q1, so further productivity improvements beyond are already -- terrific performances in past quarters.

Capped essentially by record performances in March.

Our Strip Mill ran a record 216,000 tons, cold-reversing mill had a record 73,000 tons, had record performances in the paint line and also the pickle line.

And we believe these levels are going to be sustainable in the future.

Jeffersonville set back a little on a tons basis backed by 21,000 tons in March, but actually had a record throughput with respect to linear speak through the line.

This is a strong financial contributor and we continue to balance the gauge and the product mix to maximize margin there.

As Keith suggested, the paint line had a phenomenal month and phenomenal quarter.

Production improved to about 15,000 tons, which is 75% of our normal capacity, and we have no date that we can achieve that and go beyond the normal 20,000 tons per month or 240,000 tons per year without any problem.

The product mix became richer as further product qualifications took place, and the product mix pushed into the building panel and raised garage door panel arena.

I guess a challenge in Butler right now is to explore those downstream capabilities and to unplug some of the bottlenecks that our new capabilities have created.

And we have programs in place that I think we'll confidently expand the hot size of 2.6m tons on an annualized basis by the end of 2005.

We've made some modifications to the pickle line that seemed to be working well.

It is actually running at about 4000 ton a day pace right there, for about 110,000 -- 120,000 tons a month type capability.

So, we need about 140,000 tons of pickle production to satisfy all our downstream need.

Heidtman Steel, which is contiguous to our facility in Butler is adding on a 20,000, 25,000 tons on a temporary basis, and we had a new pickle line expansion approved by the board that we are completing installation in the next 18 months or so.

Similarly, the cold-reversing mill needs to pump up production to about 80,000, 85,000 tons per month.

We've got some modifications in place there and we're also changing the product mix or the gauge range going through that line to facilitate that.

The team continues to excel and continues to raise the bar of excellence and it's doing so well in a very, very safe manner, product's quality is good, and things are good in Butler.

Tracy, do you want to talk about the condition of our balance sheet and other substantial subject material?

Yes, Keith thanks, and I should like to start with the income statement first and tell you a couple of items there.

First, the other income line jumped up in from the fourth quarter to the first.

That relates primarily to a mark-to-market for a short-term treasury bond that we hold currently.

The start-up cost we showed is disclosed as $5.1m during the quarter.

That is related to the Bar Products Mill.

Those costs are essentially done for the year.

We will have some startup into 2002.

We are dealing with the startup situation, the timing is always a little bit questionable, but we do expect that we will put that over to operating during the second quarter, and as they continue with the wonderful performance that we've seen from them thus far, we would also expect them to start moving quickly in the second half of the year, at least to a profitable situation anyway.

The interest expense, I want to breakdown for you as follows: Our gross interest expense for the quarter was about $11.9m, representing a 7.9% effective rate.

Our capitalized interest related primarily to the Bar Products Mill was $2.4m yielding our net number of $9.5m.

On the balance sheet, I want to -- we have a number questions during the quarter from the investors and analysts about the effect of the surcharges and the collectability and that sort of thing.

So, I wanted to comment on, was our receivables are currently being collected very well about 85% of our receivables are currently less than 30 days old.

So, we're having good success in collecting those surcharges.

Liquidity remains essentially unchanged by the way at about, a little bit more than $130m, which is where it was at the end of the fourth quarter.

Our long-term debt-to-capital ratio that as we've spoken before, is internally focused on about 50% cap, has decreased from that 50% down to about 48% during the quarter.

Our inventory you'll note on the cash flow statement did increase about $50m from the end of the year.

That is a little bit misleading and that the tons behind that increase are only up about 28,000 tons, and the Bar Products Mill represented an increase of about 30,000 tons by itself.

And so, what that obviously says is that the Structural & Rail Mill and the Flat Roll Mill combined actually had a decrease in those number of tons that they had or in hand, and the increase in cost therefore is explained as follows.

Given the volatile scrap environment, and the increasing cost that we've incurred and discussing with the auditors felt it was appropriate to increase our standard cost that we value our work in process and finished goods inventory, and that accounted for the increase of the $51m in more than any tonnage change.

So, again to recap, I'd suggest you that the work in process and finished goods inventory tonnage remains essentially straight across from the fourth quarter, the increase was the standard cost per ton change.

Capital expenditures, we've estimated to be about $35m to $40m on the fourth quarter call I believe, and obviously came in actually at $24m.

I would attribute that to conservative forecasting, and we tell you that the construction at the Bar Products Mill where the bulk of those CAPEX dollars arise, the construction there is completely on schedule, and as Keith mentioned earlier, continues to do very well.

For the remainder of the year, I had answered that we may go -- I would still expect it has to stay below $100m for 2004.

Mark alluded to a project that he has in tow and I would suggest that that less than $100m number is still viable and we'd break out the remainder -- given the new information we have today, revised information that we have today, break out the quarters as follows: $20m to $25m in the second quarter, $15m to $20m in the third quarter and $20m to $25m in the fourth quarter, again still anticipated same for the year, below $100m.

Keith, with that I am turning it back over to you.

Thank you Tracy.

I don't think I have any further comments, and at this time, Mark, we would like to open it up to questions.

Thanks very much.

The question and answer session will be conducted electronically.

If you would like to ask a question today, you can do so by pressing star one on your telephone keypad.

Once again, that is star one.

We will take as many questions as time allows today and will repeat as was stated earlier, due to the possible number of respondents that we have, we would like to encourage participants to limit themselves to one question.

If your question has been answered, you may re-queue for a followup.

We will pause for just one moment to assemble our roster.

Our first question today will come from Michelle Applebaum with Michelle Applebaum Research.

Hi, I wanted to ask you about the cheap price increase and about the structural price increase because there seems to be as many prices for hot rod cold rolled steel as there are companies to make up and I was just wondering, it seems like you are going to be at the high price as on May 17th, is that right?

Michelle, I would tell you that that's correct.

We are -- the word business market -- the way we people -- some people are better off with base price increases which addresses the supply demand imbalance and others have done it through surcharges where surcharge is coming down in this very positive market environment, prices are going up, I would tell you we are -- I don't know what is the highest but based on our study of it, we are right there with others in the industry, you could argue maybe we are $5 higher than most but right in line with most.

Can you tell me what period are you booking for now?

Are you booking just for the back half of May or you are booking for June because I thought you were only opening your book two weeks at a time, not a month at a time?

That's actually correct.

Yeah, we came as Michelle you said, two weeks at a time we are intentionally booking short and we are booking through June full at this moment in time.

Okay, so you don't really have a price rate now.

Would you take an order for June on a PIE basis or --?

In some areas, yes.

Obviously, we have a contract there through the end of the second quarter also.

Okay.

All right.

Can I -- I want to ask a different question.

Steel Dynamics has done more greenfield expansions than anyone else in the industry over the last few years.

Are we at the point right now where we could actually start thinking about incremental capacity, particularly on the Flat Roll side?

Michelle, I think what we've said many times, we have an interest in perhaps growing our Flat Roll business and most of our interest, as we have said many times, is due to the opportunities on the West Coast.

But you cannot construct an asset out there with all the volatility and resource cost being what they are.

If Mesabi Nugget turned out to be the rich technology that we believe it's going to be, it obviously would put a floor under resource cost very attractive for, and perhaps let you construct.

I wouldn't guess it would be a facility anywhere near as large as

, but it might be a $1m or $2m hundred thousand ton facility.

We have no decision to branch right now and have no study under the way, but I think this company and of course the time has given the opportunity may well embark on a flower of expansion of that nature.

We have no plans to increase capacity here in the upper midwest and no plans to build in the deep south.

From a structural perspective, we have already said that that capacity, we believe, as you look at the demand side of the equation is in balance, rather nicely in balance, there are those who predicted it would be out of balance, and I don't think its out of balance at all, but I think it would be dangerous to think about adding capacity where, from a greenfield perspective, we would like to grow larger in shapes and how that might be accomplished in the future is not clear to us, I mean it could be through an acquisition.

It could be through the construction of a new asset, but again, we have no definitive plans to ramp up our capabilities in small shapes at this point in time.

Most of our focus is going to be on the front end if you will, that's a vertical integration, we are very excited about the potential from Mesabi Nugget and that's where the investment opportunities lie, we do believe, because it will deliver the most handsome return to the company.

Have you thought about -- there are so many smaller electric furnace operations in this country that are kind of below the investment communities' radar and probably, wouldn't be big enough to build their own kind of Mesabi Nuggets, have you thought of bringing in smaller competitors, long product competitors who, or even some of the standalone flat-rolled mini mills that you have, like a Gallatin or a BHP North Star?

Have you thought of bringing anybody like that in as a partner for the Mesabi Nugget?

We really conservative at this point in time, but we have partners with Cliffs and Kobe Steel, Ferrometrics, and I am not telling you, other partnerships could develop in the future, but there are no current plans and you must remember shapes mills, if these technologies pan out the way, we believe they will, it will effectively cap where prop scrap prices go in the future to some degree, and if that happens, I don't think we are in any danger running out of obsolete scrap, therefore, obsolete scrap would be abundant and attractively priced than we deal.

Small shapes producers avoid those kind of investments.

You know, on just this conference call, they talked about how there had been in the last cycle, a cap based at $200 a ton scrap because of the technologies then.

Can you just -- and they actually don't think there is a cap on scrap prices, and they weren't aware of new technologies being developed.

So, may be we should share some of this with them, but anyway, can you tell me -- I don't know if you heard their call, but it's the opposite opinion of what you are saying here?

Can you tell me what went wrong last time with the new technologies and why this time it's going to be different for you?

I think, the gas based technologies had very little chance of succeeding in the energy environment that we're in, and there were notable efforts on iron and carbide, a technology that worked from the laboratory perspective that did not work well from a commercial perspective.

I think, that people have made investments in Venezuela and other arenas and ramped up production of HBI, but not in any broad sense, I think the effort that Iron Dynamics was -- it's an outstanding effort, and we just had a learning curve if we have to get through them.

There's no blueprint for success there or it's nothing to emulate a model, and I think the outgrowth of all that is a very successful project and an even more successful project in Mesabi Nugget.

And if that project stands out, given the ample fuel resources that the nation has at its disposal and it historically been fairly attractively or -- it's been a stable commodity per month, purchase cost perspective, it would allow this technology to go places where other technologies have not been able to go.

So, we are excited about it again.

Okay, that's great.

Thank you very much.

And next, we'll hear from Ken Silver with CRT Capital.

Hi, good morning Keith.

Couple of quick questions.

You said earlier that, you thought the scrap prices are going to go up $20 to $30 a ton?

When was that, what period of time was that like, one month, two months?

Scrap prices are going to go down, but the average for the quarter -- we are all going to be working on high price inventory.

So on, obviously a first in and first out basis that, those higher valued goods are going to fall through the income statement in the second quarter, and I think our scrap price increase will moderate with $65 from the fourth quarter to the first, and I said, it will be up $20, $25 from the first to the second.

But that's in the phase of a market, it's actually going the other way.

Last month, prop scrap was down $30, $35 and obsolete scrap went down to as low as $50 with the result of that.

And I think, you are going to see obsolete scrap continue to come down in this next bid cycle, as well as prop scrap, and I think it's going to be down $20 or $30, some forecast a little less, some forecast a little more.

I haven't found a single person that even the scrap in itself knows it's coming down, just a question of how much.

I've missed both.

The $20 to $30 that you just spoke, over what period of time is that?

That will hit the curve for our May deliveries and then I think, in June, the scrap market will back up a little bit more, perhaps not $30 but it will back up, I think, 10 to 15 potentially and then I think we are going to be in an environment where scrap will not decline during mid-summer months due to the lesser flow of material, especially in the profit arena with all the vacations at many of the big producing factories.

But then again, I think it has a chance to regress a little more in the fall of the year.

So I can't tell you that it's going to go back to $150 for bundles.

I suspect it will not, but I think it's got to come down from $320 to a more same number throughout the course of '04.

It came to be clear, and the $20 to $25, Keith referred to was an increase and what flows through our income statement in the second quarter as compared to the first quarter.

Like inventory accounting.

Yes, clearly he is talking about purchase prices coming down from this point on.

Okay.

And there is one another question, can you just review your--the timing for rail production and shipments?

Sure.

We are going to, as I said, later this month, actually I think on 21st of April where they are going to come to take rail from the bloom stage, all the way through finishing and through all the testing requirements that we have and commission all the

in-line inspection gear.

And once that is complete, then we have to look at what the results were and determine where, in fact, you know, where we need to put our efforts in work.

So we've been telling our railroads, we expect to make some preliminary shipments in the second quarter for evaluation purposes, and we are not going to ramp backing off of that.

We are going to put a renewed effort into attempts at producing rail.

And how long is the evaluation process on the railroads?

It's a multi-faceted item that needless to say, first let me get the dimensional and metallurgical performance.

Then depending on the railroads, they will take similar track rail and put it in track that is non-critical, just to confirm the vulnerability and put it in there and just to see things work.

We will also be then sending tracks we brought in Colorado at test track last month, and looking at what the procedures are to put our track out there and compare it to our competitors.

But then rail, we expect the railroads to step up and start ordering some of our rail to put it in various applications, whether it be in turns or in great applications, where they can compare us with their existing suppliers.

That's ongoing through 2004.

Okay.

And then just one last thing, the plants in the West Coast that you briefly mentioned about the possibility of, would that be a sheet plant?

If we were to do one and then there are no drawings, there's no plans to do that at the moment.

It would be largely resource- dependent, if we did it and energy dependent, but it would be a sheet plant, yes.

Okay, thank you.

Aldo Mazzaferro with Goldman Sachs has a question.

Hi, Keith.

Hi, Aldo.

How are you?

On your comment about the second quarter spreads, it seems like you are predicting another $50 or $75 improvement in the spread versus scrap, which is pretty high.

I am just wondering, do you need that $40 base price to stick to get into that spread range or could you tell us generally what the price was or what the spreads are now, April, say versus the first quarter average?

I think the spreads will -- the difference between the selling price and the $20 or $25 tones scrap cost increase will expand by that account earning.

Is that kind of where you are now would you say?

I would say it's where we are now with this May 17 announcement, certainly.

In this case, we have got some of that baked in but we didn't have the whole $50 baked in.

So -

Right.

And speaking of this product mix, could you say what that mix of blooms was in your mix and what it might have done to your average selling price?

Well it takes it down, it wasn't all that much.

The first month was I believe, March, was it not Dick?

Yes, we only started in March and we shipped the total, just a little over 4000 tons out of our shipments of approximately 75,000 tons that month.

Right.

And we should ship the same amount this next month and the month after against the same, relatively same arena in terms of production and shipments and it's about, probably $100 less I guess.

It was a fair number;

I mean it wasn't as lucrative as wide-flange, but it was profitable.

Right.

And then Keith in your bar business, you shipped about 19,000 in the quarter.

But I understand the run rate right now per month is almost flat level.

Would you comment on that, how about for the second quarter in bar shipment?

I think that they may not ship that much in April.

I think they are aiming squarely at 20;

I hope they can get it.

They are actually aiming at 25 and higher, I believe, in the months of May and June.

So, they could have a -- if every thing went well, a

70,000 tons to 75,000 tons a quarter, which should be awesome because their only capability is still on large bars.

I mean, the slot shapes mill will come on line in June, but none of that probably will even be shipped.

Yes.

So, it looks like, would the pattern in flat rolled shipments may begin a little better too, you might approach 900,000 tons, you think in the second quarter?

I'm really a loss at that -- I think that's right, yes.

I think it is correct.

I mean, Mark is going to begin that -- wherever it is, 575 range, I expect 600 some where on that, it is rough numbers and that could be hopefully over 200 and where shapes being 75.

Yes, you are going to be in 900,000 ton range.

Well, congratulations on the great progress Keith.

Thank you.

Next question?

Our next question will come from Andrew O Connor with Strong Capital.

Good morning guys.

Congratulations on your quarter.

I wanted to know how would you characterize steel service center inventories currently, and how do you see them trending during the second quarter?

Other observers suggest that they are too at this point, what do you guys think?

Certainly it has come off their highs, and they are very well -- I still don't see any evidence of people panicking and trying to build a fort.

I think the economy is just stronger and steel is a little tight, that's why we have the kind of prices that we have today.

It has to do with the tightness, and so, I think that the order accelerate is going to remain strong, because they don't have inventory to work off of and have no real ability to build it right now.

Mark, can we take a stab at quantifying like -- how low do you think inventory levels are currently?

I don't know specifically that answer.

So, I know they are low;

I just don't have that data.

Okay.

And then secondly, I wanted to know if you could be more explicit regarding lead times.

What are lead times for both your flat-rolled and structural products currently, and how do you see lead times changing between now and the end of the second quarter?

Thanks so much.

They did so, out about four weeks, right now four to five, somewhere in that area.

They are structurals I think, Glen is in the same arena, small shapes mill.

Mark is basically opening the book almost week-by-week for every two weeks, and I think will be ready to launch in another week or two segment here.

So, it -- I mean lead times, if we really would open up the order books, is the market order stabilizes then this could be market for the next six months and we all played into that market and opened it up.

I think it will be sold out for a quarter easily.

Okay.

All right, thanks very much.

You are welcome.

And next we hear from Charles Bradford with Bradford Research.

Hi.

Good morning.

Morning Charles.

Can you give us a little bit more information about the Mesabi Nugget project, what's the estimated capital cost and what would be your share, and what kind of coal would you be using in it.

And if you could give a little bit more flavor, it might be helpful?

If we were to -- in the end launch two projects, that would, if Indiana went first and the Minnesota project was delayed and had two projects going on eventually, the -- our share of the Indiana project would be quite high.

We would probably be at least 75% to as much as 90% owner in that facility, would be my guess.

The capital cost of each of these commercial modules, net capital and working capital, all of the monetary needs including startup of about $100m per facility.

In Minnesota, we would only be about 25% of the partnership in Minnesota.

So, we would be a greater share of Indiana, each of them being $100m in, as for the type of fuel and type of coal, and how well either would work or there's coal from Quebec or from the iron range, what types of coal, Mark will speak about that, he is the metallurgist, I'm not.

Chuck I'm sad we've not yet -- we can't actually, supplying the reduction by western coal.

What we do believe the third campaign trial that is ongoing currently in Minnesota and the

facility is testing the lower cost western coal.

So there should be ample supply for the -- and a lower cost for the operation.

I understand the process still needs some gas in it.

Can you give a total or breakdown of the energy content, how much would be gas, and how much would be coal?

The gas consumption, again, the pilot plant begins to be a little throughput, it's higher than this.

In Japan where they have a couple of commercial size facilities running, we are running under 2.5m BTUs per ton.

And we project that Mesabi Nugget conservatively in our performance we've been using for but it has every hope to get Bennett to that level.

And what would the coal usage per ton be?

Coal usage is around about 1.45 as ore and about 0.45 coal.

Thank you.

Our next question will come from Wayne Atwell with Morgan Stanley.

Thank you.

Keith, could give us some specific guidance on the second quarter?

We heard about a lot of numbers and I have got them all written down but I am not quite sure what they actually are.

You sort of talked about 575 for flat-rolled and maybe 200 for Structurals.

Can you give a specific guidance that go into your $0.80 or $0.90 number?

We don't talk specific pricing.

I'm talking volume first.

Volume?

We spoke to that, I think we are going to be very close to 600,000 tons in Flat Roll, and we are going to be well in the 225 range for Structural and Rail we believe, and in the 75 range for Bar Products.

And all that collectively is -- from a steel shipping perspective puts you at about 900,000 tons.

The guidance we gave earlier on earnings was $0.80 to $0.90.

Can you give us any thoughts on pricing?

What kind of difference or you talked about scrap up 20 to 25?

Pricing I think will be up approximately $100 in Flat Roll, and I think it will be a lot quite that much.

Perhaps for Structural, it might be 70 -- 75 somewhere in that area.

Okay great.

And then lastly, GM, any update on the discussions you are having with them?

We are not having any discussions with them.

Any update on the legal question?

Our attorneys think we have a very, very sound position.

They're not at all worried that we are going to lose that contest.

Okay, and then lastly.

Does this that seems to have changed your perception of longer-term contracts in the future?

Are you less than likely to do it or be more careful or?

I don't know, General Motors in my opinion has a very awkward supply contract or agreement or what ever you want to define it as but -- and I think we work very well with Chrysler and Ford, and have for a number of years and look forward to continue to work with them.

We hope we can work with General Motors as well.

We are not angry with General Motors, we are hoping to do business with them.

It probably will be better defined in the future, if we do.

So you'd do it.

You'd just be more specific about the terms?

Yes.

Thank you very much.

Our next question will come from Timna Tanners with UBS.

Can I ask if you could provide a little more color on the end markets for the lawn products, specifically interested in beams and the ability to pass through, of course surcharges ongoing?

I understood in the FX perhaps by TXI increasing its shipments as well.

Thanks.

I think TXI and SDI are about to -- not the same place from a base and surcharge perceptive.

Their approach again was little different and new model is probably a little under the numbers of TXI and SDI, but the Berkeley operation I think is very close to those numbers.

So, I'd tell you that the surcharges will continue to go up, and whether or not there are anymore effective price increases, really is an open question.

I think the price increases that are out on the table are going to stick, given the market climate, the demand is very strong.

Teet anything you want to add to that.

No, I think you hit it right on the head.

Would you find the shipments more than pricing.

There are increasing shipments that are planned out of TXI's Virginia plant?

I don't know anything about an increase in shipments at TXI's Virginia plant.

I can't comment on it.

I know our shipments, continue to rise, and at 225 shipping rate in the second quarter, that is an effective annual rate of 900,000 tons.

So, Dick and his team continue to make very good progress.

Great thanks.

Peter Marcus with World Steel Dynamics, has a question.

It is actually Becky Hites.

Hi, Becky.

How are you guys doing?

Fine.

Can we get some more details on the flat-rolled mix, are you still giving us those numbers?

Flat-roll mix was the question from Becky.

No details on this.

Hang on Becky, I am grabbing it.

Thanks.

Okay.

For the first quarter, the hot-rolled number was about 228,000 tons, pickled and oiled 32, cold-rolled 37, hot-rolled galvanized 96, cold-rolled galvanized including the Jefferson billed shipments of about 131, new product about 15, and our painted products about little over 31,000 tons.

Thanks so much.

Yes, ma'am.

As a reminder, if you'd like to ask a question today, you can do so by pressing star one on your telephone keypad.

And next we'll hear from Mark Parr with team McDonald.

Hi, good afternoon.

Hi, Mark.

It is right mid afternoon where you are at, still morning here.

Alright.

Good morning.

I would like to ask Mark or you Keith to talk a little bit about putting all this expansion into perspective in the flat-rolled operation, and it sounds like if liquid pig iron works, and with all the downstream value added demand that you've got, that there maybe potential for a third castor that probably works, or something--you're going downstream with another pickle line in addition to the cold mill, a third gal line, a paint line.

I am just wondering if you're looking at potential for a third castor or what you really think the hot end of the mill can do?

I think the third castor would be a very difficult assignment, I am telling you it couldn't be done.

But if you look at how valuable the iron resources are to it, you want to be less dependent on scrap, and expanding would just make us again put us in the same boat we are in now.

So, as we bring iron units into play, attractively priced iron units, or cost perspective attractively priced iron units, the likelihood of containing resource for us grows.

So, I don't know that we want to have a second or third castor.

Mark, I think we just agree, mechanically, it is not impossible to put a third castor in.

And in any event, although the hot strip mill probably has a normal capability, of perhaps over 3m tons that is based on a heavier gauged throughput.

We will still continue to focus on light gauge products, and we're probably tad bit on the hot strip mill, and in any event at round about 2.7m tons, with a gauge range that we currently have.

So, putting a 1m tons castor and only being able to use 200,000, won't be making any sense.

Okay.

So, I guess the conclusion here is then that the IDI's hot metal capacity could potentially increase the ability to produce liquid steel to around 2.7m tons?

We've programs in place right now for increasing the cross sections of the flab and then a few other things, increasing speed of the castors, to take us to that 2.6 and ultimately probably 2.7 tons.

Okay, is that I mean, is that a significant capital number?

This may be operation modifications and product mix or changes.

Okay, terrific, and now I want to really congratulate you guys for a great quarter and thanks for leading off the earning season on such a high note.

Thank you.

Thank you.

Next is Douglas

with JP Morgan.

Am I right in thinking that if the cost has gone to the balance sheet, then it didn't go through the P&L?

The cost we are referring to?

The inventory re-evaluation that you mentioned?

Yes.

That's right.

It was the next re-evaluation, we adjusted our standard cost per ton upward and so that means that our costs are being capitalized as opposed to going through the P&L and that was predicated on the dramatic increase in scrap cost that we saw during the quarter.

Okay.

Can you give us some more information on how much the charge was that went to the balance statement?

I don't know that, I don't know if I've got that number here in front of me.

Again, it's a number that is predicated upon those scrap costs changing.

We constantly look at re-evaluating our standard cost, upwards or downwards.

So, as the cost started coming back down, we are going to see that reverse as well.

Right.

Keep in mind too that the inventory levels, for example the flat-roll mills, finished good inventory levels are about two weeks.

So, those costs really flow through pretty quickly and at the structural roll mill, they are around less than a month as well.

So, those costs too flow through.

Okay, just two more questions if I could.

How does that square with $65 sequential increasing in scrap costs that you talked about, is that $65 after adjusting in the P&L or is that before?

And the second question, does the two quarter guidance include anymore of what I think calling an inventory re-evaluation?

Yes.

I really correlate the whole idea of being a re-evaluation.

The $65 represents an increase in cost through the melting cost centers, so --

Okay, not through the P&L, yes.

The scrap that was charged to the melt job was $65 a ton higher in the first quarter than it was in the fourth quarter of last year.

And then the standard costing works is after all the product is made, for example, the hot band which is our first inventorable item.

We then capitalized less than the full value of all those costs.

Some of the $65 went to the balance sheet, some of the $65 to the P&L?

That would be correct always.

Okay, thank you very much.

Okay.

And next, we will take a follow-up question from Michelle Applebaum with Michelle Applebaum Research.

Hi.

For those of us who grew up on integrated companies with their cost in their ground and purchase materials not being a big part of the cost of goods sold, so, we are not so good at LIFO, FIFO.

Just remind me here, you know, we've got these hugely volatile raw material costs, on FIFO the commodity prices come down, but you are going flow through higher cost inventories in the second quarter, so your cost is going to up $20 to $30 a ton, the market is going to be down.

I've got that right, don't I?

Yeah, I believe so.

Okay, so then isn't there kind of this automatic third quarter events that your cost come back down?

No, remember our inventories are so -- I will talk about the flat-roll because it's easy for one to talk about for the moment.

If your finished goods only represent two weeks worth of shipment those things flow through twice a month.

There is really nothing going on that is going to impact the third quarter.

The impact of those cost changes are going to happen.

We're just reflecting, under GAAP you are trying to reflect the actual cost that it takes to manufacture a product, and there is a couple of ways to do that.

One is to just capitalize actual cost.

We've always taken a conservative approach and use a standard costing mechanism, and it's also more simplistic, but it is conservative because, we capitalize less than the full cost of production.

So, we always have, and I always anticipate capitalizing something less than the cost of the actual production.

So, it is still a conservative costing mechanism, you are allowed to capitalize 100% of your actual cost.

In theory Michelle, if the inventories were to follow it and there would be no end of that.

But you are right.

When the inventories are going, when costs are going up, there is some positive P&L effect.

When that is going downwards, there is an offsetting negative effect that again flows through.

So, it's really not that easy.

So it's really not, it's sort of not, it's not between the periods.

It's really happening during a period?

We have got two weeks' worth of inventories to get a two-week impact.

Okay.

And then this is --

I don't want to be too simplistic.

Obviously, the

a little bit more than two weeks.

So, if there is only a two-week impact, how are your scrap costs going up next quarter?

Since scrap prices bottomed, I would think your actual procurement dollars of the door would have dropped already, or is it that has just not happened until the beginning of the quarter?

I think we are going to lose most of the callers here if you get in

.

Okay, maybe we'll talk about that later.

Let me say this real quickly.

There are two different things that I try to explain.

There is the costing that flow through the cost center.

There is the scrap cost versus the cost center and then there is, what you capitalize in the inventory.

Those are two completely different things.

And so when we talked about the cost, when Keith talked about cost going up $20 to $25 a ton, he was talking about dollars that have charged to the melt shop, absolutely nothing to do one way or the other with whatever we capitalized on the end, those are two separate decisions.

Michelle.

We have reached the peak level of the leverage scrap cost in March, and that in effect becomes the P&L cost in April.

And it went down $30 at Butler and that is what's delivering in April that gets used in May.

But when you average the quarter on a link quarter basis, given the cheap scrap that went into making January and February, then you are going to have an increase.

Then you're going to start to see it sharply decline in the third quarter.

Okay.

So there will be decline in your cost automatically built into the third quarter?

Yes, we've --

That's what I was trying to get at?

We've already modeled all that in.

Okay.

A completely different and much more fun question.

Am I right that you own part of the licensing on the SawB Nugget?

No.

Okay.

So you are not one of the licensees?

Kobe has the plans for the technology Michelle and has the license through the SawB Nugget as a form that we would share a small portion of any licenses that they would charge other people going down the road.

Let me ask you a question.

I mean you have vested interests in expansion of what we used to call scrap substitutes, I'd like to call it scrap substitute.

From your perspective those are scrap substitutes right?

And so the more of this stuff that's built globally, domestically whatever the more that it makes raw material available to you.

Has anybody looked into putting SawB Nugget into China, because their ore quality is low and that is part of their problem in procuring raw materials, and they are obviously scrap short.

They have too many electric furnaces for their scrap supply and so their part of the -- maybe the whole problem in scrap --?

I can't speak of it, because its obviously it's their area of expertise and they haven't.

I would say the focus right now is not to get the cart before the horse, and let's get one plant running and prove it from a commercial standpoint.

Okay.

And then --

I think China is going to be a market for them, that they are very deliberate people, the company folks and they are going to get their first one up and running well, and then they are going to go up market.

Okay.

Because I know Rios putting up a high smelt plant there, so it's kind of the same theory.

And I guess wherever they put up scrap substitute, it's a good thing for the dynamics and the rest of the many more industries in the United States.

So --

I think that's right and that's right --

Okay.

Now just one more thing and then I'll let you go.

It sounds like you are telling me you got you're looking at two of these now.

One in Fort Wayne and one in Minnesota, is that right?

We have a

to invest in one locally and to invest and be a partner and one in Minnesota.

Whether we will really do simultaneously is an open question yet.

Okay, because I hadn't heard that before.

Thank you.

Thank you.

At this time, there are no further questions in the queue.

I will now turn the conference back over to Mr. Keith Busse for any closing or additional remarks.

Thank you Mark, and thank you ladies and gentlemen.

It's really nice to be reporting in a positive environment as I said to report that keeping you updated in the near future about our privates to market progress.

So again thank you for being interested in our company.

And that concludes today's conference call.

Thank you very much for joining us.

You may now disconnect.