Steel Dynamics Inc (STLD) 2004 Q2 法說會逐字稿

Thank you for standing by and welcome to today's Steel Dynamics second quarter earnings conference call.

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

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

Tracy Shellabarger, Chief Financial Officer.

Mark Millett, Vice President, Richard Teets, Vice President, John Nealan, VP of Marketing and Sales, Fred Warner, Investor Relations Manager.

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

Please, go ahead.

Thank you, and good morning.

Welcome to this July 20, 2004 conference call covering second quarter results for Steel Dynamics Incorporated.

Today's management discussion, as well as responses to questions may include foward-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 on form 10-K as filed with the Securities and Exchange Commission.

Specifically, please refer to these 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 web site, www.SEC.GOV and on our website, www.steeldynamics.com.

After a management discussion this morning, we will open the call up for questions and answers.

We ask you to keep your questions brief and limit your follow-up questions so we may have an opportunity to respond to others.

You're welcome to ask additional questions later as time permits.

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

Thanks Fred.

Good morning, ladies and gentlemen.

This is becoming habit-forming, it's a good habit being able to report record quarters.

SDI, as you know, based on a release, had an excellent quarter with earnings per share of about $1.20.

And had we not refinanced our term-B facility, which was unforeseen at the beginning of the quarter, the earnings would have been close, as can you tell from the press release, to $1.23.

That had about a 3 cent per share dilutal effect, if you will.

Earnings were 67 million in the quarter.

Our net sales were on $526 million worth of net sales, which was a 37% increase from the first quarter.

I think at one of the conferences I spoke at, I thought our revenue would go over $2 billion this year and I'm fairly confident that more than likely will be the case or come close to $2 billion.

For the first six months of the year, when you take the 58 cent first quarter we had and add that to the $1.20 second quarter, we have $1.78 a share in diluted earnings for the first half of the year which, is greater than any prior year's earnings the company has achieved.

Obviously, one of the major factors in our performance has to do with margins and pricing.

That represents substantially most of the gains for the company, although quite a bit of our gain is related to the fact that we have all of our operating facilities starting to run on all eight cylinders and all producing profits, including our start-up facility down at Pittsboro, which had a very good, fully profitable second quarter of the year.

As we look at the shipments for the second quarter, they totaled about 889,000 tons, 11% higher than the first quarter of '04.

The flat roll shipments increased 7% in the first quarter and the structural and rail shipments declined 2%.

As I said in the press release during the second full quarter of operations, the bar products division grew to 82,000 tons from the first quarter's 19 and it's highly likely that they could produce in the range and ship in the range of 120,000 tons in the third quarter, so that facility is progressing rather nicely at this point in time.

I think our third quarter shipments will obviously be in excess of 900,000 tons, and I believe they will be in excess of 925, probably approaching 930 or 40,000 tons, which is an annualized rate now, if you get close to 3.8 million tons, and I think we said somewhere in the press release that next year we could potentially come close to our estimated capacity of 4.2 million tons.

So, everything at Butler ran very well as Mark Millett will share with you.

I will let Dick Teets run through some of the structural divisions accomplishments and I'll speak a little bit to Pittsboro myself, since Glenn is not here and able to join us today.

Glenn Pushis manages our Pittsboro facility.

They had an excellent quarter, as I said.

They were in the black, in fact, their profitability increased every month throughout the quarter.

They were able to, at the end of June, start the small mill, the small shapes mill up.

They ran on, I think basically their first try, number 11 rebar through the finishing train.

The new finishing train of the mill.

They will continue to dial in various sizes of rebar throughout the third quarter, as well as, start producing small structure shapes during the quarter.

As I said earlier, I expect something close to 120,000 tons of shipments for that operating unit.

So things at the bar products division are just going very, very well.

Very strong demand for special marked quality products, as well as merchant shapes at this point in time.

Our efforts continue with our iron-making facility, both at Butler and the proposed new facilities, which we have named the Mesabi Nugget, which is a technology that uses Kobe Steel's IT Mark 3 process.

The air permitting, I think is going along without a hitch both in Minnesota at this point in time and Indiana, and we're hopeful that by the end of the year we'll have air permits in place at potentially both locations and be able to start constructing one of the two planned batteries by hopefully year end and have it up and operating by the end of '05.

Again, we see nothing in our cost models that would suggest any major shift in the cost superstructure of the Mesabi Nugget technology.

Again, we believe that it could be in the 140 to $150 per ton cost of production range, which, obviously with today's scrap costs, could give the company quite an edge for a certain component of its melt mix.

I won't speak in great detail of Iron Dynamics other than to say it's making good progress and I expect by year end has the potential to be a profitable facility.

We'll let Tracy talk about our refinancing during the quarter.

The only other thing, I guess I would like to add is that the markets continued to remain very strong, as I said, for merchant shapes and SBQ bars.

The demand for our products at Butler are excellent.

We are sold out.

The price increases that are being passed along via surcharge mechanism are principally holding, although we chose this month because of the dramatic surge in pricing that occurred from a published index.

From index to index, prices went up $100 a ton, and we just thought that the market got a little ahead of itself, a little overheated in the month of July where seasonally, we see a lot of vacation shutdowns in industrial facilities, especially automotive and appliance and the industrial flow of scrap slows during that period.

There is not as much industrial scrap available in the industry's run-rates, they're still very strong, so scrap surged rather substantially.

I think the indices themselves at the end of June during the bidding process went up 55 to $60, but the market on the prompt grades are pushed up as much as $100, and we felt that that kind of irresponsible high pricing move within a 30-day period of time and the fact that we think the market could regress somewhat, maybe not until the September timeframe, led us to believe that we should only pass along about $70 of that $100 surcharge increase, so we, I think yesterday or the day before, published our surcharge, which is up to now $150 over the base number.

We did reserve the right to recover the remainder of that surcharge that we did not pass along in August, potentially in September, but we're hopeful by the time we get to September, the market will calm slightly.

If we continue to experience this kind of dramatic escalation in resource cost, obviously, it will jeopardize domestic, the domestic order book, not just for SDI but potentially for all producers and would open the door to a higher level of imported products.

So we believe the prudent thing to do was plan our flag at $150 and did so for flat-roll products.

As ordered, our structural products, I think, we followed due course moved to increase the surcharge from 33 to 123, but there, [inaudble] announced a base price decrease of $45 a fund, which we likewise followed, so the net gain in pricing for the structural division was $45 a ton.

I will tell you the structural division has good scrap inventory at what are now attractive prices two or three months ago, we wouldn't have called them all that attractive, but in today's universe, they have a large scrap pile with attractive prices.

I think they're in pretty good shape at the structural operating unit.

Each quarter we attempt to share, go-forward news with all of you and I would tell you that we see a higher level of shipments, as I said earlier, something perhaps in excess of 925,000 tons in Q3.

We do believe that prices in Q3 will be up nearly $100, very -- well, actually, up about $80, I think flat roll could be up as much as approaching $100, but structural and bar products would be less than that and the average price increase that, for Q3 could be in the range of 75 to $80.

Scrap costs, best guess at this point in time, will be up 15 to $20 during the quarter as well.

Obviously, there would be a net bottom-line gain of something on the order of 50 to $60 a ton times the volume minus the last -- [ Indiscernible ] effect of that.

We should have a better quarter in the third quarter.

Our best guess at this point in time is we're going to be in the $1.80 to $2 vicinity or range of earnings in Q3, and I would suggest to you that the middle of that range, to the low side of the range would be a more appropriate guest-a-mation at this point in time, but the range could be somewhere between $1.80 and $2.

We normally don't look out to the fourth quarter but a lot of people are interested in year-to-date results and that's even sketchier, obviously, but at this point in time, I believe that the pricing issue will be flat in the fourth quarter for all of our operating units.

It will be nice gains in the third quarter and I believe we'll be able to hold on to those gains in the fourth quarter.

But the scrap costs are going to be up probably at least $30 a ton, which is going to flatten out the earnings just a little bit during that timeframe, we believe.

Our best guess at this point in time is $1.50 to $1.70 would be the third-quarter range, so if you -- if do you all of your math, you're probably somewhere -- pardon?

Fourth.

I'm sorry, fourth quarter, $1.50 to $1.70 for the fourth quarter.

If you do all of your math, that's going to put us over slightly over $5 a share, in the $5.10, $5.20 range.

I think we have spoken to that in the past and just said north of $4, but this is tying it down a little bit more, and I think that it's a goal that the team the team can't accomplish.

I really don't have anything to add to my comments.

It was just an excellent second quarter. $131-per-cut operating profit, which was a good quarter.

Dick, I'm going to turn yet over to you and let you talk about the structural division at this point in time.

Okay.

Thank you, Keith.

Columbia City, at Columbia City, our efforts continue to be focused on various fronts including productivity increases, reducing yield losses throughout the plant, and improving our shipping efficiencies.

As the press release noted, in the second quarter, we commissioned all of the 33 and 36-inch sizes, as well as we also commissioned the smallest of the 8-inch wide planned sections.

In the next week or two weeks, we will commission all the 6-inch sizes and that will complete all the initial, or all of the white flange sizes that we anticipated purchasing when we bought the mill.

We also continue to work on our rail.

We have committed to the class-one railroads to send all sample pieces within the third quarter for evaluation and have product available to them in the fourth quarter for in-tract testing.

So, we have some goals in front of us and we are able to accomplish those. -- .

You did get rail production all the way through the mill?

Yes, sir.

Clear through testing during the second quarter?

Yes, sir.

We're very pleased with the progress going on in rail.

Thanks, Dick.

Mark.

Good morning, everyone.

I think the invigoration of the team in the first quarter has certainly carried through to the second.

The mills continuing to run extremely smoothly.

We had a record production on the hot-strip mill.

The hot side of the facility, about 622,000 tons for the quarter.

And we also had record volume through the pick line, code reversing mill and the hot-roll galvanizing line.

So things are going well.

Paint line produced about 52,000 tons for the month - I mean for the quarter, having 19,500 tons in June which, is essentially approaching the normal rate of capacity already, so the team is doing a great job there.

Jeffersonville slipped just three or 4,000 tons down for the quarter as we had an extended outage to install a temper mill on the line to give us increased quality and some product diversification and also some lower costs, but it is now back up and running at full rate.

The [inaudible] the core of the team is running as high as it's every been and they continue to maintain one of the safest safety records in the industry.

At Iron Dynamics, the team, obviously is energized by to try to provide raw material to the steel mill, given the scrap market today.

We're seeing some great success.

Many of the process and technical issues we have seen in the past campaigns have essentially been resolved.

We produced about 9,000 tons, metric tons since starting out and shipped roughly 40-45,000 tons to the steel mill in the second quarter.

We're in somewhat of a constrained situation right now.

We've got some mechanical problems on the off-cast system that we have - we have modifications in mind and were shut down for about a seven-day outage, maybe 10-day outage in late August, early September to resolve those issues.

But it's showing great promise.

Thank you, mark.

One thing, ladies and gentlemen, I failed to mention, most of you know a few days ago we initiated the company's first quarterly dividend of 7 1/2 cents a share, and that's to, I believe, it was to shareholders of records of July 26th - was it Tracy? - and payables mid-August, the timeframe.

Having said that, John, even though I commented on the markets, you might add a little color to the market strength that's out there.

Thank you, Keith.

Good morning, everybody.

I just want to reiterate one of Keith's remarks about raw materials.

I would tell you that I think the market's in something of a state of shock over the present cost of raw materials and the current surcharges.

I think at the distribution level, most of the people that I have talked to recently are reluctant to fill inventories at the current aggregate domestic prices.

My sense is that there is, as Keith indicated, some renewed interest in talking offshore producers, specifically focused for inventory builds which, are longer-term arrangements.

I think can you expect the inventories are going to stay down, unless scrap prices roll back and surcharge declines or in-port moves larger going forward.

On the demand side, still very good.

In fact, a number of you as I have read in the last couple of weeks were forecasting, excuse me, were recognizing double-digit growth and consumption year-over-year this year versus last.

We see that continuing at least through the end of the year and I think as it relates to demand, most distributors will provide producers with orders if they have what we call back-to-backs or a committed order from their customer in kind.

So, lastly, the end-users are still very concerned about availability of steel products.

I think that covers it all.

Thank you.

Thank you, John.

Tracy, I'll turn it over to you.

Thanks, Keith.

First I would like to go through the shipments by product that some of you are interested in.

If you would bear with me, I will just tick them off here pretty quickly.

Starting with the flat-roll division, we have a hot-roll shipment of 232,000 tons.

Pickled and oiled, 39,000 tons.

Cold-rolled of 32, hot-rolled galvanized, 117,000, cold-roll galvanized, 126,000.

Our post-annealed product of about 11,000, our painted products at 51,000, which is, obviously, very close to approaching our 60,000-ton-per-quarter rate and capacity.

So we're very pleased with that.

The structural and rail division shipped a total of about 194,000 tons as Keith mentioned earlier, and the bar products division at about 82,000 tons and increased their merchant bars a little over 15,000 tons for the quarter included in that 82,000 that I mentioned.

Earlier, Keith mentioned the refinancing, if I can talk about SG&A costs for a moment.

The increase quarter-over-quarter which was principally due to the non-cash charge associated with the write-off of financing costs associated with our old senior credit facility.

We did refinance that facility as announced earlier to a $230 million revolving credit facility that gives us slight cost reduction from what we saw before as well as improved flexibility to do things, obviously, including dividends as well as some others.

Profit sharing also will continue to be a big component of SG&A when you compare it to the previous year.

We are up about $6 1/2 million or so year-over-year in the second quarter, excuse me, year-to-date, '03 to '04.

The startup costs as disclosed in the press release, we're out of at the moment.

That is no one is classified as being in start-up any longer, although obviously the efforts continue at the bar products division to get up to speed down there but they are no longer technically classified that way as we disclosed in the release.

The interest expense I want to share with you, the gross interest expense, well, for the first half, I will remind you the first two quarters are about $12 million each and for the second half, I guide you to about $10 million each quarter.

So that would look for a total of about $44 million gross interest expense for the year.

Our other income line, you will note increased in the second quarter that is principally due to a mark-to-market of a short-term treasury bond transaction that we have.

Our tax rate, I would like to speak to for a moment, and that is we are -- we have the good fortune of obviously being very profitable at the moment and let's see that going forward as well as Keith spoke to earlier.

One of the impacts to that is we're running through our state NOLs much more quickly than we had earlier anticipated.

I think that the result of that is going to be we'll need to adjust our tax rate.

We're still examining that and I need to look at some further projections for the remainder of the year in some detail as well as look at some of the other projects that we have in play, but I guide you to expect tax rates for the remainder of the year and for the foreseeable future, 38% versus 37 1/2, and indeed, if our good fortunes continue, we might need to look at even an increase net of 38 1/2% but I'm not ready to do that at the moment.

Let's see, let's see, let's see.

Turning to the balance sheet a little bit, I want to talk about the inventory levels a bit.

Our finished good levels remain very well in line with where we'd like to see them and that is the flat-roll mill and the bar-products mill are both continued operating in the range of one to two weeks of shipments.

The structural rail mill needs more inventory and are still within the guidelines we have for them of about 6 to 7 weeks of shipments there.

Our receivables remain to be a concern or at least one that we're going to pay attention to in this market environment, a little more attention to, and I think those are being managed very well.

In fact, I would tell you that over 80% of our receivable balance is under 30 days old.

So I think the divisions are doing an outstanding job of keeping that under control as well.

The long-term debt to total of long-term capitalization has continued to reduce as I spoke to on the last quarter.

We are now down to about 44% from the 50% level that we had at year-end.

There are obviously a couple of things factoring into that.

Obviously our earnings increase, the equity side but we also prepaid about $35 million of our long-term debt in the second quarter.

New millenium had a separately-financed facility of about $14 million that we prepaid and, obviously, we paid in part of the refinancing, we paid down about 10 or $11 million of the senior credit facility as well.

There's still - that takes to about $40 million year-to-date that we've prepaid.

We're still looking at the balance sheet.

We took the easy things first and it's going to be a little more thoughtful in terms of which of these other debts we can pay off prematurely, but we are continuing to look at that.

You will notice about $13 million of free cash flow in the second quarter and a break-even for the year, and you can guess from what Keith said, that we're going to expect that increase in the second half of the year and one of the reasons I would echo that is our cap expenditure budget, which I wanted to comment on.

We have in the first two quarters expended about $24 and $30 million respectively for the remainder of the year, I would guide to you expect the third quarter, 10 to $15 million of Cap Ex and in the fourth quarter about 5 to $10 million.

That would give us a total of somewhere around 70 to $75 million for the year.

That's slightly below what we had talked about before.

I think what I said before was 80 to 85, that's solely just reflects getting a little sharper point on our pencil in terms of what we see for the remainder of the year.

I do believe with that I'm done then Keith.

Dwayne, we'll now open it up to the q-and-a component of the conference call.

Thank you.

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

If you would like to ask a question, you may do so by pressing the star key followed by the digit 1.

Again, star 1 for a question.

We will first go to Bret Levee with Royal Bank of Canada

Hey guys.

Clearly it looks like you guys have the potential to pay down all of your bank debt.

You look like you're going to be able to do that in the third quarter and then can you guys talk a little bit about longer-term, if industry conditions hold out this way, what some of your longer-term strategies are, vis-a-vis, debt reduction and potential Cap Ex projects.

I will speak to that dead issue and, obviously, let Keith answer the division question.

In terms of the debt we do expect to have the ability, of course, to prepay the rest of the senior credit facility but don't expect doing that until January of '05.

The principal reason for that is that we associated with that facility, we do have what is currently an out-of-market swap for $100 million, and as economics currently stand, it just doesn't behoove us to prepay that facility and unwind that swath, so we expect to see that run to its maturity the first or second week of January.

Bret, that should have answered your question about paying down debt.

In terms of how we're going to use the balance sheet to grow, I think we have repeatedly said we have an interest in producing flat-rolled steels on the west coast.

We're not discouraged by anything we see other than the cost of raw materials and the lack of them out west, so really, a project of that nature we said will not kick off until Mesabi Nugget is commercialized, which would be at least a year and a half from now.

So, we might do some early engineering and planning and site selecting and things like that, but we're going to have to pack up resources in our suitcase and take them west along with us before we are comfortable with the launch.

We're not concerned about energy costs to any great degree or our ability to be a low-cost producer in that neck of the Woods.

But -- an aviable alternative to other domestic shippers and/or import opportunities.

As we have said earlier, we don't plan to grow any further in structural products, but we could grow in merchant shapes and that likely given all of the opportunities that the companies looked at over the course of the last year or so - we haven't found any good matches, would lead us to conclude we're going build green field if we expand in that arena.

I think we have announced we're going to construct two more fabricating facilities, new millenium building systems, entities, if you will.

We're getting very close to site selection for the second facility, which will go in the southeastern zone of this country.

And do -- we have plans to ultimately build one out west, and we have not begun the site search.

As Tracy said, when you get beyond the next year or two, I don't think we can repay some of our longer-term debt until probably '06, and so would contemplate using a rather substantial cash position to retire some of that debt a couple of years down the road.

Does that answer your question, Bret?

Yup, thanks very much.

And then can you just talk briefly about the rail qualification and ramp-up process at your rail and B mill.

What initially we do is we'll send, once we're satisfied internally that we have met the requirements of the railroads this we will then send the railroads a small sample, say a couple of feet long for them to send out their testing labs to have them thoroughly analyzed microstructure and the grain size and so forth, and after that's successfully completed then we will begin felling the orders we have on the books to send them say 2000 or 3,000 tons of rail for their use and various applications which, are noncritical but they can can still then review the welding techniques and the efforts going into the use of the rail to make sure there is nothing abnormal that the installation crews would object to.

Upon successful completion of that, we would be involved in the greater opportunities for the '05 season.

Can you quantify what you're targeting for '05 shipments at this point, based on qualifications us this far?

Well, we had -- earlier we had forecasted, I believe, about 80 to 90,000 tons of rail for 2005, and I'm still sticking with that, unless we run into a snag that we don't anticipate.

I would say 80 to 90.

All right, thanks very much.

Great quarter, guys.

Thank you.

The next question goes to Andrew O'connor with Strong Capital.

Congratulations on your quarter, guys.

Thank you.

Keith, I wanted to know regarding new millenium's [inaudible] manufacturing facility in the southeast, what economic return are you guys invisioning for this facility or can you further explain what investment hurdles or criteria have been met which encourage you guys to go ahead with this investment?

Thanks so much.

Well, new millenium, you know, really they're a bottom-line performance, as everything to do with nonresidential construction.

Right.

That market generally lags an economic recovery by six to nine months.

Okay.

I think it's under way at this point in time or beginning.

New millenium's doing very well each month.

They have the potential to earn over a 50%, approaching 100% return on assets employed in a good year.

Uh-huh.

In a bad year, I think they would still meet our goals of 20% return on assets.

As you may recall, we have indicated that the assets in the ground for facilities like this are in the $30 million range.

Okay.

So we think they're very acceptable rate of return.

All right, and then Tracy, can you further brake out the remaining Cap Ex for '04, what the monies will be spent for?

Thanks again.

Andy, really there is two projects in '04 that we had talked about before and that are remaining and I will stick with those.

Okay.

And those are principally going to be the new millenium expansion, once the site selection takes place, which we expect to have, well, we're hoping to have that very quickly, but then they would start spending some money there, obviously.

I guess three things.

We'll finish out the Pittsboro conversion to allow us to manufacture smaller merchant bar shapes and then the - at the structural and rail mill will do the rail welding facility project and it's principally those things and, obviously, there is going to be a handful of smaller projects around the company.

Those are the biggies.

Okay, there is nothing in Cap Ex yet then for Mesabi.

No, and spoke to that the last quarter.

We're still sort of in the same place in that we don't really know timing.

What we're committed to going forward, as Keith has told us before, but can't really project anything in terms of timing yet.

Okay.

The, the situation with the partners of the Mesabi Nugget, the talks with the superstructure of Mesabi Nugget and any ensuing projects is going well, and I think Mark will probably have that wrapped up in the next month or two here, will you not?

I certainly hope so.

Yeah.

Thanks very much.

Great quarter.

Thank you.

Our next question comes from Aldo Mazzaferro with Goldman Sachs.

Yeah, good morning.

Tracy, this is a question for you.

On the numbers you described in your scrap cost change and your price change for the quarter verses the first quarter, it seems like the metal spread moved up about 94 or so dollars a ton and I am wondering why the operating profit per ton is as strong as it was, only went up around $56 a ton.

Can you help maybe describe what may have changed in some of the big-cost items in the conversion-cost area?

Aldo, there were a number of things as we have looked at this that impacted the quarter.

No one of which would raise to the level of the scrap costs.

We have -- we have a changing shipping percentage.

That is we shipped in the second quarter about almost 100% of our production versus around 97% in the first quarter that has an impact.

Our alloy costs were up, I think, as high as 6 to $8 per ton at one of the divisions and maybe a little less than a couple of the others.

Our mix has changed as well, as you understand, I laid out the shipping tonnages by product a little bit earlier.

Our highest average cost-of-sale item is down in Pittsboro because of the SBQ product that we're heavily weighed towards at the moment, and they practically tripled, more than tripled, almost quadrupled.

They're shipping volumes from first to second quarter.

That weighs our cost-of-sale number up a bit as well.

So it's a myriad of items that are playing into it.

Yeah, how much would you say the difference is in conversion cost in the bar mill versus the flat-roll mill?

I know the flat-roll you've been describing it around $100 a ton?

Aldo, this is Keith, let me take a shot at it because I saw your press release.

You're correct.

The sales price went up about $110, and the scrap costs did go up $16 if you note in our press release.

But the other costs, if you will, can't call them other costs, energy costs went up a little bit.

Alloys went up, et cetera, et cetera, which would take you over 20-some dollars.

The cost of sales changes also.

As Tracy said, we're shipping higher-margin products, so we're shipping a lot more galvanized, a lot more painted materials, a lot more SBQ products.

So the standard costs for the products, is higher than the standard cost would be for hot-rolled or pickled [inaudible].

So, our average standard cost went up the difference, essentially.

If you package the increase in cost-of-sales or standards, along with other small increases in costs and energy and alloys and the big one in scrap, maybe in the $35 range which would leave you 70, $75 of additional margin, and if you take that times 880,000 tons of shipments, you know, you're in the 60-some million dollar range and then, you know, as we said earlier, $3 million is increased profit sharing and refinancing with $3 million and increased incentives were $4 million.

When it's all done, it nets you about $54 million minus the tax affect.

Right.

The tax affect is $20 million.

When it's all said and done, it's $34 million.

When you add that to the $33 million we had in the first quarter, guess what, you come up with 67 million.

It balances.

Okay.

I think we're in balance.

Although to answer your question, it's hard to know exactly where bar products are going to end up because of the unique structure of that facility, but I can tell you currently their conversion costs are running somewhere around 35 to $50 a ton more than what we're seeing at the flat-roll mill.

Tracy, I wonder if you could just spend one minute and update us on the head count progression in the company over, say, the last quarter or two.

Would you be able to give us ballpark numbers on that?

You know what, it's something that I track.

It might be a little bit easier to ask the guys to comment on their movement quarter-to-quarter.

I'll try and give you a good snapshot of, while they're doing, that I will give you a good snapshot where we are at the moment.

We've got to be approaching 1500 people at this point in time roughly.

Just rough numbers.

It's not a question of -- I apologize for not having the answer.

Mark has what, 600?

How many people working at IDI, Keith?

We have 65 at IDI, Aldo.

Okay.

Included --

Mark, you have how many?

If you look at the steel mill itself a year ago we were up 560 - 565 people.

That's grown to 600 principally because of the paint line.

Yeah.

Great.

So you have 600, 665 and Dick's got 300, getting close to 400, 1065 and Glenn's --

250.

250.

Where are we at. 1065. 11, 12, first 200 is and some people of the new millenium.

Don't forget our big offices --

13, 14, Jeffersonville is -- .

[ Indiscernible ]

Did you have Jeffersonville in your numbers, Mark?

Yeah.

An then you've got corporate offices.

It's over 1400.

What did you say, Burt was 200?

200 people.

Right.

Over 1500.

Somewhere in that - somewhere in the 1500-ton range.

That's close enough.

I appreciate it.

One final thing, Tracy, could you give us a depreciation and amortization forecast for the next couple of quarters or so?

Sure, Aldo, I don't know -- where did I write that down -- I don't know if that's changed appreciably from what we had before, but I will certainly give it to you again.

Depreciation amortization just to recap the first two quarters is about 19 million and 24 million, and I think for the second half of the year, keep in mind our amortization is come down, even though or depreciation is going up, so it sounds a little odd, but I think that in the third quarter, we could expect about $22 million, well, third and fourth quarter, well about 22, $23 million each quarter.

Okay.

Thanks very much, Tracy.

Absolutely.

The next question is from Mark Parr with McDonald Investments.

Thank you very much.

Good morning, Mark.

Good morning, guys.

Great quarter.

One question I had, first, i was wondering if you could give us a little bit more color on what is going on in the beam market as far as demand situation is concerned.

And also, secondarily, if you have any plans at this point or are looking at perhaps filing for an expanded air permit for Columbia City.

Well, the B market is the softest of the three markets we operate in, but as I said earlier, we anticipate, based on what we see at new millenium and other sectors of our business, that it will be moving sharply forward in the latter half of this year, early next year, so they'll be better, I think, demand for those products.

We are not having any trouble selling at the level we're selling at, we still have just finished commissioning the entire product line and still interrupting the mill's activity to do rail trials, et cetera, et cetera, but that's probably the softest of the three markets and I'm sure a new course decrease in base price would lead you to conclude that they feel the same way about it, Dick.

Has there been any import pressure at all on the beam side?

Very little there.

Is occasional inquiries out there from a couple of countries, but that's not the issue.

I think the beam demand has been fairly, you know, flat to slightly increasing, but the demand at the mill level, needless to say, sees the shock from the large price increases and, therefore, the expansion and contraction is taken up at service-center level, so, you know, I think once the prices settle down a bit, things will get back to normal and as Keith pointed out, the nonresidential housing will continue to improve.

The residential housing, needless to say, has a strong demand on us, hence why we're getting the smaller beams made.

Don't like to roll the light sections, but that's what continues to sell.

Almost regardless what have the price of steel is, nobody's going to stop building homes over a couple hundred dollars, for a couple beams in the basement.

Was there a second part to your question?

No, I was -

Oh, air permits.

They expanded air permits.

We have submitted a little while ago the permit modification to allow us to run both furnaces, to make the modifications due to accept the output of the product from both furnaces and it's said IM, and they're reviewing it and they feedback some questions and so forth.

It hasn't been of the highest priority.

We're working on it as we speak.

What would that, how much production capacity would that give you if you're, if your new applications go through.

Well, only a small amount of that could be consumed right now.

We don't run even our one-arc furnace full-bore 24/7, mostly because of power issues, but we do so blooms and occasionally dog bones into the marketplace.

It would allow us to pick up some more of that business as we are waiting for efficiency improvements with in the existing rolling mill.

It would give us more flexibility to run more tons off-hours and continue to compress our operating costs.

I think domestic prices probably are a good 50 to $75 a ton below world market prices.

Certainly as you look at all product lines, whether it's SBQ, merchant shapes or [inaudible] has the weakest selling values at this point and time, Mark.

But I do believe the market will turn north gradually in the next few months and I think we will hit full stride in '05.

We're very hopeful we can see increased selling values for that product ex-surcharges.

Can't tell what is going happen to surcharges.

All right, I had one last question on the flat-roll side.

Could you talk a little bit about how far out you are as far as the order book is concerned.

I mean are you done with August?

Have you booked September?

And where, where do you stand as far as either, you know, maintaining a current contract mix?

Are you trying to expand contracts, kind of lengthen the order book out or are you continuing to maintain it very tight?

Our book is through September in flat-roll.

It's very strong, merchant products as well.

I would tell you they're probably well into September, if not through September.

What was the other part of the question, Mark?

I was wondering if you're trying to lengthen out the order book on flat-rolled or maybe increase the contract mix.

We're just renegotiating selling values for our contract mix.

We had a fair number of contracts, if you will, something greater than 3-month commitment on price up to a year if we don't go longer than a year, but somewhere between three months and a year, good many of those contracts expired in June.

Some will expert in August and there are a few of them that will drag on to the end of the year.

But those are all being renegotiated at different base-price values, plus a surcharge mechanism.

And, Mark, if I could add one thing.

This is John.

I think you heard me say this thing, say this before.

We have a very healthy perspective on the market and on demand and consumption for the balance of the year, and we're particularly guarded about suggesting to the marketplace in any way that this thing might weaken, so, you know, we have -- we've -- we have at the request of a number of customers gone back to monthly order acceptance from the bi-monthly order acceptance pattern we had early on.

We're still keeping a fairly, let's call it a choke hold, on the order book at this time.

Okay, thanks again and congratulations on a great, great performances.

Thank you, Mark.

We'll next go to John -- [ Indiscernible ] With Prudential Equity Group.

Congratulations on the great results and it's good to be alive during the best steel market ever. [ Laughter ]

Sure is, John.

Thank you. [ Indiscernible ]

With two iron ore mines on strike and four more threatening strike and inland not having its labor contract established on August 1, and by the way, it's the first time I have ever seen an operation threatened by a strike from two directions.

Raw material plus melting.

There's a reasonable chance that in the coming months, U.S. steel and the mini-mills are the people that have ore and can produce can charge anything they want.

If the strikes came to pass.

Is there a price level, say a premium over scrap beyond which you would not raise your prices ever so as to not damage the market.

I remember aluminum at $1.94 in June of '88 and $1 -- for minutes and $1.39 quarterly, but Alcoa never charged more than $1.22 for canned body sheet or about $1 for inget in that period in '88, '89 because they didn't want to hurt aluminum growth.

John, I can't tell you what we're going to do with our base prices over the long- or short-run.

Is there any thresh hold of self-restraint?

Other than is respond to market conditions, but I certainly think from a - when you look at it with surcharges added to base prices, we're at the point where a lot of people are going to shop offshore.

So I think we're nearing that point where the market's not going to absorb much more in the way of domestic price increases without finding opportunities abroad.

And we prefer that they find them here.

So, if we're worried about strikes, we wouldn't, we shouldn't put a thousand dollar hot roll into our spreadsheet for September or October?

Well, you know, I don't know that they're going to resolve their issues or not.

We're not very ore depend.

There are others that are.

We're mostly scrap dependant.

We're trying to change that mix substantially.

And I can't tell you, the stock market couldn't produce some very strange results, but I can only tell you I think being in the $700-a-ton vicinity, I think most of the customers are saying enough is enough.

So I think we have gotten left to center, and I think most of it has to do with the wild marketplace that we have seen in the cost of scrap resources.

Thank you.

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

Thank you, again, I would like to reiterate my congratulations on the great quarter.

Can you tell us a little about the scrap market.

It seems like it's in turmoil.

It's hard for me to describe it.

Can you tell us what's actually going on?

I don't know we have a crystal ball that big, Wayne.

Clearly I think that the sensing some strength in the July timeframe because of the outages, I think the, the purveyors of scrap probably held back some resources in the June timeframe.

I believe that inventories grew a little.

There are, I'm sure, certain scrap entities that would tell you theirs didn't grow or went down.

I mean everybody's different, but generally, our since of it, we did a helicopter flyover of probably 15 to 20 major yards in our area, and I can only tell you that most of them were overflowing the rim, so to speak.

Not as much emprompt scrap on the ground.

Certainly in some cases, more prompt scrap, but a lot of it being secondary great.

I think there was an early push in June, which created a little bit of a panic and then with short supply of prompt scrap being available in July, this thing just went, went crazy.

I don't, you know, you get just one guy that's out of scrap and that becomes widely known in 13 seconds.

In this industry and I think the rumors had it the Great Lakes was out of steel.

ISG was pushing [inaudible] had their source-melting problem and it canceled a lot of orders and was back in the market.

So you had a few entities who were caught short of scrap.

We were not caught short of scrap but it just takes a little excitement to push the market as strongly as it was pushed and so I think one of the real problems as I have said is we've have no transparency in the scrap universal marketplace.

We've got a thousand tons or two that gets put on the market by Ford and a few thousand tons by Chrysler and those bids could be by brokers or by mills and if somebody wants to speculate on a market, you know, what would be the harm in elevating the price of those resources on a couple thousand tons?

Has virtually no impact on the brokers' bottom line or on the speculators' bottom line, if but if they can announce those kind of up results on a couple thousand tons of scrap to the marketplace, it can drive the frenzy and I don't know that we don't have just people being, you know, irrational and irresponsible.

There's only so much scrap.

It isn't going to change how much you get or how much the next fellow gets, et cetera, et cetera.

Going to drive the price up, so we've got a situation where we shouldn't be paying attention to what those lists do. 3,000 tons shouldn't drive 6 million tons of traits.

It's, rationale, illogical and it still happens and I guess if we had -- it wouldn't change things if we had all mills bidding for that scrap because a mill without a scrap is going to be desperate and probably overpaid.

So I think we had some of that very poor timing relative to the flows.

I suspect that we're not going to see -- some people are saying the market's going to come here as we approach August.

I hope it does.

Others are saying the market's going to be up 30, $40.

I have no idea what is really going to happen, Wayne, but I would tell you I don't see the market dropping in the August timeframe.

It could stabilize or could go up slightly.

I think most scrap companies would tell you that the flows will start to increase in August and will be flowing strongly in September.

So maybe we can see some abatement in this market in the September timeframe.

And perhaps carry over into October.

How much, I really don't know.

I can only tell you that we have built rather strong numbers into our forecast because we don't think scraps, prompt scraps going back to 220 or $250 anytime soon.

just briefly, where are bundles, bushellings and the number one heavy metal?

Well, bundles, I think, for the most part are in the 350 zone.

Shredded was in the 285 and it pushed up even after the sort of the bidding stopped last month, to probably close to even -- there were some trades we heard about took place at $300.

Your melting steels were down around, number one was around 240 and I think number two was around 215 to 220, somewhere in that area, so there was just a wide range of pricing out there.

I think shredded was the bodies had dried up a little bit, but at these numbers, I'm confident the flow will pick up again.

I don't know that I can forecast or have a glove shredded but I think shredded prices could abate again as prompt scrap would perhaps in the September timeframe.

And you said, your order book you say is full through September for flat-rolled and it's into September for structurals and how is it for Pittsboro?

I think Dick is just through August, not into September on structurals.

Clearly we're sold out on flat-rolled, very strong demand there and we'ere sold out on merchant shapes and SBQ at Pittsboro through the quarter.

And lastly, what is your capital spending number for '05?

Tracy is looking that up as we speak.

It hasn't changed from whatever we said that it was going to be.

At least I don't have an update on that from what was going to be previously, Wayne.

That number is about 60 to $65 million.

Again, keep in mind that somebody mentioned earlier, that does not include Mesabi Nugget project that we would participate in.

Great.

Thank you very much.

Yes, sir.

We do have two more questions in the queue.

We'll next go to Charles Bradford with Bradford Research.

Good morning, maybe it's afternoon now.

I've got some questions, also on scrap.

You talked about being up $16 in the second quarter versus the first, yet the quoted market average for the quarter, missed number one heavy melt was down pretty considerably.

What, and I know that earnings and a lot of other things, bushellings and factory bundles and so on.

Usually you're above the market.

This seems to be a lot more above.

Was it in an inventory issue?

What, what's the issue?

Well, to some extent it's inventory.

Dick's numbers were actually down in the quarter as were, I believe, bar products.

But we had expensive scrap, very expensive scrap on hand at the end of March and that would flow into the April timeframe.

Obviously, scrap declined in April and May, rather substantially.

We bought very heavily during that timeframe, and that is now going to carry over into July and somewhat into August.

Because if you don't, I said I think possibly up 15 to $20 a ton in the third quarter, yet most people would say oh, my god, how could that be.

They were up $100 last month.

So how you could you be up 15 to $20?

Well, because we have a lot of material on hand that we'll be using in July and August.

We'll get to the really rich stuff, so to speak, in September.

So it is -- inventories have a lot to do with it, Chuck.

Okay.

I think you anticipated my second question.

Thank you very much.

Again, star 1 if you have a question.

Next go to Michelle Applebaum at Michelle Applebaum Research.

Hi.

Good morning Michelle.

Hi, how are you.

We're well.

Terrific.

I guess my [inaudible] talking to service centers the last month or so has been that, I think where all these people thought their prices were going to go down to make longer-term price commitments and by imports.

I get a sense that they're kind of throwing in the towel and saying they're [inaudible] say maybe we need to buy more import.

I get a sense the import price offerings are not terribly attractive.

Is that, is that your sense as well?

Michelle, this is John.

Good morning.

Hey, John.

That is, in a sense if you recall Keith's remarks from earlier and mine very briefly, I think they have reached a point where they can't justify putting inventory in at the, you know, aggregate domestic prices that are on the street today, so they're certainly offering domestic producers what I would call back-to-back, meaning they have a committed order from their customer.

I think a lot of the inventories to the extent that they can place it will go off shore.

Again, with the caveat, the offerings, A, don't seem to be as large as I think you might anticipate the market like this and prices certainly are high.

Okay.

The import numbers as you suggested, Michelle, are fairly high.

They certainly followed domestic pricing or came in at a level above it in some cases.

So I don't think there are cheap goods out there, so to speak, but relative to $100 increase followed by a $50 increase as some are suggesting, I don't than that could be supported by the market.

Before people do turn off shore.

Okay.

Okay.

That's interesting.

Let me ask -- can I ask a second question?

Yeah.

Sure.

This is more to John.

To the extent that, I guess, IOC in Canada and, you know, Lawbush in Canada are already on strike, I don't know what is going to happen with Cliff, but AK is, obviously, a big customer of IOC and [inaudible] and SELCO are also, you know, very dependant on both Lawbush and IOC.

Are there specific opportunities for to you gain share because I know the glass furnaces will run for awhile.

They have their winter inventories but then there will be a problem down the road.

Those are strikes that have already happened.

Is there, you know, may be you're saying there is a lot of price opportunity.

Is there share, is there new customers, better, richer mix kind of thing?

Because those are guys that are typically at the high end of things. [inaudible]

Well, Michelle, I think clearly there would be the those opportunities, but we're more or less ahead of that curb at the moment.

We have pushed about as much product into the value-added end of our product mix as we can.

In fact, as Keith or Mark would tell you, we're getting massive groans from customers that are long-standing hot roll players would like to see us roll that back a little bit.

So, while the opportunity exist, unless the boss finds a way to buy another hot mill, I think we're probably not going to be able to push the envelope much further than we already have.

We gained a quality of customers that are less spotty, if you will, but we're running at capacity so that you can't really gain, we can't take the mill from 2 1/2 million to 3 million tons.

It's just not there.

Okay great.

Listen, I just want to tell you guys, you know, it's a fabulous job marketing and producing and I mean running on all the gears and all the startups and having the volumes so well-positioned for the increases going forward.

Just terrific, terrific job.

Thank you very much.

Thanks, Michelle.

Thank you.

With that, there are no further questions.

I would like to turn the conference back to Keith Busse for any additional closing remarks.

Don't really have any, ladies and gentlemen.

I want to thank you for your continued support at Steel Dynamics.

Your continued interest in our company and look forward to seeing all of you in the near-term.