Steel Dynamics Inc (STLD) 2004 Q3 法說會逐字稿

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

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

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

Mr. Mark Millett, Vice President;

Mr. Richard Teets, Vice President;

Ms. Theresa Wagler, Acting Chief Financial Officer;

Mr. John Nolan, Vice President of Sales and Marketing; and Mr. Fred Warner, Manager of Investor Relations.

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

Mr. Warner, please go ahead, sir.

Thank you.

Good morning and welcome to this October 19th, 2004 conference call covering third-quarter results for Steel Dynamics Inc.

Today's management 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 on 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 our website, www.SteelDynamics.com.

After the management discussion, we'll open the call for questions.

Please make your question brief, and limit your follow-up questions so others have an opportunity to participate.

You are welcome to ask additional questions later as time permits.

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

Thank you, Fred.

Good morning, ladies and gentlemen.

Rufus, our moderator, indicated today that there are 90-some people hooked up on this call, which I think is a record number of listeners.

So, we appreciate the new audience we have and the fact that you have chosen to honor us with your presence on our call today.

As most of you can tell from our press release, Steel Dynamics had the best quarter that it's ever had in its history.

In fact, our earnings this quarter, just in the quarter alone, exceeded best year we had ever achieved as a Company, which I believe was about $1.64 a share, or somewhere in that neighborhood, a number of years ago.

Obviously, the earnings were excellent as a result of a combination of greater shipping volumes, higher selling values, and last but certainly not least, more effective cost control than we have ever had before, due to the outstanding efforts of our world-class employees.

In fact, I believe that our conversion costs in the quarter were down about $20 quarter-over-quarter.

So, in spite of the fact that we've had tremendous escalation in commodity pricing, our scrap costs are up significantly over scrap costs of a year or two ago, or just a quarter or so ago, we did manage to improve our conversion costs rather substantially.

As you can see from the press release, we've earned $2.01 a share on record sales volume of $635 million, which was a 21% increase from the second quarter of '04, and a 150% increase over the third quarter of '03.

Net income for the first nine months was 213 million, or $3.80 per diluted share, a sevenfold increase over 2003.

And as I said, this year's third-quarter earnings exceeded that of earnings in any other prior year.

We continue to do well at every operating division.

You might say that all of our operating units are hitting on all eight cylinders these days.

There is some stagnation in the structural component of our business.

The non-residential construction marketplace is still operating at fairly low levels by historical standards.

So, we are just kind of treading water in that business in terms of the volume.

We're not losing any volume of any significance and not gaining any volume, with the hope that business activities will improve as the economy continues to move forward in the quarters ahead of us today.

The situation of Butler is -- we are just in excellent shape at Butler.

Mark had record quarterly hot band production of 639,000 tons, and shipments where 611,000 tons.

Both of the divisions new coating lines, the hang line at Butler and the galvanize line at Jeffersonville, have now achieved rated capacity and set production and shipping records in the quarter.

So what we are doing is moving a lot of product, again, into higher margin arenas; coaching more product and/or painting more product with better margins to the Company.

So things at Butler could not be better.

Right now, the order book is a little weak, as most of you have noted in your comments.

We do not a book that is full in the fourth quarter.

We still need fourth-quarter orders, but we think we are going to close a number of supply agreement arrangements with people in the short-term.

And that buying activity, once the market understands the direction and tone of the market, there will be considerable buying activity, we think, that will occur towards year-end, getting ready for what we think will be a pretty impressive first quarter in terms of order entry.

During the quarter, the Bar Products Division, which began shipments in the first quarter of '04, operated at 75 to 80% of its capacity, shipping about 107,000 tons, a 30% increase over the second quarter.

So things are going very, very well in Pittsboro.

Glenn and his team have qualified that facility.

They're now QS 9001; they have qualified with a number of important customers, Caterpillar, John Deere; they have achieved qualification of our SBQ products in record amounts of time, and the order entry at Pittsboro is very strong for SBQ products.

We have a fair backlog of merchant material available to be produced on that mill.

All of the new finishing equipment is just ready for operation in the fourth quarter.

We have not produced, at this point in time, any significant volumes of merchant shapes.

I would tell you, at this point in time, given our success in the SBQ marketplace, that I know a number of people had asked me, over time Keith, how do you see shipments being divided between merchant shapes and SBQ bars.

And certainly the best answer I had nine months ago or a year ago was 50% merchant bar and 50% SBQ.

I would tell you today, with the success that the Pittsboro team has had in the marketplace with clients, that we are liable to be at 75% SBQ with a richer mix of margins available in that product line, and perhaps only 25% merchant shapes.

So not in any way to deemphasize the need to be able to manufacture a wide variety of shapes, because markets do come and go and ebb and flow, and that mill again will produce a range of angles anywhere from one-inch to three-inch angles.

And will produce rebar in all shapes and sizes that are available to the market today.

I think that probably one of the most undersupplied markets at this point in time is the SBQ marketplace, and we are enjoying great success there.

Glenn should roll 35,000 tons this month.

He should probably melt and cast 45,000 tons.

He should probably ship 35 to 40,000 tons just in October.

So very healthy business conditions in our bar products division.

As I said, the situation at the structure division is just sort of stable, is how I would describe it.

Our shipments were about 5% lower than the second quarter, due to the continued softness in the non-residential market.

I'll let Dick tell you a little bit more about where we are going with rail, and just how fast we'll get there in a little while.

You should note that the consolidated shipments for the quarter approached 900,000 tons, or 21% higher than the third quarter of 2003.

And the year-to-date shipments are 2.6 million tons, which were 26% higher than the first nine months of 2003.

I think one of the real bright spots for us, besides an operating profit of $216 a ton, which I think is probably a record in this industry -- and I see it only, we only have an opportunity to grow that even larger in time with favorable market conditions.

But one of the very bright spots that we saw in the quarter was the fact that Iron Dynamics moved out of the red and into the black.

We had, earlier in the year, predicted that it was possible we might bring IDI to a profitable status by year-end.

And Mark and his team achieved its first GAAP profit in September of this year, approaching nearly a half a $1 million.

And I think there's certainly better things to come.

I think we operated in September at, as I recall, in the mid-teens in terms of volume.

And we expect by December we will be in excess of 20-some thousand tons of HBI and liquid pig iron being produced at that facility on a monthly basis.

We still believe that ultimately we'll reach 30,000 tons of output.

The cost of the process are much higher today, not because we miss-estimated where we were going to be, but I think when you look at the price of net cold today and the price of iron ore fines and the price of natural gas, those commodities alone, just in the last six months to a year, have increased in terms of the cost to production, probably 60 to $70 -- in that range.

So you are just not going to see a $180 a metric ton cost structure.

But in the future, probably looking at a cost structure that's over $200 a ton.

We believe we can compress it to in the vicinity of 230 or 240 a metric ton, which would be something less on a short-ton basis.

And when you measure that against market prices for scrap resources or pig iron bought abroad, it's still a very, very attractive commodity to us.

And we are very pleased that the four-year journey, we think, is over in terms of mastering the technology and delivering ever-increasing volume over the course of time.

We still believe that the Mesabi Nugget Project is probably -- has a cost structure that is still 30, $40 a ton; more cost effective than Iron Dynamics.

And that's why we are going to aggressively pursue that technology.

And as we said before, the Board has approved two projects right out of the gate.

One project will be located in Minnesota, and one project will be in Indiana, both of them generating approximately 500,000 tons of output.

These projects are solely dependent on, from a timing perspective, when we will receive air (ph) permits in both locales.

And all I can tell you is right now we believe that we will not receive a permit in either location by year-end.

But after the first of the year, sometime January, February, we might be receiving a permit, certainly in one location and perhaps both locations.

So the timing of the launches for Mesabi Nugget are dependent on environmental permitting.

As I said, the market conditions certainly have had a lot to do with our bottom line.

But we believe that, as we move forward, SDI is well-positioned and has set the stage for sustainable profits at higher levels than we have achieved in the past.

Some of the initiatives that have strengthened our market position include a growing volume of shipments made possible by recently-added production capacity, increasing diversity of steel product offerings, i.e., coated products and painted products and things of the nature.

So our mix continues to improve over time, which should improve our margins.

As you noted in the third quarter, we had an average consolidated selling price of about $706, which was about $115 a ton higher than the second quarter.

Third-quarter scrap costs per net ton charged were $250, approximately $23 a ton higher than the second quarter of '04, and approximately $122 a ton higher than the third quarter of '03.

I think in the last conference call, I had indicated that we were going to be in the $20 a ton zip code.

And certainly did not expect the magnitude of increases that we saw in the September timeframe.

We thought the decrease would be greater in September, and the increase would be less in October, but that did not turn out to be the case.

From a balance sheet perspective, I think we are in awfully good shape.

I know a number of people, not too long ago during a recessionary period and a high-growth period for the company, worried a little bit about the fact that our leverage was approaching 60% debt to equity.

I am pleased to report that as of September 30th, we were 40% debt, 60% equity in terms of the leverage ratio.

And we have just recently paid down the outstanding $100 million on our revolver.

And this would take our leverage ratio down to, now at the beginning of October, 35% debt, 65% equity.

So, by the end of the fourth quarter, I suspect we'll be in the low 30s, 32, 33%.

When you don't consider the cash on our balance sheet, and if you considered the cash on our balance sheet and netted it, our net debt would probably be on the order of 25%.

We see steel pricing in the fourth quarter softening somewhat, with scrap prices remaining at high levels by historical standards.

Yet, we nevertheless, as we announced, see very strong fourth-quarter results for the company.

We believe our net sales will be in excess of 2 billion, approaching probably 2.2 billion, more than double the 2003 net sales achieved by the company.

We had said in our previous conference call that we thought our fourth-quarter earnings clear back then would be in the range of $1.50 to $1.70.

We have, as you can see, taken a position that our earnings will be in a range just slightly higher than that.

And went on to say that it should be noted that we will be replacing some of last year's year-end supply agreements with agreements containing more favorable terms that should result in increased profitability related to these shipments.

I know that there's been a lot of conversation about the spot market in recent weeks, which I think set the markets into somewhat of a panic.

And although I think the peak pricing is down 100 to $150 a ton, very few of us ever really enjoyed the peak.

Almost never do you enjoy peak pricing.

I see our pricing in the fourth quarter being no different than that of the third quarter.

I repeat, our pricing, I think, in the fourth quarter will be relatively unchanged from the third.

That's due to the fact that peaks are never achieved.

We have a lot of contracts that fell off at the end of June and in August, or supply agreements, I should say.

They are being replaced by supply agreements at higher selling values.

We carry quite a tail from a production backlog perspective, out of the second quarter and into the third quarter, and before we got to peak pricing, which we probably realized more in the month of September than any other month, we had some softness in the market.

So, the big fear and panic that prices are going to be down $150 and are going to drive margins substantially soft, I believe, is erroneous.

At least in our case, we are not going to see a huge change in selling values, and the squeeze won't come from selling values.

I think I predicted last quarter, and I'll do it again this quarter, that the squeeze comes from scrap costs.

Our scrap cost are going to be up -- I don't know -- in the neighborhood of $35; could be slightly more than that, could be slightly less than that.

In the fourth quarter, when you take that times 700,000 tons of material, or 660, or whatever we are going to achieve -- actually, it is more than that, I believe -- material that we are going to put in our furnaces, then that is going to have a rather substantial impact on the bottom-line.

The other thing affecting earnings, as you compare the excellent record earnings of the third quarter to the $1.55 to $1.75 range, would be slightly less volume.

Some of that is due to softness in the market, some of it's due to the holiday season and recurrent maintenance schedules on the mill.

But that's what's really driving the numbers.

Certainly those numbers are nothing to be ashamed of.

I would guide you to the lower end of the range, as I usually do.

If I were a betting man, I would tell you $1.60 or thereabout is achievable, I believe, in the quarter.

But still a lot of things have to play out before we can pin that down more finitely.

Next year, we see -- this year we saw an increase in steel shipments of 25%.

Next year's volume could increase perhaps another 10%, with annual shipments approaching nearly 4 million tons.

Getting close to what we believe is our ultimate capacity of 4.2 million when we have better market conditions available to us in the structural arena.

And as Glenn continues to wrap up to what we believe will be full capacity at Pittsboro, in the vicinity of probably close to 600,000 tons when all that growth and learning curve is put into place.

So we really had a tremendous quarter in the second quarter.

And again, would like to thank all of our world-class employees for their efforts, because they did one heck of a job in compressing conversion costs $20 a ton, which is a very notable achievement.

Again, I think the other notable achievement was Iron Dynamics in the quarter, as it pushed into the black and no longer was a drag on earnings.

So I think we are going to see a very strong first quarter next year, a strong second quarter.

I don't have any estimates for you, certainly, at this point in time, but we see strength in those quarters.

I think any opportunities that exist from a purchased cost perspective, as you can see it through the eyes of our customers, is probably short-live.

I think the world markets continue to gain strength, and I think this becomes less of an attractive market in the United States.

I think inventories are characterized today as moderate; they're not high, they're not real low.

And I think, as the buying activity surges forward, I believe it will here shortly, you could see the market under pressure again.

So I think the softness we are seeing right now is certainly an opportunity as I see it.

I really have no additional comments related to our quarter.

I will turn the mike, so to speak, over to Mark Millett, who will tell you a little bit about his achievements at Butler this quarter.

Thanks, Keith.

To be honest, I think the numbers in your summary speaks for itself, to be honest.

I don't have a great deal to add.

I think that the team at Butler certainly capitalized on a strong backlog this past quarter.

The initiative that drove new productivity levels in Q2 allowed us to eclipse those levels in Q3.

Our hot strip mill, as Keith suggested, ran about 640,000 tons.

And we got a little ahead of ourselves; we advertised we would get to 2.5 million tons next year, and we're probably going to achieve that yet this year.

And some additional initiatives should drive that to probably 2.6 million in '06.

Pig lines are running very, very well.

It's year-over-year 12% ahead of its rate.

Similarly for the coal reversal mill, some substantial modifications and changes in practice there have improved throughput there by about 42%.

In August they ran 80,000 tons.

The hot-rolled galvanized line is running about 20% ahead of its pace in '03.

We're consistently running 40,000 tons a month there.

Jeffersonville is doing extremely well.

We installed a new temper mill, allowing us to achieve the pre-paint (indiscernible) service qualities there.

It's only restriction currently is our inability to provide a full level of substrates.

They're running around 25,000 tons a month.

And we are going to supplement that with some tolling here in the next month or two to drive down our fixed costs.

Paint line is doing incredibly well.

Product is very, very well received.

The margins are high, and they are exceeding their normal 20,000-tons-a-month production rate.

So things are going very well.

All of the new production levels have been achieved without sacrificing maintenance.

We continue our maintenance programs, the mill is in great shape.

And I think the team certainly sees the ability to drive Butler to even greater levels.

So things are good.

Thanks, Mark.

Before I turn it over to Dick, I want to -- I didn't mean to leave the New Millennium Building Systems out of the mix.

We did mention them specifically in the press release, but they continue to do very, very well.

And it is a very profitable entity.

It is building its second facility, which is now under construction in Lake City, Florida.

That shop will have a capability of in the vicinity of 100,000 tons of steel bar, joists, trusses, girders, and steel roof deckings.

It's earning about a 50% return on assets employed at this point in time, which is just an excellent performance by Bert and his team.

Dick, I'll turn it over to you.

Thanks, Keith.

At Columbia City in the third quarter, we built inventories of our most popular sizes in anticipation of a maintenance outage that began in September and bridged into October.

We continue on our rail development with most of their time being spent in the melt shop area, as I believe our rolling mill is basically dialed in.

At the casters specifically, we modified or tonnage nozzles and our spray cooling patterns to improve internal cleanliness and surface conditions.

We believe that we will be supplying two class-one railroads with samples shortly.

And after it's expedited approval processes, I believe we will receive some orders here in December of 20 to 30 or more thousand tons, definitely with pricing above the current beam numbers.

From a project standpoint, we have started the dirt work on our rail welding facility, where we'll be welding our long rail sections into 1600 foot strings.

And we've placed the orders for both the mechanical and electrical equipment for our longer cooling beds, which will allow us to have improved yield and productivity performance in the rolling mill, and in anticipation of making the 320-foot-long rail sections.

Keith?

Thanks, Dick.

We're going to ask John Nolan to make a few comments about the market, because I think that has been the subject of concern by a fair number of people that analyze this industry.

John?

Thank you, Keith.

Ladies and gentlemen, I want to point out one significant accomplishment -- to take a ratio of our net income to sales, we posted an 18% return on sales for the third quarter.

And I'm particular pleases with that for a multiplicity of reasons.

Notably, the contribution of the commercial team and our operating team in achieving that.

That is a record, also, for our quarterly performance, and will go down in the archives as one I will remember for a long time.

With respect to the non-residential construction market, I really have nothing to add to Keith's remarks, except that our building products company's backlog is in excellent shape, and we hope that is a harbinger of things to come for the non-residential construction market.

Keith covered Pittsboro very well.

We've had excellent success in introducing Pittsboro to the SBQ market, and we expect to have continued success going forward.

Maybe the way to say it is, the market is a little bit quite at the moment.

And I think the focus is more on inventory valuations rather than inventory volumes.

So, the circumstances of the market could change rather quickly.

Also, we are saying a resurgence of imports.

That comes as no surprise, I'm sure, to any one of you.

That does affect the supply/demand balance.

It is, I think, a contributor to the correction that we're seeing in the fourth quarter.

But we're also seeing spot market prices move to or near world market levels.

Frankly, the word on the street -- and I think it's the same word that many of you are hearing -- is scrap coke, iron ore and global demand will certainly tighten supply in the first quarter and for most of the first half.

And that's how we see this thing at the moment.

Thank you.

Thanks, John.

Rufus, I think we're -- Teresa, do you have any specific comments before we go to the Q&A that you'd like to make?

Yes.

I think that some of your (indiscernible) gains on financial and operational (technical difficulty) specific.

So I'd like to give you those this morning.

I'd also like to expound a little bit on what Keith mentioned and John mentioned, as far as product mix change.

Just so that you guys can kind of get an idea.

For 2003, the Flat Roll mill made up about 80% of our product mix.

In the third quarter it was down to 60%.

Of that, typically 40% to 50% was hot band.

Well, that's changed; painted products, which made up about 11% of that, and cold-rolled valve has increased to about 20%, which are all highly value-added products.

The structural mill went from a 15% contributor in 2003 to a third quarter of 20%, increasing 5%.

And now we also have bar products, which is an additive to about 15%.

And New Millennium and Paradigm make out the remaining 5%.

As far as shipment levels and average pricing per division, at the Flat Roll mill, we had shipments of 611,000 tons.

And on that, they averaged about $744 per ton.

Structural mill had 184,000 tons.

And on that, they averaged a price of about $539.

And Bar Products had 107,000 tons, and they averaged $641 per ton.

Now, I'll give some financial statistics.

In the third quarter, we had gross interest of $12 million and capitalized interest of about 1.6 million.

We'd expect that to be about 10 million of gross interest in the fourth quarter, with capitalized interest running around one million probably.

We also had depreciation and amortization in the third quarter of 22 million.

We'd expect that to maintain about the same in the fourth quarter.

As far as Cap expenditures, we had about 18 million in the third quarter.

Of that, New Millennium made up about 5 million related to their new mill.

Pittsboro was 5 million.

Structural mill was 4 million, and IDI and Flat Roll mill rounded out the additional 4 million.

In the fourth quarter, we'd expect that to be about 25 million for CapEx, and 20 million of that would be related to the Lake City expansion of New Millennium.

I'd also like to talk about our tax rate.

We increased our effective tax rate from 37.5% to 38%.

We mentioned that on the second-quarter call that we thought we might need to do that, and we did.

It's related to the increase in our earnings throughout the rest of this year.

As far as cash taxes, we paid 14 million in the third quarter, and we would expect that to increase substantially in the fourth quarter.

Keith?

Thank you, Teresa.

Rufus, I believe it's now time for the Q&A.

(OPERATOR INSTRUCTIONS).

John Tumazos with Prudential Securities.

Congratulations on all the progress.

Keith, as you know, there has been an usual volatility in some of the stock prices.

You might have seen today Nucor was up about $8 dollars in one day last month.

I can (indiscernible) a short-interest spread for all the metals and paper stocks, and I'm not short your stock our having the ax to grind or anything like that.

But something that amazed me, Keith, is that Steel Dynamics has the largest short interest as a percent of shares outstanding of any metals or paper stock, 13%.

And that really amazed me, because your company is low-cost and its well-run.

And I was wondering if you had any general or specific thoughts on that.

I was trying to wonder why, and the only thing that I think might even be in the imagination, why your stock rather than U.S.

Steel or ISG or some other company would have such a large short interest, is if people are afraid you are going to build factors too quickly and get caught in the recession.

Because I know you like to build good machines and good plants with comparative advantage.

I was wondering if you would be interested in making sort of a policy, given this unusual thing, as such a large short stake in your company, of maybe saying for the next three years you're going to win the capital spending, to have the depreciation to buy in your stock?

That is my question.

Well, John, I can't tell you why we have the short position we do.

I certainly know that the stocks had a nice run.

And perhaps there's just some folks that believed on a short-term basis it would run out of steam.

I don't know.

From a CapEx perspective and spending perspective, we are going to be accumulating, as you can well imagine, a lot of cash.

As Teresa might have mentioned, we are going to spend, I suspect, 175 million or thereabouts in '05.

But that will come nowhere close to matching the cash we are generating.

We don't go out and just willy nilly build projects, never have.

And as you said so eloquently, we build world-class facilities.

We operate them in a world-class fashion.

Clearly our metrics in this company are better than any I have knowledge of anywhere in the steel industry.

I don't care whether you look at operating profit or pretax income.

And even though our tax rate is high, after-tax income, or whether you look at EBITDA margins, we have the best metrics in the steel industry bar none, I do believe.

I don't think there are any better metrics.

And certainly they are sustainable metrics.

Markets are going to ebb and flow over the course of time, and we're not bigger than the marketplace.

But I think, as I said, SDI is well-positioned to take advantage of the growth -- prudent growth, I might add -- that we put in place.

I know not everybody thought it was prudent at the time.

We had so many growth vehicles that we launched at one time, we made some people nervous.

We had a lot of balls up in the air.

We caught all of those balls without dropping any on the floor, including Iron Dynamics.

There is going to be -- we are a growth company.

I can't tell you when or where that new project will come along, but it will.

There may be periods when we have two major efforts underway, and years when we have no major efforts underway.

So it would be tough to make a statement that we'll still limit CapEx to half of the spending in any given period.

But why the stock is as short as it is, I don't know that I can answer that question.

I can only tell you that, from a return on assets or return on equity, operating profit or any other metric you want to measure us, I think we do fairly well as a company.

I think the reasons for nervousness of yesteryear are gone.

The engines are hitting on all eight cylinders, and we just have an excellent outlook ahead of us.

John, I'd also like to add that we currently have liquidity of over 300 million.

And given the minimum amount of CapEx we expect to put out in the fourth quarter, that should only grow by the end of the year.

Could you review the big pieces of the $175 million capital program next year and whether they are postponable, and what your current share repurchase authorization is?

I'd love to see you hang the shorts out to dry.

We can give you the components, the major components of that 175.

Of that, there's 90 million that's dependant upon the air permit, because it is related to Mesabi Nugget plans -- one in Minnesota and one in Indiana.

And there's 25 million that would be related to a potential third plant at New Millennium.

And there's 40 million at the structural mill, which would include the rail welding facility that Dick just spoke about.

And there's 20 million that would be remaining at Flat Roll mill and Bar Products.

So that's half of the capitals of nuggets?

Half of the capital's nuggets?

Yes, 90 million of that is related to Mesabi Nugget.

You could buy 3 million shares or so, rather than buy the nuggets to fill the nugget plants if you wanted to?

Well, I don't know that we could not do both.

The nugget plant -- if those facilities operate with the cost structure we believe they have, it would be invaluable to this company in terms of its impact on the bottom line.

Relative to your question on share repurchase, that may well be the most prudent short-term use of capital at some point in time.

But we're certainly not going to jeopardize the growth prospects for the company either.

We could launch a share repurchase program, it's not out of the question.

I'm not telling you we're going to, but at the same time, if we find a suitable project or an M&A activity that we believe would build better value for the shareholders, we certainly would engage in moving these growth projects forward.

But thank you for your question.

Allen Roop (ph) with Principled Capital.

Could you review the Mesabi Nugget a little bit.

What was it in there for the CapEx?

And what do you see for timing in terms of bringing the plants on?

The CapEx is just roughly $100 million a facility built.

And I believe there will be a number of them built, quite a number of them, over time.

We spoke of the first two.

You have to remember, there's some uncertainty relative to how much equity would be injected as opposed to how much debt we'd have on these companies.

I suspect not a lot of debt.

It might really be related to working capital more than anything.

And if it is, you're looking at maybe $20 million, which means each nugget plant's an $80 million adventure.

And then you have to understand what percentage of it belongs to SDI versus Cleveland Cliffs (ph) versus Cobeaver (ph) versus Paremetrics (ph).

And that has yet to be decided on a facility by facility basis.

But if we were to be a major these piece of a facility, then it could be in the 60, $70 million vicinity, would be the amount of cash required.

If it is for a 40% owner or a 50% owner, then it's, you know, $40 million.

It just varies, and the timing would be -- those funds would be expended over the course of a year, basically, or a year and a half before it all was up and running satisfactorily in the full working capital --

You have the permits submitted for the site in Minnesota and the site Indiana, right?

Currently we have the permits submitted and ongoing in Indiana.

The Minnesota facility, unfortunately, the permit application was delayed because we just moved or relocated the site itself.

That's something that has to be remodeled, and hopefully will be submitted in two or three weeks.

But Indiana would likely be first?

We're not saying that.

But if the Minnesota permit gets submitted in three weeks, we'll just see how hard everybody works in both states.

We really don't have a prediction.

It's not a definitive science where you can see that it's submitted on this date, it's going to come out the back end on this day.

As you know, the permitting process is a little more tenuous than that.

I guess that's all on Mesabi.

But aside from that, markets do what markets do, a very nice quarter in terms of cost and just execution.

Johnny Jimson (ph) with McMahon (ph) Securities.

A couple of questions.

You talked about how you are paying down, how you paid down your bank revolver post quarter.

Do you have any other plans for further debt reduction with your strong cash flow?

There's very little long-term debt on the books that we can almost immediately do something about.

It's probably another $15 million, is my guess, of what we could retire in the next quarter or so.

After that, we're really looking at clawback provisions and things like that, when that feature is available to us on the high-yield products.

But no, it's nice to have these lines of credit.

We've talked about building another SBQ facility in time, and I'm almost positive that we will.

And I think Glenn and his team, as they get their arms around capacity and the operations at Pittsboro, I think by the first of the year we will be engaged in engineering for another facility.

And we'll have more to say about the timing of that in the future.

There are opportunities to expand Columbia City, not in the same product field, not more wide-flanged beams, but other materials that could give that facility or other products that could give that facility a higher operating rate.

You have to remember that the melt shop is in place at Columbia City.

We don't need to add melting capability.

We would need to expand casting and need to expand rolling and introduce a new field of products to the mill.

But certainly, our capability could, in terms of cost per annual ton of capacity, could be enhanced fairly dramatically.

And I think Dick and his team are being challenged to look at that in the new year as well.

Again, more to say about timing later on.

So, we may accumulate some cash, we may then find a need for it very quickly.

But given our earnings outlook, I think it's going to be a continual challenge to manage our cash position, because I think the future is very, very bright for the company.

Well, just following up on your cash position.

You had mentioned, obviously, some of the CapEx projects, projects you were just mentioning, and that you could consider a share repurchase.

What about from a dividend standpoint?

Do you currently have any restrictions?

I know you had some in your bank facility and in your 9.5% high yields on increasing the dividend.

And is a dividend increase something you would consider?

We would.

I think, restriction is at about $0.10, and we are at 7.5.

I think the initial target we chose is around 1% as the stock started to trade in the $40 arena.

Certainly that would be begging the question for a $0.10 dividend to achieve a 1% target.

But, clearly there is room for modest improvement without jeopardizing earnings or cash needs -- I'm sorry, more specifically, cash needs of the company.

Beyond $0.10, we really need to seek approval of our lending group, which I think would be easy to accomplish.

But perhaps the more stronger step might be a share buyback.

But we have nothing in place at this point in time.

And then lastly, on your surcharge, on your scrap surcharge, is that still in place and are you getting any pushback from your end-user customers?

It is still in place.

I think recently at Butler, we moved the benchmark up from $170 to $200, which helps mitigate, to some extent, the surcharge burden that is placed on our clients.

I don't see us moving very far off of that kind of a number in the future.

I think we'll just move forward with 200, as perhaps a better future benchmark.

Right now, with global commodities being under the kind of pressure they are, I don't think we are going to achieve a $200 (indiscernible) in the near-term, but you never know what market circumstances are going to be like a year and a half from now.

The surcharge mechanisms at the other two divisions will remain in place as they have been advertised.

Could we adjust the base at the SBQ division and lower the surcharge?

That's entirely possible.

We have not done that and are contemplating doing that.

It's best just to trading the dollars from one camp to the other, if you well.

There's really no impact on price; prices remain very strong in that marketplace.

And as you know, the competition in the White Plains arena has chosen to keep market pricing fairly stable by adjusting surcharges up when scrap costs are up.

And when they move backwards, adjusting them down.

And likewise, moving the base price around.

And I think the effort there is really one of stability.

One of the worst things we have for future projects is instability.

So if we are going to see some growth activity, and I think there's a fair chance we will in the new year, stable pricing is not at all a bad thing.

Andrew O'Conner (ph) Strong Capital.

Congratulations on your quarter.

Keith, I wanted to know if you could elaborate -- what are the more favorable terms that you allude to for your new supply agreements towards the end of the press release?

And perhaps what volumes are associated with the new agreement and the duration of the contracts?

Thanks so much.

They are certainly not all in place yet.

We are still talking to a lot of people.

But as you can probably well imagine, if you go back to early 2000-- or late 2003, at a time when many of these contracts were put in place, August, September, October timeframe -- selling values in the marketplace were fairly low.

As everything changed over the course of time and surcharges needed to be introduced and implemented, they became unfortunately a way of life that we have to deal with at this point in time.

Unless we move them all into the base pricing camp, and I don't think we are prepared to do that at this point in time.

The volumes are going to vary.

We call them supply agreements now because base prices are going to be up over what they were a year ago, but down from where they were two months ago.

So somewhere in between.

So base pricing will be higher, the surcharge will be applied.

I think we're looking at durations of 180 day kind of number instead of a year, for the most part.

Maybe some of them only 90 days with re-openers.

We do want to be caught in a situation where we had a real low base price that we're obligated to honor for a year, and have what we had happened to us last year where we could have actually, on a net tonnage, probably garnered another $200.

So we're trying to protect ourselves against giant surges in one direction or the other that we cannot adjust to.

John, any further comment on that?

No, just to back up into 2004 -- last year we had a number of agreements, Andrew, that were calendar year in nature, but they are renegotiable at mid-year.

So, we lived with some 2003 prices through the first half of the year that was reflected in O&R, our revenue structure early in the year.

And they were renegotiated to 6-volume variable price arrangements in the second half.

So that's actually what Keith was addressing there.

And those will work good for us, they work good for our customers.

We are in the process now of looking forward at 2005, where we have tied up a number of arrangements on a dedicated scrap basis, and some others on index pricing.

We're trying all kinds of different and creative and innovative ways to address the marketplace and to protect our circumstances and our customers circumstances.

And so far, I would tell you it is going very well.

Thanks, John.

And then secondly, if I might, can you further characterize or elaborate on the impact of using liquid pig iron on your electric furnace production?

And then, I'm wondering, can you quantify the benefits?

Mark?

The benefit probably matched about $20 a ton of liquid pig iron introduced to the electric (indiscernible).

Those savings, obviously, being reduced power, reduced electrical costs and a few other things.

Any qualitative comments, Mark?

I think once we get into a steady-state supply of up to 25 or 30,000 tons a month, then you could quite easily see about a 15 -- conservatively 15, maybe 20% improved productivity rates for those bonuses.

Yields, obviously the liquid pig iron is pure, a product being put into the electric outfurnace.

It is purer than cold pig iron that we buy overseas right now.

Obviously the carbon content is about 2.5% versus 4, 4.5% for the regular pig iron.

So there's greater iron in that material.

Keith alluded to sort of a pretax positive impact at the rate of 450, 500,000 last month.

That was at a roughly conservative transfer price, $208 a ton for SDI and 380 for liquid pig iron.

So we think there's -- we've got a lot of work to do there.

The challenge at IDI right now is not process, it's not technology; it's purely one of overcoming our mechanical equipment challenges to bring the availability of the plant up to where it should be up to, perhaps 90% (ph).

Aldo Mazzaferro, Goldman Sachs.

On your comment on your order book, I wanted to kind of drill down a little bit on that.

You said your orders are weak today, which could be a number of reasons.

It could be seasonality, or maybe loss of share to imports, or maybe final demand weakening.

I'm wondering if you could help us understand what's -- and also, you did say that you expect things to change when you get toward the end of the quarter.

I'm wondering, what factors might be leading you to believe that?

I think you're going to see a lot of people -- the fourth quarter historically has been a little weaker quarter for the steel community.

And with that softness every year, you're talking to people about supply agreements or arrangements for the next year, the following year, etc.

So I think it's at that time, at that moment in time, when the opportunity is the greatest to negotiate a better arrangement than probably could've been negotiated in the middle of the third quarter.

So I think you're going to see inventories fall a little bit as a result of a little softer buying activity.

I think imports did have an impact.

I think there is no doubt about it.

The order entry rate is certainly good enough to sustain us, but at the same time, I would tell you, we are not full.

So the answer to your question of -- have you got your arms around all your orders for the fourth quarter?

The answer is no, we have not at this point in time.

Probably pretty close to that at Pittsboro, but a little further away at the other two operating units.

John, any comments?

No, I think you covered it well, Keith.

So, Keith, if you get to the middle or end of the fourth quarter and you still see weak orders, is your next response another price cut?

Or would you think about taking volume off?

I think we would -- I don't know what we would do.

We are not hesitant to draw back capacity somewhat.

I think certainly -- I just think that there's -- I believe that the first quarter is going to be fairly strong.

I would be surprised if it wasn't.

But we'll just have to address that issue when it gets here.

Charles Bradford, The Bradford Research Company.

This morning, I guess, AK Steel (ph) announced a reduction in their surcharge for November on flat roll, hot rolled carbon in any case.

Have you published or provided a number that you are going to use for November for flat rolled?

Yes, we have a November surcharge -- Chuck, this is John -- is $220 a ton.

It's the arithmetic of the Chicago market, Bush-linked (ph) consumer buying price of $420 minus $200, which is the new baseline for us.

So, effectively, we have reduced the surcharge by $30 a ton.

So where does that put your finished product price right now for hot-rolled?

Right where it should be.

If you don't mind, that's about as far as I want to take that.

Chuck, we're not all that far off of the press out there.

I think everybody knows the hot rolled market is somewhat south of 700, and probably a little bit north of 600.

So, we'll let you take that from there.

Excuse me, 650, a little north of 650, a little south of 700.

And in that range is the playground today, I would say.

Chuck, you know my customers as well as I do, so I'm sure you could figure that out in about three phone calls.

Yes, but one of your competitors has been pretty aggressive.

I guess they were cut back a lot by General Motors.

And they had a lot of room to fill.

Yes, there is a loose cannon or two out there.

That's all I can tell you.

That too shall pass.

Yes.

Hopefully.

Thank you.

David Litchman, Merrill Lynch.

Where do you see the scrap markets?

Do you see them continuing to tighten?

Or do you see them softening going forward?

Or where do you sort of see the scrap markets right now?

Well, I don't know that there's any tremendous offshore buying going on.

We like to write a lot about a boat or two here and there.

But I don't think the surge is anything like what we saw a year or so ago.

And I think the prompt scrap is going to be a reflection, obviously, of demand in the industrial arena.

I see it probably growing.

But at the same time, if the first quarter is a good quarter, there will be robust demand.

So, like I said in the statement, I see scrap prices remaining fairly high, although they can be mitigated.

There's been a number of us, I can tell you, people besides SDI, that have bought a tremendous amount of pig iron.

We have an avalanche of it, you might say, headed our way.

In fact, we've got more pig iron coming up the river than we have ports and docks to unload it.

So we are going to be, certainly, at pretty attractive numbers by comparison to scrap.

So we are going to be a lot less dependant on prompt grades of scrap at these kind of what I think are excessive valuations, whereas we used to be significantly dependent.

So we are going to have choices.

I would tell you that the prompt market, certainly in my opinion, has gotten ahead of itself.

And I'm sure the purveyors will tell you it is still a tight prompt market place.

I think there's quite a spread, certainly, that exists between prompt scrap and obsolete grades.

And obsolete grades have moved up aggressively.

Unfortunately, the prompt scrap moved up as well.

There's not a lot of data out there now.

Ford's not publishing their list and Chrysler does not publish, although the company that handles their scrap tends to leak that information out.

But I think, ISRI (ph) I think, agreed with the steel community that these publications are more of a nuisance and they set directions and tones that are not realistic at times in the market, because there are so few tons being auctioned.

You've got 4 or 5000 tons attempting to drive 5 million tons of trades.

It is not transparent, it is not indicative of where the market is, in my opinion.

It is a fishing expedition by people that speculate on the marketplace.

And I'd think it does more harm than it does good.

And I think a fair amount of scrap is now being traded in industries we refer to rem-dust (ph), which is Management Sciences Corporation's data.

I think there's over 3 million tons of activity there that tends to be more reflective of where the real markets are at on some of these grades.

But I think we either need several hundred thousand tons of material being offered for sale on a prompt basis, or we need none, quite frankly.

Because the little bit that is out there is just not indicative of, I think, real market activity from time to time.

And so, hopefully in the future we can have a better clearing mechanism than we have today.

But I think scrap is going to remain fairly tight globally.

And I think you're not going to see scrap back up from $400 to $200 on a prompt basis anytime soon.

Could we experience some softness at an unusual point in time?

I know everybody believes that November/December are the months where scrap surges, but as I said, SDI does not need as much prompt scrap, clearly, because of the tremendous volume of pig iron we have flowing to us.

I think there's some other shops that have tremendous volume of pig iron flowing at them as well, and maybe it'll take a little bit of the edge off that market.

That's the best answer I have for you.

Just a different topic.

On Mesabi Nugget, once you get the permit, how long will it take to construct the facility?

About a year.

Nate Curruthers (ph) Applebaum Research.

I had a follow-up about your new contract agreements.

I would not call them contracts;

I would call them supply agreements.

Okay, supply agreements.

I apologize.

They can be abrogated by either party with reasonable notice.

We are not in business of suing our customers.

They want a secure volume, we want to secure their business throughout the year.

And we are willing to give these guys a base pricing we think is indicative of the market circumstances at the time, plus the surcharge.

And that's how I characterize these agreements.

How significant a role do you see the new supply agreements having on your fourth-quarter results and maybe going into the first half of 2005?

Well, like I said, you never reach the peak of the spot market.

Very few people ever do.

And that's why I told you earlier that our numbers are not going to change a lot.

I know there are a lot of expectations out there that pricing is going to be off $100.

It's just not going to be.

And I think there's a fair chance that, resource costs remaining fairly high, that it could strengthen going into the first quarter a little bit.

Is there going to be a runaway set of circumstances where hot rolled is going to 800?

I really don't believe that;

I don't believe there will be.

You never know when you have short supply, but I believe we are in a trading range in the marketplace that is indicative of world markets.

Therefore, I don't see a lot of disruption.

Timna Tanners, UBS.

I wanted to ask you a bit about the rail progress.

If you could just elaborate a bit on when you'd expect that timing.

And also, how you'd expect to enter that market relative to the negotiated prices that we're hearing.

From a timing perspective, we've been enrolling rail just about every week.

And casting rail about every other week.

And most of this has been short runs for testing purposes.

We are very pleased with the performance, both the caster last week and the rolling mill.

One of the class-one railroads we have talked to has asked for samples to be sent directly to the laboratories for their dissection, similar to what we do to it, from cutting them and etching them in acid and looking at them under scanning electron microscopes and so forth.

And so, we are very confident that that can be accomplished in about a month.

And if we are as successful as I think we can be, we have had orders offered to us upon successful completion of these laboratory tests that range from 10 to 30,000 tons.

These are spot opportunities that they have available.

I can't comment on contracts, as we have none with any of the railroads.

But we believe there is a healthy spot market out there, and we will begin participating in it.

Can you address the pricing component?

All I really wanted to say was that it is north of where the beams are.

We are still in discussions with people and I don't think it would be appropriate to corner anybody with a number.

Mark Parr, Keybanc Capital Markets.

Keith, I know that you don't need a soapbox to stand on or someone to give you a soapbox to stand on, you are quite capable of getting up there on your own.

But I was wondering if you could talk a little bit about how you feel the industry has performed in this consolidated environment.

What sort of a grade would you give the steel industry in '04 for disciplined production and for holding the line on pricing, given the fact that it's consolidated.

I'd give them excellent marks, actually.

I think there is more discipline in the market.

We are having to -- we are just not dealing with the desperate acts of dying man.

Most of these companies or organizations have been organized very while.

They have different cost structures that exist today because of many factors -- debt that isn't there, capital costs that aren't there, legacy costs that aren't there, and in the case of some of the integrateds, I think discipline has been the order of the day throughout 2004 in a period of rather tight supply.

So I think I would rate the industry's performance in '04 as excellent, and we will see how it goes in '05.

I think that without a heavy influence of imports and the economy after the election, I believe, will continue to run.

I think a little bit of softness in the economy, perhaps in this time frame, but I believe that there's going to be a good opportunity for all of us to sell into these markets on a go-forward basis.

I appreciate it.

I just wanted one follow-up, if I could.

And John may want to pitch in here if he's still on the line.

I'm just curious -- there does seem to be perhaps some creeping concern here on a macro basis that high oil prices are taking a toll on economic growth.

And I'm wondering if you guys are seeing anything in your order book that would indicate projects being delayed, customers complaining about demand falling off, or anything that would suggest that economic growth is slowing.

Mark, this is John.

I'm still on the line.

I would tell you that in certain market segments, we're seeing some influence of imports picking up rather significant -- residential doors and garage doors is an example of that, that's certainly part of the construction market.

But beyond that, nothing specific.

Nothing that I'm aware of in Dick's area or Glenn's area that would suggest oil prices are having an impact on the planned circumstances of most market segments in 2005.

The only thing I read, much like you, is still some concerns about the direct investment in this market relative to others.

It's the only thing I can think of off the top of my head.

In our morning meeting this morning, Mark, Bert Hollman from New Millennium was talking about energy.

And I believe his comments were, if you go back to 1980 and adjust oil for inflation, you'd be in the $75 range per barrel.

So I guess his theory was that he did not see it being a major impactor at this point in time.

But that's pretty hard to get your arms around at this point in time.

I was just curious.

Anyway, I just wanted to add my congratulations -- phenomenal quarter and really looking forward to more good news moving into next year.

Certainly, I think the earnings range we put out is -- I still would tell you it would be our second-best quarter, better than any year we've ever had.

Still in a pretty good zip code, I think.

Nothing like having a record year in 90 days, huh?

There you go.

Well said.

Adam Graf, Bear Stearns.

I was hoping that you guys could go through your traditional breakdown of Flat Rolled shipments.

And also, I noticed this quarter you guys gave a breakout of consolidated shipments and pricing for your structural and your bar division.

If you could give those on a historic basis, just for first and second quarter, I would really appreciate that.

Yes, I can help you out with that.

Flat Roll shipments for the third quarter by product -- hot band was 232,000; pickled and oiled was 27,000; cold-rolled was 47,000; hot-rolled galvanized was 119; cold-rolled galvanized, 46;

Jeffersonville, 76; and post-annealed about 2.

The painted products ended up being about 62,000, which was a record for this quarter.

As far as the average pricing per division, the Flat Roll Mill's second quarter was $615, so it was up about 129 this quarter.

And for the first quarter, it was 489.

Structural Mill, its average pricing in the second quarter was 503, it was up 36.

And for the first quarter, it was 431.

And Bar Products was, second quarter, 498, up 143, and first quarter was 467.

I'm sorry, the first quarter flat rolled?

First quarter flat rolled was 49.

Anthony Rizzuto, Bear Stearns.

Thank you, but my questions have been answered.

And for a follow-up, we return to Allen Roop with Principled Capital.

Sorry, I didn't even realize I was back on.

I had two questions -- one contract or supply agreement follow-up.

What was the percentage sold under contract, for lack of a better term, for '04?

And what does that look like for '05?

Did you say that or will you say that?

Well, contract is a strange term in the world in which we live.

I would tell you that probably at least half of what we do is some sort of supply agreement.

But I wouldn't call them contracts today.

I appreciate that.

Even orders on the order of magnitude, is the percentage sold under some sort of fixed supply agreement going up or down?

In flat rolled, 50%.

There is essentially no supply agreement in beams.

And I would tell you that most of the business that we've transacted at Pittsboro has been in the spot market, so I don't really have a handle on that, but we're working with --

But that is changing --

That's changing, that's right.

We're working more in a supply agreement contact stuff for 2005 with a number of our customers.

Okay, now that's helpful.

And then the other question forgot to ask about Mesabi was related to the ownership structure.

So would we see something firm on ownership structure when we hear something like a (indiscernible) ?

I think you'll probably see something firm by the first of the year.

Just curious.

Thanks guys.

Mark Parr, with Keybanc Capital Markets.

Just for clarification, on the supply agreement that you're negotiating, are you looking at -- John, you had talked about doing a number of different things.

I know that one of your competitors is out with like a $0.30 all-in number for '05.

I'm just curious -- are you really leaning toward a base price plus scrap escalator?

Or are you looking at more toward all-in pricing?

We are not entertaining any fixed-price fixed-volume arrangements.

It's a combination of a base price, surcharge in effect, and in some cases, it's either tied to scrap or it's subject to an appropriate index, whether that be CRU or Purchasing Magazine or something else that would appeal to both us and our customer in the context of a specific opportunity.

Mark, the $0.30 numbers that I heard about are more related to a little export business.

Have you heard differently?

I had just heard that -- I heard that there were $0.30 kind of numbers being let out for a good part of '05.

This would be not from one of your mini-mill competitors, but from one of your integrated competitors.

Well, if that's the case, I guess they will fill up quickly, then we will take advantage of what's coming.

All right.

Well, I just wanted to pass that on.

Ladies and gentlemen, this does conclude our Q&A session.

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

Thank you, Rufus.

Obviously, this was, I think, one of the better conference calls we've had, with probably approaching 100 participants in the end -- certainly a record number of interested parties.

I would just remind everyone that we've been there through thick and thin.

This company gave birth to its first pound of steel in 1996, and has really had a pretty good track record throughout history, and we have not disappointed, I believe, from earnings perspective that I can remember, throughout the years.

I'd just remind everyone, I believe we have the best metrics out there today.

Thank you for your confidence in us, and thank you for your interest in our company.

Ladies and gentlemen, this does conclude today's Steel Dynamics third-quarter earnings conference call.

For those of you that were unable to ask a question, we do ask that you contact Steel Dynamics at www.SteelDynamics.com and leave your question for Mr. Fred Warner.

Again, those not able to ask their question, please contact Mr. Fred Warner at www.SteelDynamics.com.

We do appreciate your participation, and you may disconnect at this time.