Steel Dynamics Inc (STLD) 2004 Q4 法說會逐字稿

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

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

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

Mr. Gary Heasley, Vice President and CFO;

Mr. Mark Millett, Vice President;

Mr. Dick Teets, Vice President;

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

At this time, for opening remarks I will turn the conference to Mr. Fred Warner.

Please go ahead, sir.

Good morning.

Welcome to this February 3, 2005 conference call covering fourth-quarter and full-year 2004 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, SteelDynamics.com.

After today's management discussion, we will open the call for questions.

Please make your question brief and to the point.

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

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

Good morning, ladies and gentlemen.

Obviously the steel industry had a tremendous year on the whole, and the results for Steel Dynamics specifically were nothing less than astounding or astonishing.

We had certainly the best year we've ever had.

Our revenue more than doubled, as you read in the press release, exceeding $2 billion.

Our net income approached $300 million and our earnings were $5.27 a share.

As it relates to the fourth quarter, we earned $1.47 per diluted share, slightly below most analyst predictions.

And I will talk a little bit about that miss in greater detail as we move through the conversation this morning.

I would like to mention that we now have, as you could read, 1620 individuals working for Steel Dynamics.

And therefore, our revenues per employee reached 1.4 million, a pretty hefty number.

As noted, all three of our steel making operations established records for shipping volumes, sales and profits.

And certainly we wanted to say thank you to all of our employees that are listening for the tremendous year they've provided the Company.

We broke records just about every place throughout the Company.

The shipments this year reached 3.4 million tons.

I might comment that I think that next year we will experience another 10 percent growth.

I believe we will be in the 3 million 8 range, maybe 3 million 850, as we continue to ramp up capacity at our two newer installations, Columbia City and Pittsboro.

So we're looking forward to another good year, and I will speak to that a little later on in the conference call as well.

As I had stated earlier back in October, when we were talking about the results for the third quarter, I think someone asked whether or not I thought pricing was going to change significantly.

And I think the comment I made was I think it was going to be relatively unchanged.

And for the most part it was.

The average price moved up from 706 to $710.

A lot of that had to do probably with mix more than pricing changing in and of itself.

As noted in the press release, the cost of scrap melted per net ton charged, if you will, was up $40.

And this is the real reason I think our earnings were off from our forecast slightly.

I think I had commented that I thought scrap would be up 30 to $35.

If you pick the middle of that, 32.50, that means relative to where we thought we were going to be, scrap was about $7.50 a ton higher on roughly 1 million tons, rough numbers, charged into the furnace.

When you take that times 0.94 to consider the profit-sharing effect and times 9.62 to look at the tax effect, in effect boils down to about 8 cents a diluted share.

So it really helps explain why we had the miss that we did in the fourth quarter relative to our projections.

I might say that with the kind of volatility we were experiencing in the fourth quarter in the marketplace -- the marketplace for finished products, as well as raw materials consumed -- it was a very, very difficult quarter to project.

I think the quarter and the first few weeks of October started out fairly healthy, and the marketplace got sloppy and soft in late November, after the conference call and into the month November.

And I think order entry was very, very weak, in the November timeframe.

It rebounded somewhat in January, and John Nolan will speak to the first quarter here in his comments.

But I think you're going to find that the order entry has picked up substantially recently.

So it was just a tough quarter with the softness in the marketplace coupled with scrap costs literally going through the roof.

Obviously those results have been reversed.

As you all know, scrap went down in December and January, two months in which normally you see scrap escalate, which represents the softness that is in that marketplace.

I think that softness is in large part due to the fact that the mills built their inventories during periods of tightness, and switched their product mixes to more pig iron and scrap substitutes.

And we bought an enormous amount of pig iron at well below the price for the prime grades of scrap, which gave us inventory positions we weren't too happy with.

But at the same time, when we're that well inventoried, as were other steel makers, I think it played a key role in bringing the price of scrap down.

The export market I think has been fairly weak for scrap in recent months.

So the combination of the weak export market and high inventories led to the collapse.

I think you've heard me say that I believe the prime grades had about $100 of fluff in them anyway, and a lot of that air is now coming out of the balloon at this point in time.

So I think on a go-forward basis we're going to see much improved cost structures related principally to scrap.

We are not going to see a lot of that impact until later on in the first quarter, because of the heavy inventory position we have, which needed to be worked off in the months if December, January and even into February.

So on a linked-quarter basis, I think scrap will be down 20 to $25 a ton.

It went up 40 in the fourth; got to go down 20, $25 in the first quarter.

Now it will obviously be down much more than that, and I think we will see a pretty sizable impact in our March financials and April and May financials as we garner and gather a lot of scrap at much more affordable prices, if you will.

We noted in the call that we also have -- our results were affected by a special performance bonus that our Board decided to award our employees for the exceptional performance that existed.

I think we believe that Steel Dynamics is the most efficient steel maker in the world in terms of the number of man-hours that it takes to produce a ton of steel.

And that award was well-deserved by our employees.

We also were involved in some rather sizable charitable activities during the quarter, and they affected -- collectively those two items affected our earnings by about a nickel.

If you look at the $1.47 that was earned in the quarter, and add back the nickel and the couple of pennies for energy and alloys above expectation, and the 8 cents that I mentioned to you earlier, the scrap impact, minus the price impact because prices were a little bit better, we could have been in the $1.60 range without those considerations or impacts.

And as you probably have already noted in comparing the fourth quarter to the third quarter, our volume was off.

And if you take 50,000 tons of shipping volume declines versus our own forecast times the kind of margins we earned, that probably had another 7 to 10 cent impact on earnings.

So for those who are looking for explanations as to why we were off slightly, I think that would adequately explain it.

But rather than dwelling on the negative, I'd like to dwell on the positive.

This was the second-best quarter the Company has ever experienced.

I do believe on a go-forward basis that we're looking in the first quarter somewhere between $1.35 and $1.55 per share.

That's the best guess we have at this point in time.

And I would guide you to the lower end of it, $1.40-ish, or pick the middle of the road, $1.45, which would basically tell you that the first quarter is going to look alike the fourth quarter, and we will again come close to equaling our second-best quarter in our corporate history.

So all in all, we think it was an awfully good quarter and just a great year.

As we look at the year, I think that we're going to see a fairly strong first half of the year; a little firmer estimate on the first quarter then we can give you on the second, but I think the second quarter will exceed the first quarter.

I don't have any prediction for how much, but it will exceed it, I am fairly confident at this point in time.

My crystal ball is certainly not big enough to go out to Q3 or Q4.

But when consider the volume increases we are going to have as a result of newer operation coming up to full capacity, or close to full capacity, the conditions in the market place, coupled with the cost of resources and the increased volume is probably going to give Steel Dynamics a pretty good year.

It would be my guess that our year would exceed -- our 2005 could exceed 2004, but I don't have any firm numbers for you at this point in time.

I think the highlights for 2004 really revolved largely around the unbelievably quick ramp up of the Bar Products Division down in Pittsboro.

That team just did an incredible job, producing 318,000 tons in their very first year.

For those of you who remember the old Qualitech, that operation couldn't get past 8 to 10,000 tons a year -- a month and couldn't get past 100,000 tons a year in its old format, and it's currently operating right now at about a 450,000 tons production rate as we speak.

The backlog is really in good shape there.

We have a strong order book at Pittsboro, and that team is just doing a really good job with the marketplace and with the cost structure of that facility.

The Flat Roll Division, as I said, has historically been our dominant earnings producer, and certainly that was no different in '04.

They did just a fabulous job from an earnings perspective, and at the same time brought on our new paint line and brought the Jeffersonville galvanizing facility up to full capacity.

The paint line, I might mention, is actually running at more than our expected rate of capacity, and we have very strong earnings being produced on the paint line at this point in time.

Pricing is very good, and the order book is very good for those products.

I think hot rolled is in good shape, pickled and oils is in good shape, painted product, cold rolled.

We have decent order input.

I think if there is a softness that existed in the market it was related to coated products.

That market got soft with a lot of imports from India in the fourth quarter.

We see some strength returning.

But that was probably our softest product line, or product lines, in the fourth quarter, but we think we're rebounding at this point in time.

The Structural & Rail Division in its first year of operation barely broke even, if you will, and in its second year has some nice earnings and increased its shipments by 59 percent.

The backlog there -- Dick will speak to that -- is in pretty good shape.

In fact, we've had awfully good order entry in the past several weeks at the wide-flange division.

New Millennium had its very best year.

And as most of you know, we're constructing a second plant in Lake City, Florida.

That plant is way ahead of schedule and they will likely start fabricating products at the end of February and in early March.

So that project is on time and on budget.

Iron Dynamics, as we noted, operated at about half of its capability and produced its first pre-tax net income on a quarterly basis.

The projects that are the focus of the future is the Mesabi Nugget effort, and have nothing really new to report.

We're still moving forward to obtain air permits in Indiana.

We think Indiana is on target.

Minnesota, on the other hand, I have no new news.

It potentially could be on target as well.

2004, as I said earlier, was just an extraordinary year, driven largely by global demand, global demand being led by the marketplace in Asia and more specifically China.

I know there's been a lot written about the impacts of Chinese exports, and I think that's a pretty misunderstood topic for the most part, at least as it impacts Steel Dynamics.

China, I think, will still remain short on hot rolled steels or flat rolled products in the near term and will continue to build capacity to take care of their growing needs.

I don't think they're going to be huge exporters of flat rolled into the marketplace, even as they slow grow slightly.

As most of you know, a lot of the construction is concrete and rebar, which are long products that we're not currently involved in.

They build a very little out of wide-flange beams, purchasing some of their needs from Korea and Japan.

I think they are -- I inquired the other day as to how many structural mills actually were in China, and I think there's three, and I think -- one big and two small ones.

I think their total capacity is, I am told, is around 1 million tons.

So it's not a lot of tonnage, and it's not going to be an export threat.

And when you look at SBQ bars, which is what we do at Pittsboro, they only have two facilities, one of them a Japanese owned facility, I believe in Shanghai.

And their market needs for SBQ bars are growing rapidly, so I don't see the SBQ marketplace being affected by China.

So I think China is an over-written about and worried about topic that will not have a tremendous impact on US producers as we move forward.

I think we're going to see pricing probably move ahead slightly in late the first quarter, early second quarter.

And I think that, coupled with the falling scrap costs, which will flow through largely for us in the second quarter more so than the first quarter, will produce margin spreads that are better than we have enjoyed on a more recent basis.

So I think that completes my comments as regards this conference call, and I want to turn to Mark Millett next for his report on the operating activities.

Good morning, ladies and gentlemen.

Very little to add, to be honest.

Obviously the mill ran extremely well all year, posting new highs for both productivity and shipments.

We did get approval for about a 6, $6.5 million capital expenditure principally for caster modification, which will take place late '05 and through '06 to bring the capacity capability up to about 2.7, 2.8 million tons.

That rate wouldn't be expected to be achieved till about 2007 given the ramp up, but hopefully that extra 300,000 tons will drive our efficiency up and our man-hours return below the 3/10 man hour (indiscernible) exists today.

The mill is in great shape.

It's safe, well maintained and the team has got an incredible esprit de corps and continues to operate well.

At IDI we had some better success in the fourth quarter.

We hit two months at 18,000 tons, 18,500 tons of liquid pig iron and HPI (ph) for a total of about 50,000 tons for the month.

As Keith said, we're kind of happy.

This is our first pre-tax income.

That project was giving us a lot of heartache and a lot of sweat and a lot of tears years over the years.

But it's reaching some semblance of viability, we do believe.

The primary issues remain not technological.

I think the technology is well proven.

But the issues are mechanical equipment availability, just keeping the plant running on a 24 hour a day, 7 day a week basis.

We've got solutions in hand.

Hopefully, we will get to 25,000 tons a month, which would assure future profitability.

The Nugget initiatives, basically we're almost at a synergy stage for a partnership agreement between Cleveland-Cliffs, Ferrometrics and Kobe.

That should be complete here in the next week or so.

We're pursuing permits both in Minnesota and Indiana, and they are in progress today.

We would expect to start construction this year and have a plant operational perhaps next summer of '06.

Thank you Mark.

Dick?

Thanks, Keith.

Good morning, everyone.

As Keith mentioned, the shipments from Columbia City were slightly off in the fourth quarter.

We decided to forego larger inventories and instead developed additional products.

We added sections larger than originally contemplated when we purchased the mill.

And on the small end of the spectrum, we began operating a 6x6 section.

And next week actually we expected to commission both a 6x4, as well as 12 inch channels.

On our rail products we ran into a cooling issue with the caster.

And so while we worked on a solution to that situation, we directed the rolling mill to commission to 115 pound per yard section in addition to the 141 already being rolled.

We made a few hundred tons of shipments in the fourth quarter and continue to supply the non-critical market with that product.

We are making modifications to the casting equipment and operating practices to resolve the cooling issue, and we expect to be in a position to send samples to the roads in the second quarter.

As to the future, we're experiencing an improving backlog.

Our customers are seeing signs of what they believe is the beginning of a recovery to the nonresidential construction market.

At the mill, in 2005 we're installing a cut to weight system at the caster and lengthening the rolling mill cooling bed from 240 to 320 feet.

Both of those projects will improve our yield and our productivity in the rolling mill.

That's about it from Columbia City.

John Nolan, we will turn to you for your comments about the marketplace.

I just want to reiterate Dick's positive note about the construction sheet market.

There are other metrics that suggest the same thing.

I want to take a moment just to address one that I follow carefully, and that again is return on sales.

Our fourth-quarter and calendar-year 2004 return on sales ratio was 14 percent, which is, again, the highest in industry for those companies that have reported the date.

Credit for those accomplishments belong to the men and women that make and sell our products and to the disciplined approach that we take to the marketplace and have taken to the marketplace.

Now to understand the market at the moment, you really need to look at three things, and we will look at those quickly.

First, prime scrap flow -- they continue to be very good, very strong, suggesting manufacturing activity is reasonable to strong.

This fact is also affirmed by recent DOC reports, and if all of you have read the ISM survey on US manufacturing activity.

Number two, you've got to look at the import surge in the second half of 2004.

I think hot rolled is probably the best example.

We saw 4.2 million short tons of hot rolled bands hit US ports of arrival in 2004, which was up about 83 percent from 2003.

Now, 2.6 million tons of those hit from July to December, and that was up nearly 60 percent from the first half of the year.

Those kinds of increments of offshore supply spike inventories and naturally cause prices to drift down, usually to levels of import prices FOB US port of arrival, and that's exactly where we are today.

Whether you are talking about beams and foreign fighter (ph) spear-headed by Nucor and simply US hot band spot market prices, you're seeing prices trading right now in the area of US of import prices port of arrival.

And I don't see them going any further, frankly.

Number three, there is a complete -- and I am going to overstate this just for emphasis -- a complete lack of buyer interest in imports at the moment.

I am hearing this from all of the significant buyers that we deal with.

Frankly, this is reinforced by the daily inquiries we are seeing right now from trading companies exploring our interest in exporting products to Europe and Asia, particularly -- and this may surprise you -- India at the moment.

Recall Keith's remark about Indian galvanized hitting the US market.

I think that is going to dry up relatively quickly.

Indian and Chinese price of CNF (ph) are in the low to mid $600 a metric ton, and frankly we turned an opportunity this morning to export light gauge hot rolled to China at $565 a metric ton before any (ph) production.

Lastly, and I am happy to affirm Keith's earlier remark, January 2005 was our best booking month since April of 2004.

And admittedly prices are a tad bit off their peak of September 2004, but again, you have got to attribute that to the late 2004 import surge.

We see leadtimes moving out, and we see prices firming up at present levels and moving up again in late first quarter and early second quarter deliveries.

Thank you Keith.

Gary, we are going to turn to you for your first financial report as the new CFO of Steel Dynamics.

Thanks Keith.

I am happy to be here to give it.

A couple of quick comments.

First off, on long-term debt you will notice that our long-term debt has come down dramatically.

We have paid off $100 million that was outstanding on the revolver in September.

We also saw a continued increase in accounts receivable and inventories, and accounts receivable up substantially for December of '03 obviously, driven largely by pricing.

We have a very firm grip on credit position with our customers.

We have more than 97 percent of our AR under 60 days, and the numbers look good there.

The inventory increase driven largely by raw materials that Keith mentioned earlier.

And obviously then our credit statistics have improved dramatically over the year.

For the year -- well, for the fourth quarter interest expense was 9.9 million.

We had about 1.5 of that capitalized, bringing our year-to-date numbers to 45.8 million of interest expense; about 6.9 of that capitalized.

Our tax rate had been at 38 percent.

As in our previous quarters, we're now expecting it in '05 to climb to about 38.5.

Taking a look at strategies we can use to mitigate increases in taxes.

Cash paid taxes for the quarter, 53,075,000, and then for the year, 78.7 million.

That is about all that I've got Keith, and back to you.

Thank you Gary.

We might note that -- I'm sure you're aware of the fact that after our last conference call, the Company initiated a stock repurchase program.

And from time to time when there's been a softness, we've taken advantage of that program and repurchased shares.

I think we're somewhere in the zip code of 2.5 million share repurchased at this point in time.

So the stock repurchase program was not just all fluff and puff; we're active in the marketplace.

And as you know, we're authorized to buy back as much as 5 million shares.

I can't predict that that's going to happen.

I just can tell you what has happened at this point in time.

So I think you noted that the dividend did increase, and is up to 10 cents a share per quarter.

And so we expect to maintain that obviously on a go-forward basis.

I don't know that I have any other significant comments.

Lars, I think it's probably time to turn it over to the Q&A.

(OPERATOR INSTRUCTIONS) Aldo Mazzaferro, Goldman Sachs.

Can you tell us a little bit about the energy costs, a little more detailed progression, say, from third quarter to fourth quarter, and what exactly caused the energy costs to go up, and what you might think about implications for first quarter, second quarter?

I think to a large extent we're hedged on gas, but not totally, and therefore had some exposure to increasing prices that.

But probably more importantly, the energy thing -- I should probably have included alloys in there.

Alloys went up a little more sharply than we thought they were going to in the quarter.

And as it relates to electrical energy, it was a very cold December in Indiana.

And you have choices.

The price doesn't change, but we have an interruptible feature contract, as you know, and therefore we have the opportunity to buy through it.

Well, if your energy is 3 cents, you might make the choice to buy through it at a nickel, but you're not going to make a choice to buy through it at a dime kind of thing.

And if you are buying through interruptible hours at those levels, it does spike the energy costs.

Dick experiences the same thing at Columbia City, because when you have cold weather he's free to buy on the open market, but the quotes that are out there with the kind of temperatures we have weren't what we were experiencing in Q3.

So that in larger (ph) lead to energy costs being a little higher -- electrical energy costs being a little higher than we planned, gas costs being a little higher than we had planned, and alloy costs being a little higher than we had planned.

I think that you're going to see that turn backwards here as we reach February, March, April timeframe.

It's been a fairly cold January, and I don't think we had any real different results in January than we did in December.

Keith, you said you bought 2.5 million shares.

Was that all in the fourth quarter?

No.

Part of it was the fourth quarter and some of it has actually occurred in January.

Can you say how much was in the fourth quarter roughly?

Fourth quarter, Theresa tells me it was 1.6.

Thanks.

Chris Olin, Longbow Research.

I just wanted to go through some of your flat rolled assumptions.

I'm having a hard time understanding the pricing outlook.

I agree imports are down, but at the same time it looks like consumption levels should be declining, especially when you look at automotive.

Inventories are pretty high throughout the supply chain, and no one seems to be cutting back production.

You've got raw material costs coming down, so that would suggest surcharges are coming up.

I'm just wondering why would prices hold, let alone move up in late first quarter?

Let's address automotive first.

You gave me a number of things, so if I miss one, just come back and we will try to speak to it.

Automotive cuts, I think the numbers I saw yesterday are forecast for productions down 8 percent vis-a-vis first quarter 2004.

I think relative to the initial plan, if I recall GM and Ford were the only companies impacted by January sales, and they alluded to the fact that the December buying binge had some impact in January.

And we're looking at maybe I think 35,000 total vehicles cut from the production plan.

So I don't know that that's all that significant.

I think the most significant dimension is really the lack of interest in imports.

If we have a relatively or a reasonable, let's say, reasonable demand snapshot for the next several weeks and several months, I think we're going to get back into a market will bear pricing scenario.

And again, in my mind right now, the floor is where you can buy an offshore product, FOB US port of arrival.

That's the view we take.

Again, as Keith pointed out, our crystal balls aren't necessarily as clear and focused as they have been in the past, but that's how we see it.

I think the benchmark is availability abroad.

And relative to the surcharge, the surcharge will move down, but I think the base price will be adjusted to reflect market conditions.

Therefore, I don't see the price changing.

I don't see it drifting much further south.

You never know.

But I don't think anything significant.

Nor do I know that it's going to adjust upwardly significantly.

But I think the suggestion is right now that we could see some movement in an upward direction later on this quarter.

If I could add one thing.

This may come to a surprise to some of you because we are featured as something of a spot market player, but we've increased our exposure to long-term sales agreements to about 50 percent.

And frankly, none of that pricing for the most part changes in the first quarter.

So it's all tied to index pricing.

Some index like CRU (ph) or PMAG (ph).

And we think it's a very creative and will serve us in the marketplace very well going forward.

I understand your outlook on supply.

I guess my concern is still on the demand side.

Any concern on how much inventory is in the distribution channel right now?

And how long do you expect that to remain saturated?

I think inventories are responsible for the weakness.

And again, those inventories a consequence of the import surge I mentioned a little bit earlier.

I think most buyers would tell you they're working through their inventories.

Some would tell you that's not the case.

But again, it's a developing perspective, and as long as demand continues to be reasonable I think those inventories will come out pretty quickly.

And we're looking at firming near-term and some upturn towards the end of the first quarter and early second quarter.

That's the best I can give you at the moment.

The bookings in January were at the market level, not below where we had been selling, and as John said, was our best order entry since April of '04.

That's correct.

In fact --

(multiple speakers) pretty significant.

It's got to be coming from somewhere.

It's out there.

If you take -- if you project forward across the quarter, we actually have the potential based on January order collection to exceed our capability to support.

In other words, I'm looking at prime orders that would, at least at Butler, exceed our current defined capacity.

So from my perspective it looks pretty good.

I think Dick's backlog is up 50 percent just in the last several weeks.

Yes.

Last two questions.

First, inventories are up about 33 percent it looks like sequentially.

Can you give us a feeling for how much of that would be related to finished product?

And regarding your comment on orders, can you compare backlogs today versus what they were last year at this time?

I don't have that data.

Relative to inventories, very little of it is in finished goods.

Most of the increase was a result of the offshore pig iron activity or buys that we made.

That was really largely responsible, which has shifted our production mix into our furnaces and caused us to need fewer bundles and less busheling, which is, I think, the same practice initiated by other providers, and has probably served us well in helping to back the marketplace up from its almost crazy highs.

I don't have the backlog numbers vis-a-vis January 2004 at my fingertips.

What I can tell you, since I looked at some of this information just this week, we're probably at a level in the flat mill near where we were mid to late summer.

And Dick is ahead, as Keith pointed out.

And I believe Glenn is ahead of where he was as well.

So again, all of the tea leaves as we see them in the cup are looking pretty good.

Thank you.

Brett Levy, Jefferies & Co.

Can you talk a little bit about CapEx for 2005, if there are many major projects and associated downtime with those?

And then also, longer-term it sounds like the West Coast is starting to get kind of crowded.

You guys have talked, at least in some terms, about a West Coast mill as the metallics piece of the puzzle started to come into place.

Can you update us with your thoughts on that, but first just talk about 2005 projects and the dollar cost?

Other than Mesabi Nugget, we don't have any significant projects in tow.

We are looking at potential expansions at Columbia City, but that's yet to be addressed by our Board.

Dick is putting his pro formas together at this point in time.

But that's a future possibility, not likely even it were approved to be any heavy spending in '05.

The West Coast project is really dependent on breakthroughs with Mesabi Nugget, as we indicated earlier, and the support garnered from that effort on the West Coast relative to metallics.

I think it's tough to make a case for building capacity out there without the supporting metallics, at least no residual metallics.

So the West Coast thing is really down the road a ways.

We have some normal CapEx spending, etc.

Gary, you want to update them on where we are on that, the approved budget for this year?

Again, it's highly dependent upon what happens with Mesabi Nugget and the timing of the air permits coming in.

But we've got a budget of about 155 to 160 million that could be occurring if Mesabi Nugget moves forward as aggressively as we would like.

And what would be the Mesabi Nugget piece of that number?

And are there any other projects in that figure?

Yes.

There are other projects in that number.

But the Mesabi Nugget piece could be somewhere between -- about 70 million.

Some of the noteworthy projects that are included in that, at least at Columbia City, because I mentioned our cooling bed expansion, that's about 8 to $9 million.

We have a rail welding facility that has a $17 million price tag associated with it, and then various miscellaneous projects in the melt shop and rolling mill for 1 or $2 million apiece.

We've got roughly $10 million we've spent at the Butler division.

As I said earlier, about 6, 6.5 of that will be on expanding our capacity capabilities, and then miscellaneous additional spare parts for the older -- larger spare parts for equivalent as we age here.

Another piece would be another expansion of New Millennium Building Systems.

We are looking for another project to come online there.

If I may comment, one of Mark's projects involves an acrylic coating system at Butler for our line 1 hot rolled galv line, which is going to give us huge opportunities in the metal building market to displace painted pearlings (ph).

Two more questions and then I will pass the ball here.

Any thoughts about adding additional capacity to allow for another paint line given the probability of the first one?

And then second, can you talk a little bit about the rail qualification process for the longer rail?

Expanding further downstream currently is a little problematic because we just don't have enough substrate to go around currently.

We have two bottlenecks, the pickle line, and also the cold reversing mill.

We've looked at adding a pickle line at Butler to relieve that, and decided to delay that while we look at opportunities down at Jeffersonville.

Fortunately, we have Highlands Steel (ph) right next-door that has been allowing us to achieve the throughputs that we need.

So they've been up to about 15, 20,000 tons a month of pickle capacity last year.

At Jeffersonville, we've been looking at perhaps putting a cold mill down there and a paint line.

But again, it all depends on getting sufficient hot band (ph).

And in part that's why we're expanding the capabilities at Butler by another 300,000 tons.

As far as the rail qualification, needless to say they vary between railroad to railroad.

But initially here what we will be supplying in the second quarter I believe is a very small section of rail to the different railroads to dissect and run through their own metallurgical labs, physical testing labs, and run etchings and hardness testing and so forth on them.

And then it really becomes an application-driven acceptance that we will be used first in the less-demanding applications, but having of course always to supply a ream of quality product, and then move up into more and more demanding applications as we either prove ourselves out in track with them.

Or independently we will supply track to the testing lab in Pueblo where they run an accelerated test, and then we can use that as comparison to other both domestic and foreign suppliers as to how our wear patterns prospectively compare to others.

So it's not a huge amount of detail to it, and we will be initially making some shipments to them and putting them, as I said, into less-demanding applications.

But as they get good feedback from in field, it will continue to grow.

Thanks guys.

Mark Parr, MacDonald Investments.

Good morning.

I have two questions on the top of my mind here.

One, Keith I was wondering if you could talk a little bit about SBQ contract pricing '05 versus 04, and what sort of contract increases that you're realizing.

I'll let John speak to that, but I think they're all spot down at Pittsboro right now.

The contract piece would be pretty small at this point in time.

There may be a couple more.

But again, let's consider that this is really the startup -- or excuse me, last year was really the startup year for Pittsboro.

And we sat around, Glen, Bill, myself, Keith, and others and felt that there were opportunities in large diameter rounds through service centers.

Those were the opportunities we chased significantly.

We're still developing some capabilities down there, moving from carbon bar into alloy grades.

And in my opinion, it just wasn't the right time to take a step forward and tie up long-term agreements.

So we will probably be looking at doing more than this year as Glenn expands his capabilities, particularly on alloy bar.

We're doing well with the cold finishers, doing well with the forgers.

People like Caterpillar are giving us -- we're making inroads there.

They're ramping up their volume with us and we're very appreciative of it; doing a very good job with them on 86-20 type steels, etc., the high alloy stuff.

So the repeat business has been good for us.

I guess I'm just getting ahead of myself on that.

But thanks, I appreciate that input.

The other questions that I had relates to this whole situation of flat rolled pricing opportunity.

My sense was that a lot of the reason that prices went up so rapidly last year was that prices had to go up to attract imports.

And seeing as how we've seen prices outside the US continue to rise in the fourth quarter and the first quarter, how high could hot rolled prices need to rise before imports start to reappear?

That's a tough one, because again this is sort of a moving target.

But the target doesn't seem to be moving down substantially.

Again, I'm going to put a number on board, and this is -- consider it as just a, let's say, liable source.

But in hot rolled, 31, 32, sometimes 32.5 cents, depending on which trading company you're talking to, seems to be the number -- again, landed port of arrival, US port of arrival.

I'm not sure where it needs to go to attract buyers again.

Is there a $40 or $50 margin before buyers feel they need to step out and take those forward positions?

It's hard to say.

Based on today's market, you might be looking at a 660, 670, 680 kind of a number.

It's hard say.

I think more importantly is the interest on the part of traders and exploring, as I said before, whether we're interested in exporting to Europe, and now particularly to Asia.

I just want to reiterate what I said before -- we walked away from an opportunity this morning for a piece of 20,000 tons of light gauge hot rolled.

Most sizes ran, I think, 1.2 to about 1.8.

And the price was 565 a short ton point of production.

So that tells me that the Indian and the Chinese market are still heating up.

By the way, that opportunity was specific to China.

Interesting.

Anyway, I know the quarter was a little less than people had hoped for, but it's still an outstanding performance when you're pushing $170 EBIT per ton.

So congratulations on a great year.

Looking forward to more of the same in '05.

Timna Tanners, UBS.

Thanks so much for the details guys.

I did want to and make sure I understand the Q1 outlook a little bit better.

Because the shipments were a little light on the fourth quarter, I was wondering if any of that was going to run into the first quarter, if that was incorporated in your outlook.

Yes.

The volumes are actually -- we're anticipating they will be under what they were in the fourth quarter.

I think in the case of Columbia City, it could be a little ahead of the fourth quarter.

And in the case of Pittsboro, it's likely to be ahead of the fourth quarter as they ramp up.

On then the scrap side of things, I know because of the buildup in inventory I was wondering if guidance incorporated a volume decline in scrap buys, as well as the price change that you talked about?

We're not buying as much scrap.

We're passing on a lot of scrap.

The market, as you know, was reported at about 305 for factories, and we're down in the 280 zip code on a real buy.

So the market continued to drift for premium grades.

Now the cut grades are only off slightly, I think being reported down 5 to $10.

And I think shredded only off $5 or $10, from what I'm hearing.

Maybe some sales even sideways.

So the obsolete grades are not falling as rapidly as they were, but the premium grades, which had this tremendous spread that made no sense between those grades and other grades, has fallen like a rock at this point in time.

IDI, I wanted to know, I know you said that you rounded (ph) about 50 percent this last year, and I imagine that was just going through the year and a probably higher number at the end.

What's your outlook on what utilization would look like this year, 2005?

50 percent was really at the end of the year.

Oh, it was end of the year.

Go ahead Mark.

Next year?

We're hoping strongly to get up to a 25 to 30,000 ton a month level.

Anticipate February is going to short month, so it will be probably another 18,000 ton month hopefully.

But come the summer we should be at that 20, 25,000 ton pace.

Last question, I was wondering if you could provide some color on what you mean by long-term contracts, like how long of term and that kind of thing.

And of course I am assuming they have the step mechanism, that kind of thing.

If you elaborate on maybe the end markets that you're looking for to sign those contracts?

You mean specific to bars or just in a general sense?

I wasn't clear on the long-term contracts.

It sounded like you just said there were fewer of them in the bar side, so I imagine more flat and structural.

If you could just elaborate a little.

That's what I said.

We pushed our exposure on long-term sales agreements in flat.

The markets are kind of mixed.

We've got some directly in automotive.

We have a quite a few that relate to the paint line.

So they cover a myriad of products -- galvanized, painted, cold rolled.

We've got some cold rolled agreements in the motor market.

It's a mix, and they are not in shorter than six months, and they can be in some cases as long as they need to be.

That's about -- without getting into specifics of these arrangements, that's about the best snapshot I can give you.

Does that handle the question?

Yes.

Thanks very much.

Michelle Applebaum, Michelle Applebaum Research.

There's a lot of confusion in the stock market community about commodity price and stuff.

I've got one theory.

Could you talk a little bit about where secondary prices might be, John, versus primary and maybe some people here secondary price not knowing it is secondary, and that's why people get confused?

It's timely that you ask that question, because I had a meeting with Jerry Henry who is one of the co-owners of Paragon Steel (multiple speakers) offshore arm.

So I put some information together, but it was really more in terms of volume.

Prices I didn't look at all that carefully.

I'm going to guess that -- I don't know, what would you say Mark?

Maybe 40, $80 a ton excess in secondary (multiple speakers)

Actually about 80 to $100.

Is it? (multiple speakers) Mark is helping me with this one.

A good dart on the board would be like 80 to $100.

So that if your getting 640, 650 for hot rolled for prime materials you would be getting 80 or 100 less for this off-spec, low-quality, broken essentially?

That is probably reasonable.

It would be like in the 560, 580 range.

And then what we call excess prime, which is something that doesn't fit one of the custom orders that we have in hand for a multiplicity of reasons, would trade somewhere probably in the I'm going to say 40 to $50 (multiple speakers) discount.

So then excess would be selling for 600, 610 if we were selling them at 650.

And that range is pretty much close to the range at any point in time when the steel price was $400 a ton or 750 a ton, that kind of range?

I know it varies.

That's right.

Over time those spreads tend to hold in really tight markets.

At the peak of the market --

There's no secondary, I know.

Excess was selling for -- at one point in time our systems were a few dollars more than prime (multiple speakers)

That was a consequence of some long-term agreements (multiple speakers)

(multiple speakers) the customer base.

My next question is your stock opened down $2 today.

And you came in at 147, and your guidance had been 150 to 170.

You have guided people to the low-end to of the range.

You had a nickel of sort of unusual stuff, so you could almost say you were within, but your stock opened down a lot.

I was just wondering if -- I was almost surprised to hear you give specific guidance on the call, because I know used to not do that and you've only started doing that recently.

Can we hope or assume that maybe your assumptions might be a little bit more conservative this quarter?

I think they've been fairly accurate in the past (multiple speakers) this was a tough one because I don't think any of us thought the market was going to dry up in November to the extent it did.

And I certainly didn't expect the kind of escalation in resource costs that we experienced.

It's amazing you came in at that range given some of your variables went in the other direction.

It's the same situation that we faced in the past.

And one of the reasons why we're interested in customs putting some type of monitoring system in imports.

I will attribute the softness in both price and perceived demand strictly to the surge that we saw in the July, August, September, October timeline.

And when you stick as much steel as we saw coming from offshore into a supply-demand equation, you can't expect anything else.

That makes it very difficult, since we can see it until after the fact, to recognize what's happening until after it's already clear and obvious that it has happened.

I've covered steel companies for almost 25 years, and I'm amazed at the beginning of the quarter that a company like yourselves or Nucor with the leverage and stop (ph) pricing that have you got can give any guidance.

I'm not criticizing the fourth quarter.

I'm asking if we can assume that maybe the first quarter guidance is a little bit more conservative.

If you stay at the lower end of it, I think you'll be okay.

Okay.

Then one more question.

I too am amazed that when you miss something by a penny or 2 or 3 or 4 the kind of impact it has.

It seems irrational, but that's the way the market historically I guess has behaved.

I think outlook is very good and I think people need to focus on the future and look at what our multiple is in relation to our, I think, excellent past performance and future potential.

Before you call the market irrational, let's see where the stock (indiscernible).

Sometimes you do have very short-term gyrations that don't make a lot of sense.

So I don't disagree.

In terms of the comment about the export opportunity, which is just astounding to me, John, earlier I thought you said metric ton and then just now you said short ton. 565 per short ton (multiple speakers) American tons?

That is correct, short ton. (multiple speakers) emphasize that because if I -- I think I referred earlier to Indian and Chinese hot rolled prices CNF (ph).

These are more commodity being in the low to mid 600s a metric ton.

But again on what I called the differentiated products, they sell for something of a premium, because as you recall from our prior conversations regarding our activities back in 2003, the Chinese don't make a lot of light gauge hot rolled.

I think in another conversation you and I have discussed the Three Gorges project that we participated in in a very modest way through a US processor and trading company.

And the kinds of products that we make and that Nucor make was in BHP (ph) vis-a-vis light gauge have some potential to trade in the export market in the not too distant future.

But the 565 is a price that is not competitive in your market anymore?

Not in our world of the moment, it is not.

Thanks.

Wayne Atwell, Morgan Stanley.

If you could just help me out a little bit with some summary of your guidance, could you tell us how many shares you have bought now?

And could you summarize the guidance, because you have said a lot of things, and I'm sort of getting confused about the details -- tax rates, volume, price and costs?

Could you kind of summarize all that and tell us where your share count is now?

I think the share count will likely be in the slightly above on an average basis 55 million, somewhere in that area.

That's diluted shares.

The tax rate that we're looking at in '05 I believe is moving up from 38 to 38.5.

and then volume specifically for the first quarter, and what specifically did you say about earnings?

Flat rolled volume we think will be off versus the fourth quarter by perhaps 50,000 tons or 40,000 tons, somewhere in that vicinity.

I think Dick could be up a little and Pittsboro will be up as they continue to penetrate the market and reach capacity.

So the overall shipments may not change a lot, but I think some of our richer shipments made lag just a little bit.

The scrap component of it is I said I think we're looking at down 20, $25 on a linked-quarter basis; bigger impact in March.

We, as I said earlier, have a lot of scrap on hand and pig iron.

It will take time to pierce those layers, if you will, and get to the cheaper goods, which is going to show up significantly in March and certainly in April and May; fairly dramatically reduced costs during those periods.

And then price?

I don't think price is going to change dramatically from where we were -- Theresa is going to check that.

She's looking at out forecast right now.

While she's looking, I just might remind people that your stock was actually up 2 points yesterday and 3 points over the last three days.

So while it was off today, it is up a lot over the last several days.

Thank you.

Pricing will be flat, maybe up $1 to $2 on an average basis over all divisions.

So your final earnings guidance would be pretty much in the same area as you were in the fourth quarter?

Yes, I think there's the potential to have a look-alike quarter.

But I'd stay at the lower end of it if we want to all be conservative.

So maybe a range of around 10 cents either side of the fourth quarter?

10 cents on the upside would be probably a little bit of a stretch.

Say flat to down 10?

Yes, I think I said somewhere around -- if you were at $1.35, $1.40, I think we're not going to disappoint anyone.

Thank you very much.

David Lipshitz (ph), Merrill Lynch.

I just have a couple of housekeeping questions for Gary.

What are you looking for for DD&A, SG&A and interest expense for '05?

As far as interest expense, I would assume anywhere between 8 million to 8.5 million a quarter.

Depreciation and amortization should run about 24 million a quarter.

SG&A, if you target like 5 to 6 percent of net sales you're going to hit it right on the nose.

Thank you.

John Tumazos, Prudential.

Sorry if I missed this earlier, but how much do you believe steel consumption will rise in 2005?

I think we're still trying to sort through exactly what demand was in 2004.

In fact, actually I think it was a whole lot better than a lot of us anticipated right through the end of the year.

Again, Keith made the comment earlier -- I said the same thing -- our crystal balls are a little bit little cloudy as we look through the year.

John, I think we're going to have reasonable demand.

And again, you've got to look to certain legitimate standards in the markets like the DOC, like ISM, and maybe from our perspective like prime scrap to get a feel for how manufacturing activity is going.

But right now, I'd say reasonable to strong.

I don't see any clear indication based on economic forecast that that's going to move.

How that all translates into consumption relative to 2004, which I'm still not actually sure I clearly understand, there have been probably 3 or 4 parent consumption figures that I've seen in the last week and a half.

So once that's sorted out, I might be able to give you a better snapshot, but not at the moment.

I don't think the economy is going to surge quite as much in '05 as it did '04, but I still think it's going to be fairly good year.

Aldo Mazzaferro.

I was just wondering if you could give us the shipments by product and pricing by product, if you have it.

I'll give you average pricing by division.

We don't give out the price and we've not had a habit of doing that recently. (multiple speakers) shipments, I think we do provide by product.

Sorry about that.

I almost gave you something I shouldn't that I'm getting evil eyes for around the group.

Sorry about that, Theresa.

You can give me the volume, right?

I can give you the volume -- hot band, 266; pickle and oil, 32; cold rolled, 52; hot rolled galv, 89; cold rolled galv, 41; painted ended up being a total of -- painted cold rolled was 12; painted cold rolled galv, 23; painted post-mill (ph), 15; and cold rolled galv at Jeffersonville -- I'm sorry, I've broken them broken out separately -- was about 40.

Structural and Rail had shipments of 158.

Bar Products had shipments of 109.

New Millennium, 27; and Paragon, 15; and IDI, 53.

Don't try to add all those up and get to our total, because we do inter-company shipments as well.

So back those out for consolidation.

Could you say how much the rail was of the structural rail?

For rail we had just over 300 tons.

The cold rolled galvanized in total probably over 90,000 tons because we do some tolling work as well for others.

So 40, 40 plus tolling is something in excess of 90,000 tons of cold rolled galv and about 90,000 tons of hot rolled galv.

Keep in mind, about 80 percent of what we paint is cold rolled galv also, either post-milled (ph) or CQ.

Thanks very much.

That lowers the absolute number on cold rolled galvanized considerably.

But as John pointed out, you have to remember that a good bit of that line is now dedicated to the painting activity.

Thank you.

That does conclude our question-and-answer session.

I will turn it back to our speakers for any additional or closing remarks.

I don't have anything to add, really.

I look forward to seeing many of you at a number of the spring conferences that you hold, which we hope to participate in.

We thank you for your continued interest in our Company.

Let's all hope we have another great year in this industry.

Thanks again folks.

That does conclude today's conference.

We thank you for your participation.

You may now disconnect.