Steel Dynamics Inc (STLD) 2006 Q1 法說會逐字稿

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

Today's conference is being recorded.

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

Mr. Gary Heasley, Vice President and Chief Financial Officer;

Mr. Mark Millet, Vice President;

Mr. Richard Teets, Vice President;

Mr. John Nolan, Vice President of Sales and Marketing;

Ms. Theresa Wagler, Vice President and Corporate Controller;

Mr. Fred Warner, Manager, Investor Relations;

Mr. Tim Duke, President, Steel of West Virginia; and Mr. Joe Crawford, Vice President of Steel Dynamics.

Now, I would like to turn the conference over to Mr. Fred Warner.

Please go ahead, sir.

Good morning.

Welcome to this April 20, 2006 conference call covering first-quarter 2006 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 today's management discussion, we will open the call for questions.

Please make your questions brief.

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

Before we begin, we have two brief announcements.

SDI's Annual Report for 2005 and proxy statement for our upcoming shareholders' meeting have been distributed to stockholders.

Our annual meeting is scheduled 1 month from today on May 20, 2006.

There will be a live audio Webcast of the annual meeting.

Secondly, both the proxy statement and the Annual Report, which includes the 10-K for 2005, are now posted on our Website and can be downloaded from the Website.

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

Good morning, ladies and gentlemen.

I think it goes without saying that we are very pleased with our earnings results in the first quarter of '06.

But before we get into that detail, again, I want to remind everyone we have with us today Joe Crawford, who manages our Roanoke Electric merchant bar operations, and Mr. Tim Duke, who manages our structural operations with Steel of West Virginia with us this morning.

We collectively as a group will be prepared to answer a lot of go-forward questions relative to the integration of Roanoke Electric Steel into the Steel Dynamics family.

I will make some comments about that as we work our way through the press release.

I think everyone probably has a copy in front of them.

You can see that we have earned $1.52 a share, which -- versus 76 million or $1.52 a share versus 61 million or $1.12 per share in the first quarter of '05; that's about a 36% increase comparable quarter over quarter.

It's about a 16% increase from the $1.31 that we earned in the fourth quarter of '05, so obviously some exceptionally-strong results.

A lot of which are driven by continued substantial progress and performance with all of our newer assets -- the assets down in Pittsboro, Indiana; the structural steel and rail divisions assets, and last but not least, the progress Mark Millet and his team have made with productivity results at Butler.

We are going to be going through a substantial outage in June to modify our casters at Butler.

A little longer than normal outage -- let's put it that way -- which will probably dampen our results just a little bit over what they could've been, whatever we might dream that they might be.

We'll help provide some guidance about that as we go on.

But, I like to kit with him because the mill without the modifications is now running at about a 2.8 million annual run rate without the modifications.

So, we've asked you on several occasions, could we just forego the capital expenditure and get up to 3 million without the expenditure, teasing him a little bit.

But, we had very, very strong results.

Our selling prices were up about $12 a ton quarter over quarter.

As you know, the scrap cost per net ton charge increased $5 from the fourth quarter, but our scrap costs were 16% lower than the first quarter of '05, so again, fairly positive results.

The marketplace for scrap resources has moderated over the past few months with some minor ups and downs, and I think everyone in this business is thankful for less volatility if you will.

Prices are always going to rise and fall with regard to the laws of supply and demand but certainly been a more stable environment, which I think helps all of us manage our business affairs better.

First-quarter consolidated shipments reached 1.1 million tons, 24% higher than the fourth quarter.

Then, the first quarter of '05 is 15% higher than the fourth quarter.

So, outstanding shipping results, which is to a large extent what drove the better results.

In the past, we've come out with guidance, upside guidance, when we are within outside of a 10% sand box.

I think as we looked at going into the third month of the quarter, we were probably just a smidgen ahead of that but just had astonishing March and it drove the results even higher.

So, we are very pleased to report them.

As it would regard looking forward, we expect our earnings as we said to equal or exceed the first quarter.

But I would caution everyone, they are not going to dramatically exceed the first quarter and there are some reasons for that.

The extended outage at Butler will actually drive shipping volume down in the quarter, even though we believe certainly price realizations will be better and scrap costs will be up.

Mr. Teets is also taking an outage.

Mark's is in June.

Dick's is in April here that he did not enjoy in the first quarter.

So, the outages will have somewhat of a dampening effect on it.

So, I would encourage you not to get carried away with your pencils.

You know, we may do better than $1.52, but it will be marginally better, maybe $0.05 better or thereabouts, which is still an awfully, awfully strong quarter.

For those of you who wonder whether or not Steel Dynamics -- the inclusion of Roanoke Electric Steel into Steel Dynamics is an accretive event or dilutive event, I can with great confidence assure you that in the future, as we look at the third quarter and fourth quarter, we think it's going to be significantly accretive to our earnings.

But, in the second quarter, it is unlikely that that will be the case.

There are multiple reasons for that.

Some of which are funny money-type accounting reasons.

We will let Theresa and Gary kind of deal with those issues.

But, in the acquisition, we are required by accounting rules and regs to write their inventories up to selling values rather than record them at cost.

That happens -- that's an event that happens in the transition.

It does not flow through the income statement.

It just kind of gets lost in the shuffle and is part of a calculation that eventually yields a goodwill answer if you will -- I guess is the best way to say it.

So, you won't see them.

So, actually their earnings in April and May -- and we really didn't take over until April 12 -- so you are working with a partial month in April and full months in May and June.

Their earnings I think are going to be very, very good.

But, when you get done accounting for the increase in inventory values that will be netted against that if you will, they will enjoy actually lower margins until they wash the existing inventory through their income statement.

We've done our best, not having all of those answers in hand yet, to estimate what that might mean.

But, we are going to be writing some of the assets up.

We will have some additional depreciation to deal with, etc., etc.

But, to the best of our ability, they will neither be accretive or dilutive in the second quarter.

They will be rather neutral.

Now, it may turn out that they are $0.02 or $0.03 accretive or $0.05 accretive or $0.02 dilutive.

But, it's fairly immaterial.

It's in the $0.01 kind of range we think.

So, rather neutral effect in the second quarter and rather positive effect in quarters 3 and 4 beyond.

I would tell you that it is their business conditions as much as anything and their results driving those results as well as synergies to be enjoyed.

The synergies to be enjoyed will just continue to grow and grow and grow over time, making it even more accretive.

So, we view the Roanoke acquisition in a very, very positive light in terms of accretive/dilutive.

We think the shareholders will enjoy greater earnings per share as a result of it.

We, unlike some others -- or like some others, I might say, enjoyed an extraordinary first quarter from a production perspective.

We set new production records in the flat-roll business -- extraordinary records.

We set new production records in the structural and rail business and had increased volumes flow through the operations at Pittsboro, Indiana.

The Roanoke operations remain strong, good backlog conditions, very positive business conditions, with a good outlook into probably the second and third quarters.

That's probably about as far as any of us can realistically see at this point in time.

I might mention that with the announced capacity increase at the structural division, the increase in capability at Butler being installed in June and the introduction of Roanoke's assets to our reported statistics, we will be very close in '07 to a capacity of about 6 million tons of production, so again, continuing our very aggressive and historic pattern of growth into the future.

I might also mention again, well, you certainly have the press release.

But, I might also mention that we have a special dividend of which one-fourth of it was being paid in April -- on about April 13th of $0.10, which is our first special dividend in the history of the Company.

Of course, we hadn't introduced dividends all that long ago.

So, that really wraps up my comments relative to the quarter.

It was just a great quarter, and we look forward to your questions.

But, in the interim, I will turn this over to Mark Millet for some brief comments of our flat-roll division.

He will turn it over to Dick and so on and so forth.

Good morning, everyone.

As Keith suggested, I think the Butler team excelled in the first quarter.

Shipments for the division itself was a record 663,000 tons, while operating at an annualized rate of about 2.8 million.

That performance has continued into Q2, and we've produced about 246,000 tons of hot band in April.

All the value-add lines also showed strong performance.

We had records at the pickle line, [Code Reversal Mill] and Jeffersonville.

As Keith suggested, the first cast and modification for capacity expansion is on schedule.

It's going to happen in June.

We're going to see probably a 7-day outage on the original caster, which is going to impact this some 25, 27,000 tons for that month.

We're drawing down on our overall quarter by a little bit.

The announcement of the Galvalume line at Jeffersonville has been met with quite a lot of excitement and interest.

It's going to be the only double-wide Galvalume line in North America.

We have executed license agreements with DHTs for the Galvalume trademark and the process.

We're purchasing the equipment, and that should come online we hope first quarter of '07.

Likewise, for the paint line at Jeffersonville, we are going to finalize the negotiation tomorrow for the equipment supply and would expect product to be shipped late Q2, early third quarter of next year.

So, things have been extremely good at Butler.

Mr. Teets?

Thank you.

Everyone at Columbia City is very proud of our recent performance.

As mentioned in the press release and by Keith that the rolling mill has set in the first quarter two monthly and of course a quarterly record of production and our shipping departments at one monthly as well as the quarterly record.

We are extremely optimistic about business on a go-forward as we continue to have a record backlog level.

We're currently within a 3-day maintenance outage.

We are accomplishing routine maintenance as well as commissioning some capital projects, and both of those activities are aimed at increasing mill utilization and productivity.

We are also excited about the announced projects related to the mill expansion, rail welding and our dynamic composites business.

Construction activities have already begun on a second mill and on the rail welding projects.

When we now look at the rail, we have produced prime rail sections for the third time and plan to distribute samples to Class I railroads and testing facilities upon successful completion of our next rolling.

Thank you, Dick.

Joe, you want to comment about business conditions at Roanoke Electric's merchant bar division?

Sure.

Thank you, Keith.

First of all, I would like to say that it's nice to be sitting at this table with our new family members of Steel Dynamics.

I can deliver that message from not only myself but all of the employees of Roanoke Electric Steel and all of our subsidiaries and employees at those companies.

We're delighted to be part of Steel Dynamics.

Unfortunately, we cannot take credit for any of the nice results that you're reporting this morning because as Keith said, we didn't become official members of the family until April 11 and started our first day on April 12.

I can report as many of you have seen our first-quarter results, the last quarter reported, this run of electric steel was a record quarter for Roanoke Electric Steel.

Those conditions continue currently.

We are still enjoying excellent business conditions.

Order entries have been extremely good.

Production and shipments have been excellent.

So, we have not missed a beat through this last transition period in becoming a part of Steel Dynamics (technical difficulty).

But, we're looking forward, as Dick says, as far as the structural mill to good conditions for the next couple of quarters.

There will be no changes.

If anything, business continues to improve and we've seen some slight improvement in prices.

So, all good signs going forward.

Thank you, Joe.

Tim?

Sure, thanks, Keith.

I would like to echo Joe's comments in welcoming us to the Steel Dynamics team.

Our main facility is in Huntington, West Virginia -- our two rolling mills and our melt shop.

We also have our facility in Memphis, Tennessee, which is a fabricating facility.

It fabricates cross members.

Our results were included in the Roanoke's published results for the first quarter, and we enjoyed a very good quarter.

We see continued strength in the original equipment manufacturers that we serve -- the forklift market, the off-highway equipment and the truck tow industry remains very strong.

We see that continuing through the rest of this year.

Thanks, Tim.

I might mention, Glenn Pushis is not here.

He runs our Pittsboro operation.

I might just say that business conditions are strong there as well.

But, more importantly, his new finishing facility is -- parts of it are up and running already, which is amazing -- short construction and operating period.

It won't be long before heat treating and turn grinding and polishing activities will start there as well.

So, good progress being made on that investment to enhance earnings from a value-added perspective.

I might just have John Nolan comment about the market or other subjects before we speak with Gary and Theresa about financial matters.

Good morning, ladies and gentlemen.

I'm going to be brief as well as this morning.

As you've heard from my colleagues, pretty much wherever you look, say possibly the residential construction market at the moment, the market is very strong.

In fact, I would suggest it's surprisingly strong if one properly recalls what many of you wrote last year and earlier this year about the developing market.

We see that continuing at least as far out as we can see, which as you heard me say before, the spirit of the cloudy crystal ball is not all that far.

So let's address any specific questions -- market-related questions or topics a little bit later.

Thank you, John.

Gary?

Okay, I will do two things, first, to address the accounting issue that Keith mentioned earlier and then we will go through some of the numbers.

The issue that Keith referred to -- the GAAP requirement that we allocate the purchase price appropriately and in doing so are likely to have to write up inventories, which will make it more difficult to have the new facilities that are part of the Roanoke acquisition be accretive in the first quarter or in the second quarter.

Again, as the FAS 141 analysis that we have undergoing, we have got a lot of folks looking at that and experts doing the evaluation work.

Of course, that will all be very carefully calculated in accordance with GAAP.

Moving on to shipments, steel operations shipments this quarter -- we shipped hot-rolled bands of 306,000 tons, [PNO] 29, cold rolled 36, hot-rolled galv 110, cold-rolled galv 122, and painted products 60,000 tons to get us to total flat-rolled shipments, as Mark said earlier, of 663.

We had in structural and rail 247,000 tons and bar shipments of 125,000 tons, giving us total shipments for steel operations of 1,035,000 tons.

Keith referred earlier to I think our average selling price of 610 for average steel operations.

Let's talk a little bit about capital expenditures.

We have a lot of work underway with regard to the new subsidiaries we acquired through the Roanoke transaction to determine what capital expenditures need to be made down there and the timing of those expenditures.

As we've announced earlier, we will be spending money to basically make the joist plants more efficient and make some significant changes in some of the steel operations.

But, again the timing of those is not yet nailed down.

So, what we spent in the first quarter was 15 million, and our projected capital expenditures through 2006 are 131 million.

And, that's based on the inclusion of the Columbia City expansion that was recently announced of about a $200 million expenditure, a portion of that being paid this year but most of it coming in the following year.

Depreciation and amortization, we had 25 million in Q1.

Barring the Roanoke assets which, again, we will have to determine the values of after the purchase price allocation.

Barring that, we would be at about 100 million for the year.

Interest expense for the first quarter, 8.1 million.

We will end up between 35 and 40 million for 2006 we believe.

Effective tax rate, again, 38.5% and our cash tax at this quarter $1.2 million.

Our first-quarter tax payments are normally low because of the timing of payments that occur in the second quarter and thereafter.

From a working capital standpoint, we certainly saw receivables increase but they remain very, very healthy.

That's really because of timing and the level of business activity we've got right now.

Inventory is relatively flat.

We've had plenty of scrap on-hand and plenty of finished goods on hand but really have been able to push it down slightly about 4%.

But, overall, materially flat.

Leverage is down to 0.86 times EBITDA.

We did have $5 million worth of our $115 million convertible notes convert this quarter for reasons that should be fairly obvious, given our stock price and the fact that we really looked at those as effectively equity since their strike price of $17 for some time.

Liquidity at March 31, we had cash of 196 million.

Now, of course, we have since closed the Roanoke deal.

With the Roanoke deal, we paid out cash to shareholders of 111 million.

We paid about 45 million to retire Roanoke debt, and Roanoke had at the time of the transaction about $22 million on-hand.

So, the net cash impact of the closing was in the neighborhood of $134 million.

Obviously, that leaves our liquidity extremely strong.

We still have no drawings on the revolver to date, the revolver being $350 million facility.

So liquidity is quite good.

Then, one final point, shares outstanding -- at the end of the quarter, we had 44.1 million shares outstanding.

We issued 4.5 million shares to Roanoke shareholders as in keeping with the -- in closing the acquisition, giving us now about 48.6 million shares outstanding at this point.

Keith, that's all I had.

Thank you, Gary.

I might also mention -- I failed to mention that business conditions at New Millennium Building Systems, which is now an aggregation of our assets in Indiana and Florida conjunctively with the fabricating assets in Ohio, Virginia, and South Carolina gives us five fabricating facilities east of the Mississippi River, certainly a significant presence in the joist and deck business.

In fact, I think it's probably -- we're probably the third-largest producer in the country and hope to be the second-largest before too long.

So, business conditions at New Millennium are also in great shape at this point in time.

So, having said that, we will now turn to the Q&A.

(Operator Instructions).

Brett Levy, Jefferies & Company.

He is preoccupied with --

David MacGregor, Longbow Research.

Nice quarter.

I just want to understand the year-over-year dynamics on the price per ton -- pricing per ton realization and also the operating profit.

In the year-ago quarter versus where you are now, your ASPs were down about $38 a ton, but operating profit was only down about $1.

I'm sure there's some mix implication there.

There was probably also some scrap costing implication.

But, I was wondering if you could just help me better understand sort of the disparity between the movement on your pricing and what you realized on operating profit per ton?

Well, we had higher selling values that were headed south at the early part of 2005.

Scrap costs were also high at that point in time.

But, the selling values have obviously went the other direction, and they are up $12 over the fourth quarter.

So, they are likely to go higher in the future, given spot market conditions that are out there.

We really don't know where scrap is going to go.

But, I think simply said, the margin didn't change because the selling values, although they declined, scrap also declined in like measure, in lock steps, so producing almost identical results in terms of the bottom line.

Roanoke, is there any chance of -- you talk about the fact that the second quarter will be largely a push in terms of the impact on the P&L and then you'll start to get accretive in the third quarter.

Is there any way that you could quantify for us the synergies from 3Q, Q4 queue and then whatever your goals might be for '07?

I didn't come prepared to address specific synergies.

But, the earnings impact I think in the third quarter could probably at least be a nickel if not greater.

I know it's just too early to really talk about 4Q or '07, is it?

Yes, I think it is.

I think as we've said, we're going to have a pretty good second quarter.

Unless business just dries up, we're probably going to have -- have a very good strong third quarter as well, and we just don't have a crystal ball going out to the fourth at this point in time.

Then, just last quarter, I was just wondering if you could give us your impressions and some color on the import market.

We're hearing that offers declined pretty rapidly 3 to 4 weeks ago and the volumes this summer ought to be pretty low.

But I just wondering what your thoughts were and what you were hearing?

I think that certainly, we were not buried under an avalanche of imports as earlier in the year.

Some people had suspected we might be.

I think the import levels were rather stagnant year over year, and healthier market conditions prevailed for a wide variety of reasons, better global market conditions number one.

But, we're not working off high levels of inventory in the sector, in the industry.

The inventories have been better managed by all I think.

So they are at rather low levels right now.

So, the business climate is very, very good, and there's not much of an impact we don't think in the second quarter or from what we can see in the third quarter from excessive imports at this point in time.

Michelle Appelbaum, Michelle Appelbaum Research.

Nice quarter.

Nice to see that you were well ahead of guidance and appreciate all the caveats about next quarter.

That's all very helpful.

Can you comment -- it's surprising that we're now -- prices started going up again last August.

We're now what, 8 months into a recovery cycle.

But we've only seem nominal increases in inventories.

I agree with you, inventories are being better managed.

But I know part of that has been the pessimism on your customer side.

Your customer base -- when prices were going up, they all thought it was very temporary.

Imports are coming; imports were coming.

They were reading all this stuff.

Imports were coming.

The price gap is $200 a ton.

So, your customers kept thinking, okay, prices are going to be good now.

They are going to drop next month.

I think that is what has kept them from building inventories all along.

What do you think is going to happen now that import prices are up to almost domestic levels, prices overseas are rising, spreads almost disappeared, etc.

Do you think that they are going to start building inventories and we will have more of the same as we did in '04?

I don't think they will.

John will offer you different comments than mine but certainly not rehearsed.

But, I think that there's not the fear out there that pricing from a hot-roll perspective is going to 750 or $800 a ton.

I think we are -- our resource costs are different than the bountiful times of a year or 2 ago.

The industry's resource costs in some cases are up sharply.

I understand that.

But, so is pricing.

I think the demand is good.

I think prices are going to continue to edge up.

But I don't think they are going to get out of control.

So, you might see some people attempt to build a little bit of inventory, but I don't see a real panic out there, just steady, strong order entry.

John?

Michelle, I think you pick up something that is key, and we talked about it before.

Perception is very important in terms of how both producers and buyers behave so to speak at least in the sense of a near-term going-forward perspective.

Yes, I think some people were guarded about what the developments might be and frankly maybe when import prices were a little bit more amenable to inventory building passed on certain opportunities.

But, I think we are in a situation now where if you talk to a significant buyer in the marketplace, he would tell you that whether it's a domestic or an office or offshore source, it's going to be very difficult for them to tap an adequate inventory rebuild inventories, maybe even to modest levels compared to early 2005.

So, that's one of the reasons why I made my remark about at least near-term going forward, we don't see any change in what we would call market strength.

Okay, so you're saying that there's not enough steel either domestically or offshore for your customers to overbuild their inventories?

To overbuild, I would say yes.

So, should we read from that that further price increases are in store?

I think we said that we think the market is going to have some upward momentum from here certainly but I think tempered by the fact that I don't think you are going to see a runaway freight train either.

If it runs away from current levels, we're going to be back in the situation where import prices are going to be attractive.

So, there's a certain discipline that comes from consolidation and sound business judgment prevailed today in the market, whether you are talking about a producer or a buyer.

I am more confident that that's going to be the rule rather than the exception going forward.

So we're not going to see kind of vertical increases in prices but we probably will see continued strength?

I think so.

I think that's fair.

Nice job, again.

Greg Macosko, Lord, Abbett.

Could you talk just a little bit about inventory please relative to Roanoke?

How long do you expect that to take the burn off and what are your expectations -- would we expect then some margin improvement as a result of it in the fourth quarter as well?

Yes, I think it's going to take Tim a couple months to burn it off and Joe 1 month or 1.5 months, something like that.

Joe?

Yes, it sounds about right.

About right?

Okay.

In terms of the increase, I assume that was just relative to price and not to tons, the overall increase in the inventory.

Right.

Our inventories -- ours actually went down in this quarter from year-end.

I think you pointed out about 4% or something like that, about as much as receivables went up.

We really are very comfortable with where we are from an inventory position.

We don't have a lot of inventory sitting at any of our operating units.

Probably the largest stock is maybe at Steel of West Virginia.

But, everybody else has a moderate level of work in process and finished goods.

Our scrap inventories, we've made a decision to carry greater amounts of scrap a year or 2 ago, and we're not really going to change from that policy.

So, we have very adequate inventory, so we're not going to ring any juice out of them, nor do we anticipate adding to them dramatically.

With regard to the rolling trials of the rail, when -- have you delivered rail now to all of the potential customers there?

No, we have not.

We decided that we wanted to repeat successful trials three times, just to make sure that we didn't stumble and that we weren't just lucky.

I think with the fact that we were repeatable on three separate individual casting and rolling trials gives us the confidence on the next one to deliver those samples.

So, when might you expect those deliveries to take place?

We're looking forward to rolling that most likely in the beginning of May.

Mark Parr, KeyBanc Capital Markets.

I have a couple questions.

First, Keith, I was wondering if you could give us an update on [Rim DOS] and how you see that whole process unfolding over the next couple of quarters?

Well, I'm not that current.

I know they're getting ready to publish through Metal Recycling Magazine I think here in the near future.

But, I really -- other than we've attracted some new players to the tent, if you will, I don't have the latest and greatest information for you on that, Mark.

I had a couple of other questions here if I could.

First, related to Columbia City, Dick, I was wondering if you could give us an update on the weld line that you are putting together and when do you expect that to be operational?

Also, when do you expect 320 foot lengths to be -- or be able to roll 320 foot lengths?

Well, the first part of your question, having to do with the rail welding facility, we elected not to pull the trigger on the investment in the ground on that project until we were successful with our rail trials.

That having been said, we're currently installing foundations for that facility.

Much of the equipment has all already been delivered, including the welder and some of the grinder and brushing units and so forth.

I would expect those units to be functional by the end of the third quarter, maybe middle of the fourth-quarter-type time.

It really depends on the weather here if we lose much time during the construction of the foundations.

As far as the long length rail capability, that's actually the capital project that I alluded to in my comments that we are commissioning currently on this 3-day outage.

Hopefully, when we come up out of that outage tomorrow that the cooling bed extension, the gathering bed collection will be functional, will actually be able to produce longer beam sections initially.

Then, I have a few more items to procure and finish over in the rail side.

We didn't have a need for it, since we had no real welding facility and we have no approved methodology from the railroads to ship those longest -- those 320 foot sections as no one else does it.

So, we're working on procuring adequate shipping instructions from the railroads for those what I will call them long single length sections.

I had just another question.

Could you -- and I missed this.

I think you made a comment on backlogs.

Could you just repeat what you had said about the backlog for the beam product line?

What I said is that we're -- what I would say -- is at a record level.

We're taking orders currently for July, and --

How many rolling cycles does that get you through?

We are on a -- right now, we there are employing a 6-week rolling cycle.

It was 5.

We extended it to 6 for purposes of slight productivity improvement.

But, I believe and I'm telling you we won't go further than that because we believe it is a useful sales tool and advantageous to us to have what I would say is the shortest rolling cycle in the industry.

So, you are through two cycles at this point?

You are taking orders against the third cycle out?

That's correct.

Okay, so that really is amazing.

I had one other question then just related to the Pittsboro operation if I could.

Keith, have you made any comments or could you give us some color on what the mix enhancement is for Pittsboro once the value-added operation facility is fully up and running in terms of either EBIT per ton or dollars per time on the shipment mix?

I don't have a net marginal cost structure versus marginal revenue stream at my fingertips, so I would rather not comment on it at this point in time.

But, the margins as we saw them are going to be we think substantial.

But more importantly, they will be beneficial to our customers who have to take these products now off-site for these services and then redeliver them to their clients.

So, we think the return on assets, which is -- what's the capital investment in that project?

Well, you said 17 million I think was the number.

I think that's the number I was thinking of -- 17, 18 million, whatever it is (multiple speakers) -- 18.

With working capital and what not, it may be somewhat higher.

But, they expect to enjoy something north of a 30% return on assets.

I am sorry.

I've got some more questions, but I don't want to dominate this.

So, I will get back in queue.

Thanks very much and congratulations on just a phenomenal quarter.

Timna Tanners, UBS.

I wanted to ask a couple quick questions.

I was wondering on the timing of the outage in the second quarter, is there anything to read into that in terms of your expectations for the market?

It seemed to me a little unusual maybe because of the strength usually in the second quarter that you would be taking outages and given the strength of the market.

No, Timna, it's really nothing to read into it.

Mark had ordered this equipment a long time ago.

We are ready for installation in June.

So, it's just we tried to get there as fast as we can, and that's as fast as we could get there.

Then the second question really was on the scrap market.

You usually are really good about giving details, so I was just hoping for a bit more in terms of the market.

Usually seasonally, we see a bit of a pullback and it sounds like we are not expecting that.

Certainly, the scrap dealers I talked to are expecting further strength, and they are talking quite adamantly about the continuing strength of scrap in scarcity.

So I wanted to hear your thoughts on that.

The past 2 years, there have been significant declines as the flow increases in the early part of the year in springtime, early summer kind of thing.

So, I guess we would all want to arm wrestle that question just a little bit.

Recently, we certainly did not see that for April deliveries.

There is good strength out there today, and everybody's operating rates are fairly good.

So, maybe the increased flows are being eaten up by some of the increased demand.

I really don't think it's going to go all that much higher in the next month or 2.

We always have the July issue to deal with.

The export market is not showing any signs of strength.

So, I think a lot of people that provide their wares to that market don't have a lot of upside opportunities there.

So some were arguing that -- number one, heavy melt was starting to drift down already, $10.

We've seen some evidence of cut grades drifting a little already.

Whether or not somebody is going to get silly and bid the bundles up, gosh only knows.

That's usually a hocus pocus thing anyway that we've all come to understand has very little value to anybody, sometimes not even terms of directional ton because it's an orchestrated process.

I suspect you could see the market up $10 in May.

Maybe you could see it sideways in June and maybe you could see it increase again in July.

I think there is certainly the potential for that.

But then again, you could see it sideways this month.

I'm not really expecting it to fall.

But, we have been surprised ourselves before.

Then finally, I didn't hear if you made any updates on the condition for Iron Dynamics or for -- I guess is there anything to update there?

Mr. Millet is prepared to speak to that.

I don't know whether I am prepared to speak to that.

But Iron Dynamics, we took an extended outage in the first quarter.

Total shipments were about 40,000 tons.

Although so much [art] furnace is currently down, we have been producing hot-briquetted iron this month and should produce and shift about 20, 21,000 tons for the month.

But, that's a project in progress as always. (indiscernible) we're still negotiating with our partners -- Kobe Steel, Cliffs and Ferrometrics.

We've just heard back from Kobe Steel, their position just in the last 10 days or so.

Hopefully, we will make some headway there.

(Operator Instructions).

Wayne Atwell, Morgan Stanley.

Congratulations on a good quarter.

Could you bring us up-to-date on the expansion capacity in your flat rolled with the changes you are making?

Mark?

Let me jump in there before Keith over commits.

I think we originally suggested probably this time -- well not last summer that we were going to get modifications or have modifications to the casters, namely extend the strain length to increase the caster speed that would get us up to about 2.8 million tons.

We've done some other tweaking and changed scrap mixes and changed our oxygen practices and are currently operating at that 2.8 million ton rate.

So if things all align, we should get about a 3 million ton capacity.

That won't happen this year obviously.

We're modifying one caster in June.

The other caster will be modified in September, and then there's going to be a learning curve.

So, I would suggest in 2007, we will be at that 3 million ton rate.

We probably won't produce 3 million tons in total in '07 but should be there in '08 for sure.

Could you bring us up-to-date on the backlog in flat rolled, how far out you are in the current hot-rolled spot pricing?

We are out through certainly the end of the quarter and entertaining July business.

It is strong.

We are -- we have some inventory care -- not inventory.

We have some production carry that we have to deal with.

So we're probably going to limit somewhat order entry in July to deal with that issue.

The hot-rolled spot price?

Going up.

Are you going to raise galvanizing prices, like one of your competition announced today?

Well, what we're doing is we are addressing the zinc issue particularly, with either a zinc surcharge or changing our coating extras.

We haven't firmly decided, which is the most prudent approach to take, but we will probably get that resolved and out by the end of the week.

David Lipschitz, Merrill Lynch.

Just a mundane question.

In terms of shipments for the second quarter and for the full year, what are you looking for now compared to the first and also for the full year total shipments?

The second quarter should probably be fairly flat with the first quarter.

That includes Roanoke?

No, no, no.

Roanoke's volume for the period, which they are reporting and on our books, should be excellent.

As we said earlier, the difficulty is the margins get eaten alive by the increased inventory value by GAAP-accounting pronouncement.

So add a full-year shipment number, including Roanoke?

Okay, what we could do, both Tim and Joe are prepared to talk about their shipment numbers for the last fiscal year and the first fiscal quarter in their year -- historical numbers, which might give everyone on the phone some context to start modeling the acquisition.

So, you would like to do that.

Joe?

Sure.

In the first quarter of our -- I guess we look at January, February and March, which is -- does not coincide with a quarter that we reported in the past, we were shipping finished steel at the rate of roughly 115,000 tons during that quarter.

Billet shipments have been extremely strong as well.

Although we sell a good portion of the billets to Steel of West Virginia in Huntington.

That rate was roughly 60,000 tons during that 3-month period.

Packing the billets out that we shipped over to Steel of West Virginia would reduce that total billet total by roughly 30,000 tons during that period -- roughly half.

So, we continue to ship products other than the fact that we are also experiencing a down week at the Roanoke mill this week, which will impact our shipments and production levels for April.

We're not seeing any downturn in business levels that would indicate that those levels I mentioned from January, February, March period would not continue to hold.

One other quick -- I am sorry.

Go ahead.

In spite of a perhaps modest decline in the second quarter because of the outages looking at it from a Steel Dynamics and just steel-only perspective, we probably can end up in the 41, 42 range perhaps for the year in terms of where we're going with shipments.

You just have to model the kind of numbers that Joe gave you for the other operations on a go-forward basis.

But, you know, overall, their combined capabilities are in the 700,000 zip code or 7.25 divided by 12, multiplied by the number of months they are going to be with us.

So, Tim?

Some comments?

Just generally speaking, I just -- rather than try to play with the different fiscal quarters, last year, 2005, on a fiscal year, we did 317,000 tons in total. 51,000 of that was billets and 266,000 tons were finished products.

We expected to ship on a greater pace this year.

So, I will let you do the math.

Just one final quick one.

In terms of the diluted shares, are we looking about 55 million shares for the rest of the year or for at least the third and fourth quarter and whatever the proportion is?

Actually, 55 would be high unless -- if you are including -- I would suggest it's going to be closer to 51 million on a diluted basis.

Oh, you mean averaging for the year?

Yes.

Oh, okay.

But on a go-forward basis, on a diluted basis like out in Q3, 4, it's about 55 million shares as I recollect.

Does that sound about right?

About 50.5 plus 4.5, I think.

Theresa is looking at my question I guess at this point in time.

I think that's pretty close.

We are at 50.5 in Roanoke.

We issued 4.5, so it's got to be around 55 million shares.

I just wanted to make sure.

You can go on and then get back to me.

Super!

Do we have any further questions?

Aldo Mazzaferro, Goldman Sachs.

Just a few quick ones on Gary for the balance sheet.

Gary, you had a nice working capital swing there with some -- especially in the payables.

I'm wondering, is there a seasonal pattern we should expect the payables to decline as a percent of sales?

I'm wondering what you're seeing for working capital going forward?

I don't know that there has been a seasonal pattern.

As I looked at this now over the last four or five quarters, what I see are some significant payments for significant raw material purchases that fall on one date or another and that cut off issue typically can swing the number from a payables standpoint pretty significantly.

So, I'm not sure that there's really a seasonal issue there.

We're buying scrap all the time.

That's the biggest component of our payables and there are days where we may pay three or four suppliers let's say on the second instead of the 31st and there is a swing for you.

A question for Mark on the shipping volume in the second quarter.

With the performance in April, it seems like your off to a great start.

I'm wondering with the outage being worth about 27,000 tons, are you expecting volume to be down from the first quarter or do you still might be able to get an uptick?

I think the outage is worth more than 27,000 tons.

But, --

The actual caster modification is 27.

We aren't taking the shutdown for its normal 3, 4-day outage.

So, we're impacting the other caster too some.

I would imagine shipments are going to be 635-ish.

Mark, how much of your flat rolled is spot market now versus what you might call contract?

I would say it's consistent with probably last year about 50-50.

The rest of the divisions are probably mostly spot, right?

Yes.

Yes, Columbia City would practically speaking be all spot and --

Glenn is probably 30 contracts, 70 spot right now or maybe 35 contracts --

And growing the contracts --

55 and then growing the contracts side.

Joe is what Joe?

We are pretty much like Dick.

We are about spot.

Tim?

On 20% of our volume is spot.

Only 20.

The rest is contract.

A final question for John.

A lot of people are arguing that this tightness that has come into the market this year has been due to the CSN outage.

Are you -- you know the Gloucester outage at CSN.

Are you seeing anything you might think is unusual in terms of disruptions or how do you ascribe the -- what do you think is responsible for this tightness that just seems to have come into the market in the last month or 1.5 month?

You know, there is a whole list of things that we've been talking although since the earlier part of the year.

I think first, maybe an ambitious -- maybe certain ambitious objectives on the part of the market relating to inventory in the second half of last year.

Certainly, the three glass furnaces at CSN has taken CSN out of the light gauge galvanized market.

You know, we've seen that impact Jeffersonville significantly.

You've got the slower turn of US steels, 14 furnace at Gary that had an impact.

You've got the [A Case] deal lock-out.

I mean I can give you a laundry list of things, a surprising recovery of Asian demand and particularly Asian market prices.

All of these I think have contributed.

So, it's not necessarily the perfect storm we experienced in 2004.

But, clearly, when you add all these things up, it tends to help supply match demand reasonably.

And that's kind of how we see it at the moment.

I think also, as John has described, is the heard mentality in the past.

But, buyers had low inventories and sensing imports and sensing softness later in the year, they stayed out of the market, stayed out of the market, stayed out of the market.

All of a sudden, they are seeing the pricing is actually flipping the other way.

They are all buying -- they're all jumping back in the market at the same time.

I would -- just to underscore that although, I would suggest that some of the early reports about this huge tsunami coming from China frankly did -- as my exchange with Michelle a little bit earlier -- frankly did adjust the perception of the market.

You know, the heard chose to stand in the headlights so to speak.

Charles Bradford, Bradford Research.

A question for you on some of the nitty-gritty for forecasting.

Where should we be looking for SG&A and depreciation in the second quarter?

I'm assuming I can't just add together the Roanoke figures (technical difficulty).

From a depreciation standpoint, again, we have to get through the purchase price accounting and figure out what our basis is on all these assets and then begin to depreciate them.

So, that's a number that's still in the works.

If you want to take that approach from a standpoint of just getting a ballpark, maybe that's a good place to start.

Theresa, do you have any other suggestions?

Well, historically, Roanoke runs depreciation anywhere between 3 and $3.5 million in depreciation a quarter.

So, it's going to be higher than that and it's the amount of that again.

We can probably come out with some better information later in the quarter.

The same kind of thing for SG&A, they I guess runaround 8-ish.

Do you think it's going to be lower?

It's going to be lower.

There have been a lot of folks down there who have retired or as the transaction was closed left the Company, who were in the SG&A number who were fairly high-earning folks as compared to the average population down there.

So, it will be lower.

The total of that I'd say maybe 5 or $6 million a year you could shave off of their previous SG&A numbers without us making any other major changes.

As we continue to integrate, that number may change still more.

I just caution everyone that you've got to look through the second quarter.

So many developments there and changes and quirky accounting things that Q3 will really give you a much better picture and Q4 will be an improvement.

As they pointed out, depreciation will go up.

What's it going to go to from 3.5 to 5 million?

I don't know.

Probably not much worse than that.

But they will provide an answer to you, Chuck.

Okay, I had another question.

With all the -- wall actually with Steel of West Steel and Roanoke not giving shipment data in the past, do you have a guidance for us as to what their average selling prices have been running?

No, we really don't.

As you know, we typically give it for consolidated steel operations.

Truth be told, we haven't analyzed what it would be if you combine them historically.

So, we don't have a consolidated average steel operation selling price that would include them.

You will see that -- you will see that in the second quarter.

But the margins, you really won't have visibility until the third quarter.

Michelle Appelbaum, Michelle Appelbaum Research.

I had a question that I know is I think right up John's alley and Keith's as well.

I have learned to watch the licenses quite a bit.

You know they've been real high all year.

I think perhaps higher than the market has been.

One thing I noticed a couple days ago, the import licenses jumped and the months kind of annualizing the weeks for the month, April was running over 6 million tons of licenses and then it got corrected and it was back down to like 3.9 or something like that, still a high number.

Obviously, someone caught an error.

I was just wondering, have you guys been watching that carefully and are we -- 6 million tons obviously was big enough that someone called somebody and they fixed it.

I'm just wondering, have you found other errors on that and is that a good tool to be using to predict the value of imports?

Because it seems to be fairly -- it doesn't seem consistent with the feel of the market lately.

I've found it to be reliable, Michelle.

If you recall, when we were in Chicago, I had a presentation, which compared the actual census data after the fact of arrival to the SEMA information for a comparable period.

They're very consistent.

But I'm not going to tell you that this developing system in the Department of Commerce is without flaw.

You know, for example if the folks that are responsible for this were on the call, they would clearly tell you very candidly that it is work in process.

So you're going to discover some of these things occasionally.

But, by and large, I believe that it reflects properly what we can anticipate might arrive in the going-forward months.

What kind of correlation, John, is there between total license volume and actual deliveries?

Is there a percentage?

No, it was within 3% I think, Keith.

So, in other words, it accurately reflects 97% of the time the receipts identified by Customs.

Do we find that there is inter-month revisions?

There is an inter-month revision in the census data that comes from Customs okay?

You've probably seen that.

It happens every month.

It's large.

I might say publicly that that's consistent with the Bush administration.

They constantly revise information and statistics.

Right and you guys complain about China.

But I am saying I don't know that there is an official revision.

In fact, there's at the bottom of the screen, there's a date in which it tells you when it was last updated.

So, it's constantly updated, but I don't know that they correct it as they do the census data.

Well, obviously, there was an error this week.

It makes you wonder how often there are small errors.

When you see a big error and someone catches it and it gets fixed, and then I wonder if there are small errors.

Well, there were a few days I tried to get on and I couldn't get on the site.

Yes, I've had that happen too.

But yes, I mean it's a brand new tool.

It's not even 1 year old, is it?

Or roughly 1 year old.

It's longer than 1 year old, but it hasn't had the mass exposure that it's had longer than 1 year.

You're correct.

I am seeing no further questions.

Mr. Warner, I would like to turn the call back over to you for any additional or closing remarks.

I really don't have any additional comments other than to thank our employees for an outstanding job well done for those of you who are listening.

We just have a great team at Steel Dynamics, and they do a great job for the Company and themselves and the shareholders of the Company.

We look forward to continuing to chat with all of you and talk with you, both in the interim and during our next conference call.

Thanks, ladies and gentlemen.

That does conclude today's conference.

We would like to thank everyone once again for their participation and have a wonderful day.