Steel Dynamics Inc (STLD) 2006 Q2 法說會逐字稿

Please stand by for realtime transcript.

The Steel Dynamics conference call will begin momentarily.

Good the everyone and well to to today's Steel Dynamics' Steel Dynamics' second quarter earnings conference call.

Today's conference is being recorded.

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

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

Mr. Mark Millett, Vice President;

Mr. Richard Teets, Vice President;

Mr. John Nolan, Vice President of Marketing;

Ms. Theresa Wagler, Vice President and Corporate Controller; and Mr. Fred Warner, Manager of Investor Relations.

For opening remarks I'd now like to turn the conference over to Mr. Fred Warner.

Please go ahead, sir.

Good morning, welcome to this July 20th, 2006 conference call covering second quarter 2006 results for Steel Dynamics Incorporated.

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 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.

Also the full 10-K report is included as a part of our printed annual report available from the company.

After today's management discussion we will open the question-- open the call to questions as time permits from participance who have informed us that they wish to ask questions.

Please make your questions brief, you are welcome to ask additional questions later as time permits.

Please note that today's call will be available for replay on our website.

This quarter we are also making the replay available for download as a pod cast should you be interested.

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

Thanks Fred.

Thank you Wendy.

Good morning, ladies and gentlemen.

Obviously STI has an excellent quarter by comparison to the last quarter and by comparison to early guidance.

The $1.78 that you see reflected in the press release on an operating basis is probably closer to $1.80 or 81 or 82, somewhere in that area.

We did have an $0.08 a-- negative adjustment to earnings because of certain purchase accounting entries required under GAAP, and we also had about-- I don't know-- $0.06 pick up for R&D credits and other adjustments and our tax rate, so you take them both into consideration and we're in about the $1.80-- my favorite word-- is ZIP code with earnings.

Just truly an excellent quarter versus the $1.00 reported in the second quarter of '05 and the $1.52 in the first quarter of '06.

Net sales for the quarter were 821 million, a 50% increase or thereabouts when compared to the second quarter at 23% increase when compared to the first quarter.

When you look at net sales on an annualized basis, just thinking out loud, into quarters 3 and 4, we should certainly exceed $3 billion.

I think in previous years, slightly above 2 billion, part of that is internal growth organic and the other part is obviously related to the acquisition of Roanoke but certainly should be in excess of 3 billion maybe approaching 3.2 billion for the year.

Net income as you know was up 20-some percent quarter over quarter statistically.

Consolidated shipments were 1.2 million tons and probably will be in the vicinity with a-- reporting Roanoke for a full quarter, and increasing business atmospheres in various places could be on a consolidated basis somewhere in the area of 1 million 250, 1 million 275 thousand tons which means '06 shipments could be in the range of 4.8 million tons this year and when you back off the Roanoke impact through-- not quite three-quarters of a year we still would have been probably in the 401, 42 range versus '05 of about 3.6.

So still some rather good organic growth occuring.

You know, with-- with the reaching full capacity at some of these operating units, which is really the product of the seeds planted in the ground a few years ago, and their germination, we probably-- in '07 will have shipments in the range of 5.2, 5.3 million tons.

Obviously inclusive of more organic growth and more Roanoke and in '08 should approach 6 million tons if all goes according to plan, so I think some nice future growth from a shipments perspective are-- are available under positive market conditions to the company.

So in terms of look forward, which we did in this report, we're looking at 205 to 215 is our best guess about where we're going to be in Q3.

I would guide you to the low side of that number for conservative sake.

It's not they don't believe in my own number it's just that I-- things change fast in this industry and we offered up some yearly guidance.

We think our earnings could approach 725 to 750, and I know you are quickly going to do the basic math and take 330 and add $2.10 to get the 540 and then say to yourself, "Well gee, if they earn $2 they're at 740, so maybe the range isn't so bad," kind of thing.

But that's forecasting out a ways and would caution you there, and would tell you that you never know.

But right now I would tell you the business climate is good.

I really don't see it changing at this point in time.

I think the fourth quarter seasonally, even in bad business climates as well as good business climates, tends to see impact from the holidays and shipping to certain industry segments shows slow down and you could see that affect slightly, but generally speaking, I thought it was important to give everyone just-- the analysts were seeing us on a yearly basis in the $6 range, 6.16 or whatever consensus was and I think you can clearly see with stable markets, stable demands, stable business conditions out there, that we're well above that and approaching 725 if not in the range of 725 to 750.

So I think that's about really all I want to say relative to that.

I want to talk about the markets just a little bit.

They're stable at this point in time.

Order entry is very good.

As I said in the report, we have record backlogs everywhere.

Very positive business conditions exist in flat roll.

I think pricing is probably just about peeked?

Could it go up?

Could it go down?

Yeah, I think it could do either one of those.

But I think we're in a very stable ZIP code and I don't expect pricing to change a whole heck of a lot on a go-forward basis.

The backlog at-- at the structure division is-- is in really good shape, it has been a record as of recent.

We don't really input Q4 data this early, but we're out there with some of it already, but it's not in our statistics, but still our third quarter backlog, at its peek, was well above anything we had seen before.

We expect business conditions in the non-residential market to remain strong and performance at our structure division to remain strong throughout the year, that would include steel of West Virginia, which is involved in some of the smaller wide plan shapes as well as special sections.

They see their business climate is extremely positive.

The Roanoke mills are both running very well at this point in time.

They had a record quarter-- not record-- they had a record month in June from an earnings perspective.

That's buried in our data, as you could expect, but nonetheless, very positive performance from the Roanoke assets, so the-- Joe Crawford tells me his backlog at the merchant division in Roanoke, Virginia is really in good shape.

Doesn't see a changing order input study and stable.

Unless there's a catastrophic failure at the mill, they should be in terrific shape to get near record volumes and hopefully record earnings in their up-coming quarter.

I think Tim had a record month as well in June at Steel of West Virginia, so very positive results there.

We have yet to really realize the effects of transformation at the fabricating divisions, not only transformations we're waking at New Millennium but integrating Socar and Handcock into the family, and it's becoming a family and we're getting better and better at what we do.

We have all of the fabricating division modifications engineered and or underway, and or about to be under construction so we should see results in six to nine months.

Very positive results.

In fact, I think we're going to see very positive earnings results in Q3 from our fabricating division versus its Q2 level of performance, so some good news on the way there.

The backlog at Pittsboro is also in the best shape it's ever been in.

I think some of the damage we might have done relatetive to not understanding the mission and not performing in all arenas early on in our learning-- early learning curve have been corrected.

I think some of the consumers who were disappointed in us have returned and are very happy with what they see.

We're running a pretty tight ship, there aren't any grades we can't manufacture successfully, and are doing so.

Our new finishing facility is just getting started and we'll probably see short-term negative impact minor and as we move forward in the quarter, and throughout the rest of the year it will be a earnings contributor.

We think it's loading up very positively, in fact the management team said, "Keith, I'll bet you we double the capability of our finishing business within 18 months."

That's a pretty positive statement so things are going fairly well.

I would expect the volume to continue to grow at Pittsboro and SBQ.

Glenn rolled about 40,000 tons last month.

He's going to be in that ZIP code.

To analyse that's about 480,000 tons that won't be the year's results, but nonetheless very solid improvement over--over--over '05 results, if you will.

As I said earlier, we have done a lot of spade work, planted a lot of seeds and they are blooming nicely, and that includes-- I might just say-- seeds that are in the greenhouse yet, And there are a few of those.

We're not going to get into detailed discussions about it, but I think some very positive things on the horizon.

As I said, I think selling values will remain fairly stable, scrap costs were up 10 to $12, I think $10 specifically-- or excuse me-- in this past quarter they were up $10 and I think they're going to be up 10 to $12 in Q3.

You might say to yourself how could that be?

Scrap unusually declined in July.

Yes, it did.

And it's been a while where we have seen a July where the market hasn't been hyped for scrap products.

And I think the market just ran out of steam.

It's seen some rather nice increases in March and April, and May, and perhaps got ahead of itself and a lot of people had-- were-- were well prepared for July.

They had a lot of inventory, we were one of them.

Didn't need to be an aggressive buyer, but rather than the market moving up as the press would have it $20, the market actually moved down on premium grades about $20 and I think is in the process of backing off even more in August.

I don't have a strong prediction, but if you look at July and August, perhaps moderating as well, and perhaps even September, you would wonder why we were forecasting scrap costs to be up 10, and it's really because of the stock on hand flowing through the books and records principally in Q3 with the resulting impact of lower and or moderating scrap costs really affecting us in '04.

So I think-- in the fourth quarter, versus the third quarter.

So I think the fourth quarter, we're probably going to be down I think about $5 somewhere between 0 and 10, maybe $5 is a good number, it could be as high as $10 but I think resource costs will-- will drop in-- in the fourth quarter.

So we just had a great quarter, far better than we had earlier anticipated.

As I said things are going well.

Iron dynamics, I might mention, made it's first real profit not just a cash profit.

That was sort of a significant event for the company.

As I said in the report the-- as I said in the last conference call, the-- the outage at Butler went fairly smoothly.

It ended up taking us a little longer, we were down a little longer than we thought in June 4.

But the overall impact of shipments wasn't that substantial.

But I think Mark and his team done a good job and I think their capacity with-- with all of the modifications and half of them that will still occur in October, they did one caster in June, we're doing one in October, will probably put him on a go-forward basis in '07 at probably you know 2.9 million tons approaching 3 million tons of capability, so some future growth on the way in-- in flat roll.

Dick's already begun work on the new rolling mill, and we'll let him talk about that.

But I think he's done has and good job-- they are done a good job of equipment procurement and I believe they are on budget and on time with that project, and things are going very well.

We're going to start to put some money into the two Roanoke operations.

We already started that to some degree but hope to continue to upgrade those facilities and make capital improvements in them with the hopes of expanding their capability.

Not going to talk about billet shipments at Roanoke, because they have the capability to ship several hundred thousand tons of billets, but I think on finished product they've been as high as 425,000 tons and I suspect they'll get back to that level and probably exceed it.

They may actually end up next year, we hope, and you know 450 to 475,000 tons, somewhere in that area.

We think Steel West Virginia could be in the three-and-a-quarter, maybe 350 with business conditions remaining very positive.

We're very upbeat about it.

We think the integration has went very well.

Not without a hitch or two.

We had some misunderstandings of the timing of a pay increase and this and that but they have all been corrected and we're dialed in.

I would just say a little bit about our SG&A, people might look at that and say, wow, your selling and administrative general expense is up, and I would tell you, yes it was, but we have to understand that some of that is-- has to do with the-- the transaction, I think wrote off some of our or amortized some of our organizational expenses et cetera, et cetera, and just general expenses associated with that, pushed up SG&A a few million dollars.

I look for it to come down 5 million, but it's really not going to come down it's really going to net go up 3 or $4 million and the reason is success.

The profit sharing rewards, the percentage is changing, and obviously we're success-- multiplying a greater number times a result produces more bottom line for profit sharing and we're tickled to death to be able to share the profits with our employees.

We believe we have the best work force in the North American steel universe and there are others certainly, not to disparage there are other quality work forces out there but I think SDI has shown time and time again that they are the most proficient North American steel makers at least in proficiency and productivity prospective at what they do.

We just have a great team.

They're just very well engaged and just doing a great job everywhere in the company, and these rewards are well deserved so that really summarizes my comments about our quarter and where we think we are going for the year.

I might add that I was at an AISI meeting yesterday, and the mood was really very upbeat for everyone relative to the near-term business climate.

I think everybody is positive about Q3 and very positive about Q4.

I know there has been a question mark surrounding Q4, and where the s the market going?

And boy, I didn't hear any negativity whatsoever, in fact, the comments from Europe from a recent IISI meeting were also very positive by the Europeans and some of the Asians.

We know China has issues, and we're all talking about them, we've been talking about them for years, whether or not some of that capacity finds it's way into our market is an open question.

If it does and it's dumped capacity obviously we're going to go after the Chinese very aggressively in court and stem the tide of such a pending problem, but I don't see any real evidence of that.

They have been fairly well behaved, at that point in time, with some of their excess capacity.

As you know they are discussing ways in which to shed some of the more antiquated capabilities, shut it down, integrate it, merge it, et cetera, et cetera, and I think the big question mark for everyone is when is that going to occur?

With respect to imports, they've been at a seasonally high level, the April, May, June timeframe is when the boats deliver historically.

It's been that way this year.

Numbers were a little bit high, but we all have to remember there was some capacity that was out of service in the North American arena, and I think the demand equation or the demand -- specific demand for steel products is very, very high, and I think that those imports were needed just to keep domestic inventories at the rather balanced level that they seem to be at from a service center perspective.

I don't think the service center are going to grow their inventories or shrink them mutually on a whole.

I think imports will in the short run abate somewhat.

Of course by the time the fourth quarter gets here seasonally they do abate.

I don't know what we will finish on a year to date basis, but I think the economy is probably stronger, and demand is probably stronger than most people are giving it credit for.

I will also tell you this industry is really a totally different industry today than it was 10 or 15 or 20 years ago, and I know the industry used to have a sign multiples of $20 and with all of the calamities that have occurred over the past dozen years or so the multiples were lost in this industry because we didn't have believers.

Obviously there has been somewhat of a shift in how the industry is valued.

It's up from 6 to 7 to 8 to 10 and hopefully it will be up to 12 and maybe up to 15 shortly.

I don't know that we're ready-- I don't think anybody has that much confidence, but I think this industry from a PE perspective is dramatically undervalued.

And I think the business climate is positive and I think global consolidation has mattered, it has had an effect, and a positive one, I don't think where we're going to go with that subject in the future.

As I said it's still survival, bigger is not always better.

We're doing very well organically growing the company and getting together with folks who wish to be part of this family, if you will.

So I think it's just a pretty positive outlook and I think-- in a rather differently disciplined industry today.

So that really does conclude my remarks.

I will now turn it over to Dick Teets for his comments about performance at the structural division.

Thanks, Keith.

And good morning.

I think the seeds that are planted at Columbia City it's fun to see some of them coming up out of the ground.

Though dirt work and site development work has been basically completed for the expansion to our second rolling mill.

The foundations have been put in place for the expansion of our-- the scrap bay and the melting bays and we're going to be working on the rest of the melt shop building expansions in the short-term.

As you mentioned in the press release, and I think you mentioned in your comments, major equipment contracts are basically in place for the melt shop cranes, caster modifications and addition, second rolling mill, melt shop steel, things like that, and so we're knocking them off as the list is presented and we feel very comfortable with where we're at both time wise and economily.

As far as the rail-welding project goes much of the material handling equipment is installed and kind of neat seeing 1600 feet of discharge area and 800 feet of processing area for extremely long site plan, very narrow, but it's taking shape, and we expect to be a welding rail in the fourth quarter.

We're excited about it.

All of the equipment has been delivered.

It's either on-site or in storage locally.

And finally our little composite tie company, the building is going up.

It should be completed in August with the equipment foundations going in.

These are pretty minor equipment foundations compared to steel mill ones.

So most of the slab on grade with some minor embedments.

But all of that is going along and we're very comfortable with where we are, so we'll be making ties before the end of the year also.

So we're excited at Columbia City.

Thanks, Dick.

Mark?

Again, the mill continues to run extremely well.

We're operating over the first half at about a 2.6, 2.7 million ton rate, which is appreciably above the 2.4 that we have experienced in recent past years.

The expectations of higher quality and faster cast speeds on the caster-- or through the caster modifications is proved out.

Those changes have gone very, very well.

The second caster modification will occur in our bi-annual adage in October.

These changes along with some process changes and equipment changes on the furnace area and hot strip mill will lead to the 3 million ton expectation at annualized rate later next year and certainly 2008.

Cost structure is in great shape, most commodities have kind of stalelized or backed off a little bit, naturally we're enjoying the fruits of incredibly high storage, natural gas is back down quiet dramatically here in the short-term.

As Keith said the backlog remains extremely strong for us.

Pricing is potentially peaked at all, but significantly I think the backlog strength has allowed us to pass through increases on the zinc extras.

So those are going to be realized as of new orders July 1st so we're see a little expansion in coded product margin probably in late August, September.

So it's-- things are going well.

Equipment has been purchased that's on schedule for probably third quarter of '07, again, Galvalume(R) half the equipment has been purchased and that's going to be installed probably late first quarter, early second quarter of next year.

So things-- those performing incredibly well.

Incidently it's also our safest quarter ever on the steel side of the shop, so.

Congratulations, Mark, thanks for a good report.

Mr. Nolan, we're going to let you talk about the market for a few minutes.

Thank you, Keith.

Good morning everyone.

I just want to underscore a couple of points that Keith and Mark touched on.

First demand and all of our what we call "focused market segments" we see it as relatively good no signs or signals of declining strength on the horizon and any of those segments.

As Keith indicated supply constraints are mostly behind the industry.

We believe that bodes well for the stability in the marketplace going forward.

Imports, one of my favorite subjects, as you all know, I think have supported the inventory objectives in the market place in light of some of the supply constraints that are highly publicized over the last several months we have them to be irresponsible or disruptive in this cycle as they have been in-- often in past cycles.

In fact I'm surprised to find more foreign mills and trading companies offering CRU indexed arrangements on a longer time side to give more confidence to buyers to place orders with them.

I think that's a constructive move on their part.

But again as Keith indicated we're watching all of this rather carefully at the moment particularly the China aspect of it.

In the words of NASA folks this morning, all systems go.

So thank you very much.

We'll turn it over to Gary Heasley our Chief Financial Officer for some comments.

Sure.

Thanks, Keith.

I'll just run through briefly some numbers that hopefully will help you in modeling and analyzing the company.

Steel operations shipments for the second quarter hot-rolled coil shipments were [inaudible] tons, P&O, pickle and oil product 29,000 ton, cold-rolled 41,000, hot-roll galvanized 115, cold-rolled galvanized 113,000 and painted products, we shipped 60,000 tons.

For total shipments of flat-rolled products of 653,000 tons.

Structural and rail products we shipped 243,000 tons for the quarter and at the engineered bar division our Pittsboro facility we had shipments of 124,000 tons.

The Roanoke bar division, new numbers to give you this quarter, 146,000 tons of shipments and Steel of West Virginia we had 80,000 tons-- I'm sorry?

It's not fourth quarter yet.

Right.

Right.

That was or course a partial quarter as you know they joined us on April 12th.

Giving us steel operation shipments of 1.2 million for the quarter.

I think Keith has already addressed selling prices and the change in scrap costs so we'll move on to capital expenditures which in Q2 were 34 million.

We're looking now at CapEx for the year, probably around 157 million, although the timing of payments on some of the projects that we have been speaking about, can have an impact on what the actual number is, so that's going to be more of a function of payment schedules, delivery of equipment and progress made on the various projects we've got underway so that may move around a bit.

Depreciation and amortization for the quarter, 32 million, we're expecting about 116 million for the year.

In terms of interest expense, we had interest expense of the quarter of 8.6 million, we're still looking at 35 to 40 million for the year, our affective tax rate for the entire year, however, we're looking at about 37.5%.

We had cash taxes in quarter 2 of 94 million.

As Keith mentioned we did have some beneficial impact to our taxes, that was predominately an R&D tax credit we have been working on for some time.

We also had somewhat of a decrease in our deferred tax rate because of the Roanoke acquisition which affected our state taxes a bit.

So the new effective tax rate for the year 37.5.

Obviously we had significant increases in working capital, most of that obviously, again, related to the Roanoke merger.

In terms of leverage, our leverage is extremely strong, cash is at 54 million, was very strong at 630 and leverage at 0.70 times [inaudible] very good.

Shares outstanding at the end of the quarter were 50.6 million.

We have converted this year 2.1 million shares of the-- 2.1 million shares of the converts have converted, and 1.8 million shares of that occurred in quarter 2, and so now are fully diluted will be still around 55 million.

I think for the tax rate, the go-forward tax rate will be-- effective rate-- will be 38.19% but for the full year that will result in the 37.5%.

That's correct

For modeling purposes, 38.2 would be a good number, I think

For the second half

Right Thank you, Gary.

Wendy, it's time for the Q&A.

[OPERATOR INSTRUCTIONS] We'll take your first question from David MacGregor with Longbow Research.

Nice quarter.

Thank you, David.

The Roanoke accretion, maybe you can help me better understand this.

It looks like it was $0.08 negative to this quarter.

Last conference call you indicated you thought third quarter might be $0.05.

Can you talk a little bit about-- in more detail about accretion expectations in the second half?

Actually it was not negative just the purchase-- it could have been better.

It actually was accretive and I don't know how many pennies, $0.06, 0.07 something like that.

Actually overall accrete, including the purchase accounting $0.08 affect.

So, just to understand this clearly the purchase accounting adjustment left you with an $0.08 negative number without that adjustment it would have been $0.07 positive.

No it was $0.07 positive.

So therefor it would have been $0.15 positive.

Okay.

And it's going to grow beyond that, we believe, in Q3 and 4.

Is there any way to give us some guidance or some sense of where that could go in 3Q and 4Q?.

Maybe we were just talking over each other.

I think it's probably-- without the purchase accounting going to go from 15 to $0.25, 20, $0.25, somewhere in that area.

Okay.

Great, thanks.

Your flat rolled backlog, how far are your right now with current pricing?

We only are through September, essentially, we have not opened, no my knowledge, October is that right, Mark?

Actually we haven't opened September yet.

So that giant backlog we have is just through August.

Obviously we've got commitments, but spot is not open for-- it's September--

Okay.

Just through August.

Good.

And then you had mentioned your record backlogs in a number of other areas, is that a similar situation in your other product groups?

It is.

Pittsboro, the SBQ division has a record backlog.

I think Dick's backlog going into Q3 was a record.

Yeah.

Very definitely, so I think Joe's is.

Tim's is, and Mark's, if he'd booked September would have been.

Okay.

Very clearly our entire portfolio of products is experiencing very positive backlog conditions.

Okay.

And then with all of the caster upgrades at Butler, how much extra capacity on your reheat ovens and your hot-strip mill are you going to have once this is all done?

The product pulls directly from the casters through the furnaces and into the rolling mill.

The rolling mill certainly has the capability of beyond 3 million tons, I would guess.

So the limitations has been the casters-- speeding the casters up in time as they are fully developed, should add, as we said about 400 to 500,000 tons.

Mark should approach 3 million tons of capability, up from about 2-4 to 2-9 to 2-5 or 3 or somewhere-- it's hard to tell exactly where we're land, but somewhere in that zip code.

And what do you think hot-strip mill is capability of doing under, sort of, full stress?

I don't think it's going to go beyond that I mean, the mill could do it.

We still have the casting capability to get there.

Yeah.

Basically the hot-strip mill is really product mix dependent and given the large portion of light gauge product we put through it's happening at a range about 3.1 maybe 3.2 million tons.

If we went to heavy gauge, hell, the thing could do 4 million.

Right.

Okay.

And then finally on the SG&A, I thought I heard you say it could be down about 5 million in the third quarter but with all this success you expected it to continue going up, which is what we'd all hope for I guess, but did I hear that correctly that for the upcoming quarter it should be down about 5 million?

Yeah, I think the expenses related to the deal and the amortization write-off, we're probably in the vicinity of 3 million in amortization and 2 million in SG&A so they'll not be with us in the third quarter, but about $9 million worth of additional profit share willing be with us in the quarter.

Great.

Well, congratulations on all of the progress.

Thank you.

Thank you.

We'll now move to our next question with Michael gambardella with JP Morgan.

Hey, Mike.

Hey, how are you doing Keith?

Good morning, congratulations.

Thank you.

Quick question, can you just go through and talk about how mix changes impacted, say, average pricing per ton and say average cost per ton during the quarter?

Well I don't have that data, and that's not something we normally come to the meeting armed with.

I suspect we could go back and do some research and try to get it, but I think the mix didn't change a heck of a lot.

It maybe was a little bit richer with more and more success in painted projects, et cetera, but-- at the same time, from a margin perspective, I think hot-rolled was as good of a product or maybe a little stronger than others, so I don't know that it changed a whole bunch one way or another.

Even with Roanoke?

Well that, yeah.

I was speaking-- I'm sorry-- Butler.

Yeah, that's changing.

Tim's values at Steel West Virginia are higher than our average generally and Joe's at Roanoke Electric and Roanoke, Virginia would be lower because it's all merchant.

I suspect the average-- Gary do you have-- are you reading something there?

It's not going to change a heck of a lot, but .

The average for the merchant part-- product mix if you want to talk about that is in the $550 range.

Sure.

At this point in time but whereas at Steel West Virginia we'll have actually a much obviously lower volumes, but a much higher selling value because of the fabrication.

There's a tremendous amount of fabrication.

So if you go beyond the mill products, right down into what they're selling, we actually get up in the 750 to $800 range with some of those products on average for the facility.

So some are much higher, some lower, but those will have a big impact on our average steel operations prices.

When you mix in 750 to 800 with 550 in the entire mix, probably the overall impact on our mix isn't all that great.

Okay.

All right.

Great.

Thank you.

Yep.

[OPERATOR INSTRUCTIONS] We'll now move to Mark Parr with KeyBanc Capital Markets.

Hey, Keith.

Good morning,Mark.

Gary, guys congratulations great job.

Thank you.

I was wondering if you could clarify a little bit the situation, you talked about pricing, you thought pricing may have peeked out a little bit here--

--and I also left room for upside.

It could be up a little on a go-forward basis, or could have reached it's plateau--

I guess one of the things I'm curious about, we have seen pricing move up so aggressively in the May, June, and July timeframe.

Do you think the market needs a little time to kind of digest these higher prices?

And also, I guess, how much more important is the metal spread as opposed to just the absolute level of pricing?

I think that is one of the keys because some of what is driving price momentum is additional cost momentum, if you will.

For the integrated folks there are costs that are about to go up again and coal costs haven't regressed all that much and they use scrap too and the cut grades at least were selling at near record levels.

So the input costs are up but alloy costs up electro costs are up, zinc costs are up, so on and so forth, and it's hard to see-- in just consolidated statistics how that plays into the mix, but I think margins are going to continue to grow somewhat, that says that the spread is going to grow somewhat.

I think we're-- all of us work off of-- to some degree, long-term sales arrangements or agreements or contracts or whatever you want to call them and there is-- there are those-- I don't want to call them deals-- but there are those agreements in place that will be honored by everybody [inaudible].

So it's not all just about the spot.

And you can't always just get the spot.

The spot using how well it goes up to 640 or 660, are we going to find a transaction or two or three or ten or a hundred?

Yeah, course we are.

But mixed in with other agreements, you're never going to see our average reach that kind of a level in terms of average pricing, but I think the important thing is that margins are being maintained.

Terrific-- hey, can I ask just a flow up in a different area.

Could you give us an update on the labor contract negotiations of Steel of West Virginia and do you have any plans for capital upgrades there at this point?

The negotiations are actually going okay.

We did something rather unique and novel and wanted to we knew that incentives were perhaps a bridged too far and we-- changing the profit sharing that is applied directly to their division was probably sacrosanct in some respects.

So we kind of left those two items alone and said we really would've liked to include Steel of West Virginia in our benefits package.

From administrative perspective it makes it pretty simple, but what that really meant is that their group insurance plan, which is what I call a Cadillac, the entire industries I would call a Cadillac, wasn't going to move back to a Chevy but it might turn into a Pontiac or a Buick, so to speak.

We have a very good plan but our people share more of the cost.

In light of that change, that "C" change, should they adopt ours, we were prepared to build it into their paycheck, so they really hadn't lost anything, which is a very unusual move.

Most people thought it was pretty creative and then allow the people at Steel West Virginia to take advantage of all of our other benefits because we do have significant benefits that could flow to them if they adopted our program whether it was a match up 401K or special bonuses at the end of the year or scholarships and things like that, but the union-- I don't want to say the union, the bargaining committee of the union, really was, I think taken by surprise.

I suspect they were rather suspect that-- there isn't a real Santa Claus and even though he seemed to appear on their doorstep and give them a net upside gain of thousands of dollars per person or per family they were skeptical and I think they backed up and said there's nothing wrong here but we think we would like to negotiate a standard pay increase and talk about our plan and other subject material rather traditionally, so that's what we are doing.

They have an negotiator there that's very busy elsewhere so they have been asking for extension after-- we're not really fighting about anything.

We could do it the old way or the new way, but we thought the new way held some real promise.

We're getting along with everybody and we'll find a solution.

Hey, Keith, again, congratulations on all of the progress and I look forward to further good news.

And from Wells Capital Management we have Andrew O'Connor.

Great quarter Keith and Mark.

Thank you.

Keith and Mark I wanted to know what percent or portion of the 4 to 500,000 ton increase in hot pan production at Butler will be further processed by SDI?

Probably-- a lot on the downstream lines are already maxed out.

I think Jeffersonville that has been running historically at a range of about 22 to 25,000 ton pace will creep up to 30 to 32,000 so you'll going to see probably 60,000 tons go through that line.

But the bulk of the increase will be actually hot band.

And that's something in all honesty we're in sad lack of right now.

We're somewhat constrained, so .

Thanks for that, and then Mark can you quantify the reduction in cost, do you think you realize that Butler as a result of the expansion, if not in absolute terms, percent terms?

Thanks so much.

Good question.

I would say--

It's really going to impact fixed cost, because of volume more than variable costs, and so half of the cost of production tends to be the cost of resources, and they are not going to change a whole lot, but there will be a positive impact.

It would be a wild guess-- and he can-- Mark can have his but I would guess a couple of bucks.

I was going to say a few dollars maybe at tops.

A few dollars per ton?

Yes.

Yes.

Okay.

That's all we have.

Thanks again.

Thank you.

Chuck Bradford for from Bradford Research has our next question.

Good morning.

Hey, Chuck.

Hey, how are you?

Great quarter.

What's the manning at Butler these days and will it change any with the expansion?

I wouldn't think so, but--

Probably on the not shop end on the label furnace and the caster we're probably going to have to add-- I would say eight people in total.

But in the whole scope of thing it's pretty insignificant.

At the Butler facility today we have a total of 650 people.

It will be remain about the same, Chuck.

What is the size range of SBQ that you are making these days?

We can make three-quarters up to 9 inches, but we're not doing a lot of small-end work.

We're really very good in the upper end and I would tell you 2 inches to 9 inches is kind of where we hang out, 6 inch range, probably.

I've been hearing there's been some issues about supply at the margin side of 6 to 9, the market has been pretty good.

The market has been pretty good in that range.

That's correct, Chuck.

Do you see much growth in that market?

I do.

We have the new processing facility down there that's capable of fully inspecting bars, sawing bars, turning, grinding and polishing bars, heat treating bars, et cetera, et cetera.

As I said earlier in the call our troops actually think the interest in that business is so strong, that we'll nearly double our capability within 18 months.

Sounds good.

Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] We'll now move to Aldo Mazzaferro with Goldman Sachs

Hi, Keith.

Hi, Aldo.

Say, regarding your comments on the pricing may be near a peak, I was wondering if you help us out by just telling us roughly, today, right now, in the month of July how the market price of hot-rolled coil compares to what it averaged in the second quarter?

You know, ballpark terms?

Hey, Aldo, this is John, I would tell you that right now numbers on the street somewhere-- I'm talking spot pricing now, somewhere any this 620, 630 range.

I think it's somewhat consistent with what we're seeing reported by Paul Scott and Company at CRU it's probably relative to spot prices in the second quarter maybe up-- I'm going to guess $30 a ton.

Yeah, so it's up 30 right now from where it averaged, right?

Yeah.

I would have said 20, but we're in the same zip code and I don't want to put a lid on this thing, that's not the attempt--

I'm just trying to get a feel, because it looks like, you know, when you are saying scrap will be up 10 or $11 you know you want to get a sense for any metal spread it seems up even with that scrap price up you will see a widening in the metal spread, you think?

Yeah, that's the point.

I think that's right.

Scrap can go down in Q4, and I don't think that the price would go down, but it could.

It could also go up.

You know, business conditions are very good, but I am not going to sit here and predict that it's going to go up but it's certainly possible.

Right.

And I had couple of little housekeeping questions, I wonder, Gary why did you pay off so many of your accounts payable in the quarter?

That's in fact mostly just timing.

We have a lot of scrap purchases, whether they get paid on one date or another can have a significant impact on our payables, there's no strategy to pay off accounts payable although it's mostly just timing.

Right.

And on that purchase accounting adjustment was that to write-up the value of some of the scrap inventory or anything?

Yes, there was a write-up to inventory, there was a write-up to some of the assets, there were some intangibles that were identified and valued and then there was some goodwill.

So the impact of that then would have showed up in your cost of sales then mostly or where?

I think mostly, yes, in cost of sales although there would have been some amortization that would have be elsewhere.

Right.

Another little question, on Iron Dynamics it swung to a profit in the quarter, could you quantify at all how much it made and how much it might have lost in the first quarter?

Just be happy that it made money.

Aldo it was very small.

Couple of dollars?

Okay.

Yeah. 100,000 or two.

But quarter over quarter from first quarter over to the second quarter is a huge swing.

Yeah.

Do a lot better.

Produces better, costs are getting better dialed in and as you know we spent a lot of money on that project, so I don't know I would recommend anybody run out and build another Iron Dynamics.

We can certainly learn from what we did, but we still believe the soggy nugget that project will become a reality and will be much better positioned from a cost perspective.

Right.

Do you think Iron Dynamic stays in the black now?

Oh, well, it depends on what-- we try to track it's revenue stream to where the market is going on resource costs.

The market is head down, got the scraps [inaudible], and the pig iron is headed down.

I would tell you before long pig iron is going to be at 300 or 290 NOLA instead of 350 and right now it's at something like 325 so it's likely their revenue stream could back up slightly, but at the same time they're getting better with costs.

Right.

Okay.

Can you tell us generally what your natural gas input cost was in the quarter versus the first-- second quarter versus first?

I don't have that data, but Teresa is looking at it.

In the first quarter, Aldo it was about 4% of our total cost of goods sold and it was about 3% in the second quarter.

Okay.

Little better?

Uh-huh.

One final question for you, Keith is-- is how big do you think the SBQ market is as you would define it?

And what kind of impact do you think you see from Nucor's announcement?

Well, Aldo, I'm not quite sure how big it is, and I have not put the pencil to that so I better refrain from saying anything.

It is a healthy marketplace, and there are some imports in it, and Nucor's recent announcement, they have been interested in growing SBQ for sometime so I am not totally surprised by their thoughts about a new build.

Some people say oh, my God, 850,000 tons I remember when they said that about our structural mill and it has fit nicely into the marketplace today.

I'm sure theirs will too.

It's really not very feasible to just go out and build a plant from 4 or 500,000 tons from a melting perspective.

So it doesn't surprise me they are at that level.

And the other thing-- the definition of what is SBQ is a little bit--

A lot of it's carbon bars as well as alloyed bars and all ranges of carbon, so it gets a little sketchy about its definition.

Are you making any other shapes besides round at this point?

No.

All right.

That's all I had.

Thanks for a great quarter.

Squares and things like that, Aldo, but-- but from a casting and rolling perspective it's principally rounds.

Okay.

Thanks, Keith.

Yeah.

[OPERATOR INSTRUCTIONS] And we do have a follow-up question from David McGregor.

Yes.

If you said this I missed it, but what turned out to be the total cost of the-- of the caster outages in the quarter and other work that was being done?

Can you quantify that for us?

I can't.

I don't know that you can, Mark, can you?

Costs in terms of lost time and profits and--

Right

I don't think we look at it like that.

Obviously the capital cost of the changes run about 10 or $11 million.

Right.

And-- obviously there goes the capital as opposed to expense.

Okay.

We essentially from a production standpoint we produced around 190-- 190,000 and if we were not have had that outage that would probably for that month be about 230 so we lost about 40,000 tons total.

But again that was partly the caster expansion modification, but also it's just a regular biannual outage that we have twice a year.

Okay.

And then just finally on the SBQ, can you talk about the percentage of SBQ sales under contract versus spot.

I realize that's probably mostly contract, isn't it?

Yeah, I don't have that data, David, but it's growing.

It's not 50%.

It's probably in the 33 to 40% range.

Yeah.

Good.

Thanks very much.

Thank you.

And we'll take our next question from John Tumazos with Prudential.

Congratulations on all of the great progress.

In today's market a lot of assets are selling and a lot of product lines for bigger values than ever in the past, copper, nickel, maverick tube, steel mills.

Going forward, Keith, should your shareholders expect that you're going to build steel mills again like 10 years ago or 5 years ago?

Or make acquisitions?

The other day Nucor announced they were going to build a mill which they hadn't done for eight years.

I think a our growth, John, will both be organic and certainly potentially MNA activity where it makes sense for both parties and they are both happy to join hands kind of thing, and so our I think our shareholders will actually see both on a go-forward basis.

I don't have any specifics for you, but clearly we had thought about expanding SBQ in the southern most region of the country.

Perhaps we'll change direction and put another rolling mill in at Pittsboro instead it might be much more economical for us and grow our capability there.

We have some real neat niche market opportunities on pierced and drawn bars that we're looking tied to SBQ.

Merchant shapes, we may find an opportunity downstream there as well.

As you know Dick is building a new mill.

The MNA activity-- the quality assets that are out there are obviously fewer.

There are fewer of us proficient steel makers left in the business so there are still opportunities, I'm sure in MNA and I'll-- but I don't have any specifics for you, John, but I think the answer is both.

Thank you and good luck.

And gentlemen it appears we have no further questions.

Mr. Busse I'll turn the call back over to you.

Thank you, Wendy.

And thank you, ladies and gentlemen, for continuing to provide the kind of coverage you do to our stock, and to those of you that are shareholders we appreciate your continued support and certainly to our employees who are just doing a bang up job.

Thank you for a job welcome.

Thanks, Wendy.

You are welcome, sir.

And that does conclude today's conference call, ladies and gentlemen.

You may disconnect at this time.