Steel Dynamics Inc (STLD) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Steel Dynamics third-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 Millett, Vice President; Mr. Richard Teets, Vice President; Mr. John Nolan, Vice President of Sales and Marketing; Ms. Theresa Wagler, Vice President and Corporate Controller; and Mr. Fred Warner, Manager, Investor Relations.

For opening remarks, I will now turn the call over to Mr. Fred Warner. Please go ahead, sir.

Good morning and welcome to this October 19, 2006 conference call covering third-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 that are 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 on 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 call for questions from participants who have informed us they may wish to ask questions. Please make your questions brief, and you are welcome to ask additional questions later as time permits.

Today's call will be available later today on our website for replay. It will also be available for download as a pod cast. We will now begin today's discussion with introductory remarks from Steel Dynamics' President and Chief Executive Officer, Keith Busse.

Thanks, Fred. Good morning, ladies and gentlemen. Thank you for joining us this morning. It is certainly a pleasure to be with you this morning and have an opportunity to discuss our rather positive results for the third quarter and through nine months of the year and to engage in discussion about the marketplace in general as we look into the future and don't reflect on the past to any great degree.

But for those of you that keep track of statistics and want to know the nuances to certain questions that have arisen in the past relative to our earnings, our $2.17 a share was divisible by -- the net earnings were divisible by approximately the same number of shares as the previous quarter, as our share repurchase program really kicked in very, very late in the quarter and really had a very de minimus impact on that calculation, perhaps $0.01 a share at the most.

So, as you are measuring it through the viewfinder and some could see it as $2.16 when you back out the impact of repurchased shares late in the quarter. Nonetheless, it's a record quarter for Steel Dynamics.

There are those of you who want to know about the impact of the integration of Roanoke Electric Steel. And I can just tell you that is going very, very well. And, it had a -- depending on how you want to view profit-sharing subject material, it had an impact -- a positive impact on our earnings of probably about $0.11 to $0.14, depending on how you see it through the viewfinder but nonetheless very, very accretive to earnings. Yet, when that number is subtracted from $2.17, it still produced a record quarter for Steel Dynamics and slightly exceeded the guidance that we had provided and the estimates that were available in the marketplace.

So earnings were up substantially, an increase of 11% quarter over quarter and obviously 83% higher than earnings in the third quarter of '05. The same is true for the nine-month figures. Net income increased 23% in the second quarter of '06 and 100 -- from the third quarter of -- or from the second quarter of '06 to the third quarter I should say and increased 161% quarter over quarter as you look at just the quarterly results. So it was a terrific quarter for the Company.

As you noticed, our selling values went up $61 per ton during the quarter, which was a pretty sizable increase. And our scrap costs were up a little less than we had projected. I think we had said they might be up $10 a ton last quarter. And they were for us up $6 dollars a ton. And our operating profit was at about $160 a ton with certain divisions obviously doing better than that figure and other divisions coming in a little under that figure.

On a statistics basis when we were forecasting the fourth quarter, we did take into consideration that there would be some impact from the share buyback. So, for those of you who want to map things out on the old basis strictly, then our forecast for the fourth quarter, which is in the range of $2.10 to $2.20, if you took an average, it would be $2.15. And for those of you who certainly didn't know that we had calculated some repurchase impact already in the numbers, even if you took the straight math at 95% of $2.15, you would still be at the low end of the previous guidance that we had provided.

So we're still there, rock solid with our guidance. For us, the way we view it, probably up a little bit. So, we are pretty positive about fourth-quarter results. You have to -- although as I noted in the press release, flat-rolled margins will likely -- maybe I should say will not probably be impacted to any great degree, given the softness in the service center community as scrap costs have trended down as well.

When you look at the Company overall and not just referring to flat-rolled, I think pricing overall on a quarter-over-quarter basis will probably be down $20, could be down as much as $25, somewhere in that area next quarter. And scrap costs, we expect on a linked-quarter basis will be down $20 to $25. So you might say that any selling price decline being experienced is being matched by a decline in resource costs. And so, I think our volumes, as we said, could be somewhat impacted by planned maintenance outages and some degree of softness in the flat-rolled sector that although it will not impact margins, could impact volume to some small degree.

We think that any downturn relative to inventory corrections will be somewhat short-lived. Certainly, that is open to interpretation -- two months, three months of a duration of that nature perhaps. But our -- and I noted in our press release that our steel shipments are now 50% long products and about 50% flat products. So that we are rather nicely balanced. And in the long products arena, we're doing very, very well. Margins in some business units continue to expand, while margins in other of those business units remain relatively flat. But the volume is very healthy. So, our backlogs in long products are up sharply.

I know construction vision is up through about the end of January. So there are out a good 3 months, 3.5 months. Business is very robust at Columbia City. Business at Steel of West Virginia, which is in a related product field, is also very strong at this point in time.

Our business in merchant bars remains very strong with record backlogs at Roanoke Electric Steel in Roanoke, Virginia. And our SBQ bar division in Pittsboro, Indiana currently has a record backlog in its portfolio. So, things are good in the long products arena where the margins are stable to increasing. And as I said, it appears that the flat-rolled sector is slowing somewhat.

Although, a lot of our tonnage you should know is tied up in what we call long-term sales agreements. And those agreements are being honored. I don't think there's quite as much potential deterioration in pricing in the value-added products, the coated products perhaps and the painted products where we enjoy some additional margins. I don't think the decline -- declines if they're going to be seen are going to be very substantial in those arenas. Although, it could impact volumes for hot-rolled and pickled and oil and could have somewhat of an impact on pricing. Although as I said, I don't think it's going to be monumental in nature or of a very long duration.

So, we are -- you may see a dip -- a cyclical dip of two to three months. I think a fair chance you're going to see the industry start to recover again in early first quarter and perhaps be headed for another fairly terrific year in the year '07.

So other things of note, we are looking, as we stated in the press release, at potentially adding another rolling facility at Pittsboro. We have more melting and casting capability there than we have rolling and finishing capability, so we have a study under way to expand our volumes in the SBQ business at the Pittsboro location.

The value-added component of that business, our new finishing facilities at Pittsboro, are doing extraordinarily well. Our bookings are very, very good there. I think it's probably led to a more robust environment generally speaking in SBQ for the Company. So we think that that activity will break into the black early next year and will be a major contributor to our earnings.

As with regard to the Roanoke acquisition, I think you know we had a strike at Steel of West Virginia that lasted for about a one-week period of time and was resolved satisfactorily amongst the parties. Everybody is back to work, and our shipping volumes were almost identical to that of the second quarter. So from a shipments perspective, there really was de minimus impact. Production was down during the quarter. That could result to slightly lower shipments in the fourth quarter as inventories were pulled down but certainly not significantly.

On the other hand, the Roanoke bar division has had some record-breaking months, both from a volume and an earnings perspective. As noted in the press release, we initiated a new incentive compensation program that was patterned after SDI's program. Certainly, there were some hiccups in the first five or six weeks of activating that program, but some people responded very well to it. Production is up, not just historically high levels; they are actually breaking production records.

Bonuses are just in good shape. The people are earning better rewards for a better delivered performance, if you will, simply said. And the bottom line to the Company has extraordinarily increased. So we will continue to view the Roanoke acquisition as very accretive to our earnings on a go-forward basis and very pleased about that acquisition.

We are right in the middle of actually revamping the fabricating divisions and adding roll forming to the Virginia operation. We're in the middle of, if you will, totally reworking those assets and bringing them forward to the 21st century as we would view it and making them more productive and a better earning member of the family. But that really won't be completed until probably first quarter of next year actually. But, we think that they will be contributors and have a fairly significant return on assets deployed throughout the course of time.

Also, as viewed in the press release, as you know, we announced a program to repurchase 5 million shares. And we have repurchased 3.1 million shares through the end of the quarter under that 5 million share program. We also, during the quarter, announced a doubling of the regular quarterly dividend from $0.10 to $0.20 and the continuance of the special dividend through the remainder of the year 2006 at least.

We have a number of expansion programs under way. One new program that you obviously just learned about today is exploring the viability and profitability of putting additional rolling facilities in at Pittsboro, Indiana, which would -- if it moves forward would probably be an '07 project that couldn't be completed until sometime in '08 and probably would not have a meaningful impact on earnings until late '08 potentially if it did go forward.

Dick's expansion of the Columbia City mill, which is about a 500,000, 600,000 ton expansion is under way. As we said in the press release, we expect that expansion to be completed very late fourth quarter or early first quarter of '08.

Obviously, with all of the enhancements that we've made as we have committed capital to value-added programs of the Company and expanded volumes throughout the Company as well as with the acquisition of Roanoke Electric, I think it's fair to say that Steel Dynamics is a wholly different company today as you look through the viewfinder than it was a year or two ago with even more growth on the way in the future.

So we are very pleased about our position in the industry today and very positive about our ability to sustain higher profit levels throughout the course of time. And I will conclude with those remarks and give Mark and Dick and Gary and John Nolan an opportunity to comment on markets and activities in their specific areas of responsibility.

So let me first of all turn to Mark Millett.

Good morning, ladies and gentlemen. Appreciate you being on the call today. Actually Keith, I've got very little to add to that. The team continues to work very well and perform very well at Butler. We're still on schedule to make about 2.7 million tons of hot band this year, which is roughly a 12% increase over last year, which for a mature -- what is essentially a mature mill now quite a positive improvement.

The conversion of the second caster, the strand extension and new oscillator was completed just last week very smoothly. It is now up and running. And it's already recognized high casting speeds and gives us confidence to pursue our 3 million ton production goal over the next year, 1.5 years.

The environmental tonnage for the paint line in Jeffersonville was received last week. So we should be constructing within the next one to two weeks down there. That obviously increases our -- or further increases our product diversity. And as Keith mentioned, there is a little market softness out there, principally in hot band. Given the fact that we've got a broad array of products out there that it kind of insulates us from that softness to some degree because the primary softness is in hot band as we see it today. But the mill is running very well.

Thank you, Mark. Dick, let's turn to you.

Thank you, Keith. Good morning, ladies and gentlemen. Again, the press release was pretty self-explanatory about all the good news at Columbia City. Needless to say, we are excited about the recent production and shipping records that have been achieved and truly expect to have a few more of them here before the year is out.

Touching on some of the expansion projects going on, the second mill for the medium section products all the equipment is on order. We are expecting foundation -- building foundation and structural drawings later this month. And we expect construction to commence at Columbia City on this project before the end of the year.

Associated with the expansion during the recently-completed maintenance outage, we successfully modified the third strand of the casting machine to produce a larger [flan-sized] product, and that will needless to say influence our product mix offering on a positive way. The other two strands will be modified during the spring maintenance outage.

Other projects under way at Columbia City include our rail welding facility. The final delivery of equipment is due here in December. We'll be staffing and training those individuals who will run that facility here in the fourth quarter, and we expect to have welded rail available for customers in the first quarter.

Finally, our joint venture on railroad ties the facility. The building is complete and we have our occupancy. We are currently installing the equipment in that building. We expect to be producing ties if not by the end of the year, very early in January. So, just a lot of good news and things happening at Columbia City. Keith?

Thanks, Dick. John, we might turn to you just for some general comments about the marketplace.

Thank you, Keith. Good morning, ladies and gentlemen. I think Keith, Mark and Dick touched very well on backlogs and shipments. Just to reiterate, long products, both are very good. They are excellent at Columbia City.

In the sheet market candidly, there is a correction currently under way and it is largely due to what I want to call supply disruptions from the surge of imports we saw this summer and on the demand-side, the recently-announced auto production cuts.

I think it's important to understand how the automakers do business. They give suppliers forecasts with a clear expectation for finished goods inventory. They give releases against that inventory. And when they cut their production schedules, it results in immediate volume reductions to suppliers, both in terms of producers and service centers. And they are left holding the bag, so to speak, on that inventory. Clearly, that contributes to the inventory bubble, and you may have seen some indications of that in MSCI data and others.

How long a correction? It's really anybody's guess. I think if you read Chris Plummer, his metal strategy, he is suggesting that the industry is responding very well and very quickly to this. And I believe he indicated this morning in American Metal Market that this should be over before the end of the year.

That's it, Keith. Thanks.

John, thank you. We might mention that we talked about the backlogs at Roanoke Electric and structural mill -- both structural mills and at the SBQ division. We might comment on our flat-rolled backlog at this point in time.

We believe that we're good to go basically through the end of November and have booked somewhere around 50% to 60% of the tonnage requirements for the month of December. So, we are not full through the end of the year, which is a reflection of reduced buying activity to some extent. But, I believe if the right orders continue to come in that this should not be a problem of finishing out the year with somewhat healthy levels of production at Butler.

So, Gary, you want to make some comments?

Sure. I will just run through some of the numbers. Shipments for steel operations in the third quarter, we had hot-rolled shipments of 291,000; pickled and oiled 32, cold rolled 29, hot-rolled galv 112, cold-rolled galv 117, painted 63, giving us total flat-rolled of 644. We had structural rail shipments of 262,000. The vast majority of structural just immaterial amount of rail shipments. We had engineered bar division shipments, SBQ, of 131. We had shipments out of Roanoke at 166 and Steel of West Virginia shipped 86, giving us 1289 as our total steel operation shipments.

From a CapEx standpoint, we had capital expenditures of $36 million. It looks like at this point, we will round out the year at about 120 million, depending on the timing of some of the projects and the payments that will be made for some of the projects that are under way. This is actually I think a somewhat reduction from the earlier estimate we had last quarter, which is prominently due to timing of projects as we are getting permits and contracts issued and whatnot. Interest expense for the quarter, 7.4, and probably going to range between 8 and 9 next quarter Q4.

Taxes, the effective tax rate for 2006 is expected to be 37.4%. That's not much of a change from last quarter. The effective rate for Q3 and 4, 38.2%. If you remember, we have some tax credits and other things that flowed through earlier in the year and reduced our effective rate for the year below our current effective rate.

And to help you with shares outstanding, we had as you know some changes there. At the beginning of the quarter, we were about 50.6 million shares outstanding. Keith mentioned earlier that we repurchased 3.1 million shares in the third quarter. That leaves us at about 47.5 million shares outstanding at September 30.

We didn't have any conversion of the convertible notes during the quarter. So we still got about 4.7 million shares of converts out there that could at some point convert over. We've got options out of about 1 million shares. And in the fourth quarter so far, we've repurchased 1.6 million shares as well. So we've got about 300,000 shares left under our existing authorized share repurchase program. That gives us an estimate of fully diluted shares at year-end of 51 to 52 million, depending on how many options are issued and other things that might happen.

From a working capital standpoint, we saw some increase in receivables. Most of that attributed to the flat-rolled mill. But our receivables remain very, very healthy with about 79% under 30 days, 98% under 60 days. We have no major concerns in terms of receivables. Inventory is up slightly, most of that in the raw materials category I think driven predominantly by scrap. So, that's -- those are the numbers.

Thank you, Gary. Leanna, we are ready to take questions.

(Operator Instructions). Aldo Mazzaferro, Goldman Sachs.

I just had a kind of a you know a question on the operating expenses below the scrap line. I noticed your metal spread was very, very much improved sequentially. And yet, your profit per ton was less improved sequentially. I'm wondering if you can tell us in those line items between the scrap costs and the operating income if there was any impact from say the upgrades or from mix or from other events that might have squeezed those margins a little bit on the operating side?

No, it was really profit-sharing -- is really what it was. Our profits were up sharply. And during the quarter, in the integration of Roanoke, the Roanoke community into the Company, there was a 2% change that was authorized and planned relative to the amount of profit-sharing that we are setting aside. We went from 6% to 8% on that calculation.

So, in the first two quarters, we had set aside about $16 million for profit-sharing, about $8 million a quarter. I think this past quarter, we are at $14.5, so it's up $6 million -- $6.5 million, which is a pretty big figure. So, if you're looking at the other expense line, which I think is about $46 million, if you just try to view it through a constant viewfinder from the previous quarter, you would really see that as about $40 million instead of $46. But really most of the increase is tied to additional profit-sharing being awarded our employees, so just absolutely a fabulous job for their company.

Great. And that was basically my key question. I heard you comment on the service center numbers. Do you think that recent bump we just saw in September was mostly automotive you think? Or how do you see the underlying end-user demand if you take the automotive side out of the equation for a moment? Maybe that's for John, I don't know.

Yes actually, although, I believe that is reflective of the cuts in automotive schedule that you saw. Actually, you could come in here and take a look at our order book, I would tell you all the other segments, including residential construction that we support, are still relatively good. And that frankly caught me by surprise because of all the press concerning a downturn in the residential housing purchases. But you know, in garage doors and related hardware, we're not seeing a lot of that right at the moment.

Obviously, we all understand that no matter where the steel is sitting in which service center and even though we're not huge in automotive finished materials, it still impacts the overall industry. Because that material is likely to move somewhere. And again, you know --

Thank you and congratulations on the stock repurchase. That is great to see.

Mark Parr, KeyBanc Capital Markets.

I just want to congratulate you on a really solid performance. I guess Keith, is there anything that you can tell us about Mesabi Nuggets (sic). If you could give us an update on that. I missed a little bit of the call; I don't know if you've made any comments on it. I apologize for that if I'm asking you to repeat yourself.

We did not comment on it. Mesabi Nugget, the fact that it is progressing slowly really has nothing to do with the technology itself. We think the technology is rock solid and will perform. It really has to do with the ongoing saga of the partners having diverse agendas and not being able to come to terms in certain areas.

Once that is resolved -- and it seems like every time Mark and his troops meet, I think any and all issues with Kobe are resolved and with certain other parties are resolved, we are still having issues with one of the other major parties in the transaction. But we continue to make progress. And so, we believe the project will still get a green light sometime next year. But progress in negotiating rock solid agreements amongst parties are -- it's slow in happening. Mark, you want to comment any further on that?

No. I think you encapsulated it well.

Terrific. And one last question if I could. Just I hear things are really going well at Columbia City, and I just want to congratulate Dick for great progress there. But I was curious if you could talk a little bit about what your expectations would be for rail in '07 at this point?

As the press release stated, regretfully from a marketing aspect for rail, we're just so busy that we really only take the time once or twice a month to roll rail really just to keep in practice and improving a few of our handling techniques and so forth.

But we had a major AREMA meeting in Fort Wayne that was a tour of our mill, and about 100 steel-related individuals were there. And I think they all went away recognizing our capabilities and it's really a timing issue. So, when you think about next year, we originally were hoping to be in that 30,000 to 40,000 ton range. That may be dampened a little bit basically by a first quarter that is still dedicated to our booming structural market.

Okay, if I could just ask one last question. If I could just get an update on what the outlook for delivered pig iron costs in the fourth quarter would be compared to the third quarter and I will pass it on. Thanks.

Mark, we're not active in that market right now. So, we can only provide hearsay to you. We have quite a stockpile of pig iron from previous purchasing activities. We are in no danger of running out for seven or eight months. Latest quotes I suspect are in the 290 range, somewhat above the price of prime scrap that's 290 [Nola]. Somebody said the other day that there was a deal affected at 280. I don't know if there was or there wasn't. But you are somewhere in that zip code.

Of course, in our case, we're not on the river and transportation costs would be a factor. But iron dynamics continues to produce slightly more tons quarter in and quarter out. And that certainly benefits the Company because that is not -- half of that production is liquid pig iron; it's not even a solid. So we are still in just really good shape.

I think you know the market for resources has backed up recently. It's probably going to back up some more in my opinion. These guys can read the press as well as the next fellow. And even though our earnings were in great shape and Nucor's earnings were in great shape, the market is under a little pressure. I think they are well aware of that, and scrap may actually correct again this month. I wouldn't say significantly. But, it could correct slightly.

But then again, whatever it does in November if it moves down, it could move back up in December. So I don't really think on a linked two month's basis, it's really going anywhere. And scrap costs are what they are and allowing the metal spreads to stay in pretty good shape. Of course, you know, if you multiply an excellent spread times no tons, it still results in a zero.

But, I think the spreads are certainly there. And I think the volume in all sectors other than automotive is still fairly significant. Although we're going to -- we will see the inventories at the service center level, whatever they are, 3.5 correct probably well under 3 before there's really major buying activity at hand. But I don't think that's going to be all that long lived of an event.

Terrific. Hey again, congratulations. Thanks for the additional color, Keith.

Timna Tanners, UBS.

I wanted to just ask you if you could run through -- you obviously had a really nice track record for using cash and CapEx, dividend, buybacks but wanted to run through how you're thinking going forward. Sounds like if you bought back 1.6 million in Q4 already and you bought back 3.1 million in the third quarter, kind of used up your authorization unless I am missing something. So wanted to know how you might think about buybacks, dividends.

And then, CapEx -- just wanted to clarify into next year, the number that you gave in the press release, does that assume some of the additional expansions that you talked about, like Pittsboro and the paint mill? I wasn't entirely clear. Could that number go up I guess is the question?

I don't think it will go up significantly because by the time you reach a decision relative to rolling mill expansion, it will be next year. By the time you engineer it and order the equipment, nothing is going to happen of any significance in '07, so I really don't think you are going to see any significant expenditures tied to that should it materialize.

Most of the CapEx for next year is really tied to the new paint line at Jeffersonville and to the new rolling mill at Columbia City. I think those are the largest products -- projects. Although we will spend next year, oh, I don't know. We've already purchased a new bag house down at Roanoke Electric. We're upgrading PLC controllers, making upgrades to the reheat furnace. There's just a lot of activity there under way relative to upgrading both their melting and their rolling capability, and that could be $20 million next year, $25.

That's included in that $400 million estimate that we have out there and anything related to those (multiple speakers).

Right. Teresa was pointing out that that's all included in the $400 million over the course of both years.

Got you. And then the question on buybacks?

If we think our stock is a buy, is a value, we will continue to press for additional activities in that arena. So, I wouldn't -- I can't predict where the share price is going to be. But if we consider it's a value and we believe it is one heck of a value yet, I wouldn't be surprised to see another announcement in the fourth quarter sometime.

David MacGregor, Longbow Research.

You had mentioned that long-term sales agreements represented a lot of your tonnage. And I guess historically, I've always thought of you guys as having a relatively higher spot exposure. Could you just bring us up-to-date on where you are today in terms of percentage of your sales under your long-term sales agreements and any color you can sort of bring in terms of sort of the tender of those agreements? Are they six-month deals or are they annual deals? That would be helpful as well.

I think we still are largely spot. These agreements are tied to CRU. A few of them are tied to resource costs. Others are cost plus. There's all kinds of agreements. Most of them are quarterly to six-month I believe in duration and still represent less -- maybe it's approaching 50% of Mark's -- John, go ahead and comment.

Yes, this is John Nolan. At Mark's division, it's about 50%. Certainly at Columbia City, we're talking about something that's predominantly spot. Glenn at Pittsboro is building our engineered bar presence, particularly with OEMs. That's I'm going to say right now maybe in the 30% range, going to trend up to 40% next year, maybe even 50% depending upon how many of these we close. I don't think there's a lot of those kinds of arrangements at Roanoke.

Steel of West Virginia being a specialty shop probably has a few more of those, but I would need Tim Duke to provide you with the right perspective. But again coming back to flat-rolled, it's about half of what we do.

Okay, that's helpful. Thank you. Then just finally on the SBQ new rolling facility that you are considering, can you just talk about the extent to which you have extra melting and casting capacity? Can you quantify that for us? And I guess also are the melter and caster in balance?

They are not. The production at Pittsboro this year could approach 500,000 tons, which is -- or production from a rolling perspective. And that's up significantly from where it had been in previous years as we have grown into that business as you will. We suspect that with the right kind of mix in the backlog that we might be able to roll 600,000 tons. That is yet to be achieved but it is certainly doable we believe.

The melt shop probably if pushed could get out 900,000 tons, 800,000 to 900,000, somewhere in that area. If you increased its transformer capability, it probably would push north of 1 million tons. And therefore, if you only have a 500,000 or 600,000 ton rolling facility, you could add -- you could see adding another facility that might increase and enhance rolling capability to the tune of 400,000 tons.

Michelle Appelbaum, Michelle Appelbaum Research.

Really amazing quarter and what's really amazing is the positioning of the Company. You know perhaps, Keith, you saw the sheet market weakening and said, "Hey, it's time to change my mix to 50% longs in the winter." But, your timing couldn't have been better in terms of the acquisitions. So congratulations on that as well as the performance.

I was hoping that we could get a little bit more color from John and Mark on what's really happening in the flat-rolled business. And AISA weekly production numbers are coming down a lot. And you've had lots of noise about production cuts, but companies aren't being terribly specific for various reasons. But the statistics are coming in down a lot. So can you talk about what's your sense of what the production cuts really are already and how much is lost on the come?

I would guess that the production -- we talked about that the other day between ourselves and what Newport is doing and what [Middle] is doing and US is doing and a few others. It could be significant; it could be on the order of 1 million, 1.5 million tons perhaps. And as you look at domestic shipments of flat-rolled -- I don't know exactly what that number is -- but it used to be in the 70 million ton zip code.

So, let's say it's 72 and divide that by 12.6 million tons a month. And if you are a month -- and half of that may be service center-related type activity. So, then you are saying, "Okay, there's 3 million tons and if there are corrections out there from outages perspective of 1.5 million tons over the next couple of months, then maybe you would address half the problem." These are just wild numbers, but I think they make some semblance of sense.

And then the imports are -- you can't -- unless the boat is late, you can't find any hot rolled or cold rolled coming in offshore. So that is obviously going to help. So if you say, "Geez, I've got a 3 million ton problem here and I need to work through it in the next couple of months," you would have to address the next couple of months 3 million tons of inventory perhaps or maybe a little more. And I think that can be done.

Relative to its impact on margins, I said earlier, I don't think there's much of a margin impact. It's a matter of how well can people run. I think many of the producers have done a good job of holding the line on pricing. There are obviously a few renegades running around out there at this point in time, dropping bombs on people. But you know they don't represent that much capacity, and I would tell you the market is holding up real well.

I won't mention any names, but I had an individual that follows this industry tell me that he had contacted several service centers, not just several, quite a few and found none of them that were actually buying under $600, which was pretty encouraging news. Although, there are some reports of some sub-600 numbers as you well know.

The other piece of the equation is, 50% of Mark's mix you are saying is now on longer-term agreements. But can you define the duration? Are we talking about 12 months or 6 months or--?

Michelle, this is John. Anywhere from 3 to 12 months to in one or two cases even longer than that. We've got a couple of evergreen arrangements that are tied to CRU that make a great deal of sense to both parties. Again, the value of these things is the longer you entertain them, the more advantageous they become to both sides of the agreement.

Are these calendar year kinds of (multiple speakers)?

So far, yes.

So do we -- I mean with the OEM -- with the mills selling OEMs for years, we always had this big jump in January or a big drop in January for more years than not. Do we have a January event as far as expiration of 12-month arrangements or 6-month arrangements?

Actually in the marketplace, my sense is that we're seeing less of that type of thing.

Oh, absolutely, absolutely.

There are more of these what I want to call evergreen arrangements that more or less are -- you know make January 1 somewhat equivocal in terms of the business relationship.

So you are saying that you don't have -- this seems to be very company specific. And I know that there are some companies who are trying to do it -- actually have quarterly kind of expirations where they have only 12-month deals. So you are saying Steel Dynamics doesn't have a January kind of event for one big chunk of renegotiation?

Michelle, you need to focus on the type of agreement. It's not your typical old agreement where there was a fixed price for a year, and the automotives or whomever would go out and say, "Okay, what's the price for 2007?"

These are more commitments of volume. And they ratchet up and down to some degree with the market based on CRU and other indexes that we employ.

So they are a lot more producer and distributor and consumer friendly.

Yes, they are stable, I think. They're actually -- you are going to add some and lose some, but these are fairly stable arrangements because they follow the market around.

So the 50% number you are giving us of your longer-term arrangements would include some that are strictly volume driven and include some that are volume and price?

Yes, that includes everything that Keith described before. They could be quarterly arrangements. They could be multi-year arrangements. They could be 12-month arrangements, 6-month arrangements. But typically, the format for the methodology that we employed in most of these things, whether it's all in cost, index to scrap, scrap window, index to CRU -- all of these things basically flow in the same fashion.

So, they are not contentious at all. Believe me. This is one thing I really enjoy about them is that it's not a contentious type of thing. You don't have to hold your breath in October and November and wait to see if you are the low bidder so to speak in January. It's a different way of managing a business relationship.

Right, but they are not price ceiling arrangements?

No, absolutely not.

Kuni Chen, Banc of America Securities.

Nice job on the quarter, guys. Can you just give me a little bit more clarity on what you are seeing on the flat side of the equation in terms of pricing? You mentioned that prices should be down about $20, $25 quarter to quarter. Obviously, the long product side is going to be holding up fairly well. So, what is -- what do you see happening right now on the spot side of the sheet market?

Well, if you were averaging down $20 and the long products are holding up fairly well, then you would have to deduce from that that the flat products are providing most of the weakness. And we're anticipating that with CRU falling and the index pricing that John just spoke of being affected that most of that activity will come in that array of -- in flat rolled.

And then, just on the maintenance outages that you are planning for the fourth quarter, can you just give me a better sense as to the impact sequentially from third quarter to fourth quarter, how many tons are down in the fourth quarter?

Typically, when -- maybe not typically but at least with the only visibility we have being June after we have a caster modification, we -- before Humpty Dumpty gets up to full speed, we usually suffer some stumbling blocks. And we have again -- and Mark was telling me -- corrected a few of them yesterday again.

So it takes a little while to get that caster up to speed, so it will have somewhat of an impact on volume. The length of the outage obviously does. So Mark's on a quarter -- he was affected in the third quarter by the slow start-up of the first one and he is going to be down somewhat I believe in the fourth quarter activity-wise. But his outage is behind him.

Dick's outage is behind Dick at this point in time. Glenn's is behind Glenn. We have a major outage at Steel of West Virginia about Thanksgiving that will take that facility down for probably a little over a week, 1.5 week maybe. So that's the only major go-forward outage we are currently facing.

Then just lastly on the cost mix on the fourth quarter, obviously, you have higher outages. Scrap potentially lower in the fourth quarter, seasonally higher energy -- where do you think this all averages out in terms of your cost mix from the third to the fourth quarter?

I think the volume is going to -- could raise it -- who knows -- $10 a ton in scrap could knock it down $20 -- probably as good a guess as any.

Chris Olin, Cleveland Research.

Can you talk a little bit about what you're seeing from the Chinese market? Seems like the export levels are rising, and production levels still seem like they're trending upward. What's your outlook for this market here?

I will let John do that one. He knows more about what is happening in China than I certainly do.

John Nolan. Clearly, the current estimates are 417 million or 420 million tons of raw steelmaking in China. So it's -- I can remember thinking 240 million tons was a lot. So it is going up. I understand that statistics suggest that China is again a net exporter of something like 20 million tons of total product so far this year.

But, again, we all have some suspicions about the information that comes out of China. I believe that it is affecting the US market in certain products like galvanized -- particularly like gauge galvanized -- was having more of an influence in Pacific Rim countries and probably Europe at the present time.

Where it is going to go depends upon how intelligently the Chinese government and the Chinese manufacturing community manage the situation. And as you can read in American Metal Market, The Washington Post or The Wall Street Journal, we're working carefully with the Bush administration now to try to bring some sensibility to this circumstance. In fact, Tom Danjczek, President of the SMA, and entourage of SMA companies are with the Treasury Department as we speak in Beijing.

I get the sense that there might be an increase of Asian product going into the Canadian market and then trickling down into the North American industry through price cuts from the Canadian mills. Are you seeing anything like that?

We are watching that very carefully. The Canadians frankly are a little bit of a loose cannon in the market at the moment, so it would more or less support or affirm your suspicion.

Then just finally, are you seeing any more Chinese steel mill offers or exports ahead of the change in this VAR rebate to suggest that the imports will trend up November through January?

I can't tell you that what we're seeing can be identified to the change in value-added tax rebates.

Fair enough.

Tony Rizzuto, Bear Stearns.

Congratulations gentleman on the strong performance. And also, I like to see the discipline in balancing the capital allocation.

I've got two questions. First of all, how confident are you that the tariff protection in galvanized will be maintained? And secondly, just an update on Millennium building products. I'm just wondering what your backlog today looks like? Is it as robust as it was earlier in the year? Are you seeing any signs out there that there is any deceleration in the nonres construction market?

No, the backlogs are very good at New Millennium. In fact, they are up in a couple of cases. So we're not seeing any deterioration there yet. John, you want to address the first part of the question?

Yes, Tony, let me address the first part of the question. This is John Nolan. I obviously was in Washington Monday and Tuesday testifying on behalf of petitioners to continue the orders against Australia, Korea, etc.

In terms of confidence, I -- it's a tough decision for the ITC, and I think they're going to make a fair and responsible decision that will support the trade laws of the United States. And my personal opinion is that they will decide to continue the orders.

When you look at the auto industry and obviously the jobs that are being created there, I've spoken to a number of people that think there could be some kind of middle of the road. But you believe that it will be kept in the same type of positioning that it is right now?

Yes, Tony, this is a matter of statute. They are either going to continue the orders or they're not. There isn't any middle road here.

There's no rollback of anything. It's either total repeal or continue?

Yes, you either vacate the orders or you continue the orders for five years. Again, it's a matter of statute.

Obviously, Tony, if you look at it through the eyes of fairly decent industry profitability, you might lean one direction. But if you think about deteriorating market conditions and the impact of removing an order could have, you would -- I would hope decide the other direction. So it is a tough call, but --

And I think it isn't important to recognize that in the Department of Commerce review, they have recommended the ITC to continue the orders. So, surely, you have to consider that a huge vote of confidence as it relates to petitioners.

Keith, when you indicated that there is no deterioration yet, it's not indicating you are expecting anything. But you just don't see anything yet. It remains as solid as it was earlier in the year.

That's right, Tony. Maybe that was a poor choice of words. "Yet" could signal a deterioration. We just don't see it right now.

John Tumazos, Prudential Securities.

Congratulations on the outstanding results. Your fabrication tonnages rose in the second and third quarters after being flat in the first. But of course, you have the new locations from the Roanoke acquisition. Nucor's choice tonnages and deck tonnages rose only 1000 tons a year ago from September and Worthington guided a few weeks ago that its non-residential framing business volumes would be down 10% or 20% in their November quarter.

It's difficult for us to determine if Nucor is losing share or if very low wood prices are gaining back some volume from Worthington Steel framing. Are you gaining share in the joist business? Does nonres construction appear to be flattening out? Please help us interpret the end market.

As it would regard the two Socar divisions and the Salem Virginia John Hancock division, I think their volumes are flat. Their volumes are flat to up somewhat. As it regard the old New Millennium, the two operating units we have, clearly our volumes are expanding. And that could come at the expense of others. Certainly not just Newport, there are other players.

We're having more success. We're at record -- all-time record levels at Butler and growing into our shorts you might say down at Florida and picking up a head of steam down there because they are well-positioned in the market.

Now as it regard your comments about Worthington -- and I think that's probably mostly a result of some retrenchment on the part of Dietrich after they introduced a new product, which perhaps didn't pan out as they had planned. But Mark, you know a little bit more about that. Maybe you could add some color to that.

They have changed their marketing strategy vis-a-vis the stud business and quite a unique and creative new product back there. I just think it's taken a little bit of time for the market to embrace. I don't see that being a long-term issue.

So you think their UltraSTEEL could be causing a little transition?

Again, I would ask that question.

Because we'd have said.

Charles Bradford, Bradford Research.

Can you talk a little bit about natural gas and what impact that's been having on you? And how well you have hedged or not hedged for the next couple of quarters?

From a flat-roll Butler perspective, we're hedged at around about 50% to 60% through next April time period. And so, we've been enjoying the softness here over the last couple of months. Obviously the last couple of weeks, it's popped up a little bit. We are at 60% hedged.

Charles, this is Dick Teets. At the structural mill, we are hedged slightly greater than that. But also mostly through the same time frame, which was the hurricane season and aftereffects of the winter season. And so, our hedged position is slightly higher than the spot market today. But we've tried to pick off a few spot purchases in additional hedges that go forward for one year or a two-year pattern and try to average down.

Andrew O'Connor.

Nice quarter. I missed some prior comments. But Keith, wanted to know, can you elaborate what other synergies between Steel Dynamics and Roanoke should we look forward to in 2007 that aren't fully realized in 2006?

I think the reconfiguration of the fabricating divisions could have a significant population impact perhaps the 100 jobs hopefully mostly through attrition. Maybe not so funny but it has been a hot topic -- illegal aliens so to speak -- we've lost about 30 of them just through that process alone. But they in time when reconfigured could be down perhaps as much as impacted by 100 bodies.

And we have offered early retirement to some of the workforce at Roanoke Electric Steel. I think at this point in time, there are 30 people with perhaps another 20 by year-end that could take advantage of it.

So when you look at attrition and reconfiguration there, we are actually going to discontinue next year production on the [F] furnace that will all be carried by the main battery. And those jobs will be put in the mix if you will.

I think we're going to be down in time 100 jobs, 80 jobs at Roanoke Electric Steel. So those could be -- if you just map that out times the wages in [Benny's] -- could be somewhat significant if you set 150 jobs are worth take a figure $70,000 a year, it's $10 million -- is it $1 million? 70,000 -- get my calculator out here -- times 150 jobs, it would be 10 million. That would be a fairly significant number.

So, maybe as a percent of 100 you know at this point, how complete is the integration? And then maybe at what point do you think you would hit 100% in terms of total integration?

Yes, I think the total integration would be late next year. But, it will just keep coming throughout the year.

And Keith, even a little bit more of it will be achieved as we bring our second -- our medium section mill in because it's not only a medium section structural mill, but there will also be the capabilities of rolling angles and so forth. And we will be working with both Steel of West Virginia and Roanoke division on optimizing the sales and optimizing the shipping and production among all those products.

That does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to your presenters for any additional or closing remarks.

Thank you, Leanna. Again, ladies and gentlemen, thank you for your continued interest in our Company and support thereof. We look forward to chatting with you in the near future.

That does conclude today's conference. We do thank you for your participation and have a great day.