Steel Dynamics Inc (STLD) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Steel Dynamics fourth-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, Investor Relations Manager.

For opening remarks, I will now turn this call over to Mr. Fred Warner.

Please go ahead, sir.

Good morning, and welcome to today's Steel Dynamics conference call covering results for the fourth quarter and full year of 2006.

It's webcast on January 24, 2007 from Fort Wayne, Indiana.

Later today, this call will be available for replay from our website.

It will also be available for downloading as a podcast.

Today's management discussion, as well as responses to questions, may include forward-looking statements.

We caution that actual future resent 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 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 call for questions from participants who have informed us they wish to ask questions.

Please make your questions brief and you're welcome to ask additional questions later as time permits.

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

Good morning, ladies and gentlemen.

Thank you for joining us this morning.

If I sound a little nasally to everyone this morning, it's because I am.

I caught a cold last week.

I was in Arizona attempting to enjoy some sunshine, play a little golf and attend the Barrett-Jackson automobile auction.

Most of you know I am a car enthusiast, if you will.

But I ran into some 24 degree weather early in the morning when we started to play golf, and ended up catching a cold.

I actually feel better than I probably sound.

But again, thank you for joining us.

Let me just say that I think everyone knows SDI had a fantastic year.

It was a record year for Steel Dynamics, and it was the second-best quarter in our corporate history.

Sales reached $3.2 billion in 2006, which was about a 50% increase over 2005's $2.2 billion.

We earned $3.77 per diluted share, and for those of us who still occasionally think about the old basis prior to the stock split, that would be $7.54 per diluted share -- just an excellent year.

Net income for 2005 was $222 million and 2006 was nearly $400 million.

In the quarter, we achieved $1.03 per diluted share, which I might point out is only a couple cents different than the original estimate we had in the conference call, the bottom side of the original estimate, which would have been on a split basis $1.05.

So in spite of the fact we warned we might be a little lower, it worked out fairly well.

We had just an excellent quarter.

It could have been a lot better quarter, obviously.

It was impacted by the softness in the flat-rolled segment of the market.

Those declines manifested themselves, you might say, in the last half of the quarter.

You saw it from a pricing perspective and a volume impact perspective in November and December, and as one might imagine, with the market bottoming out at this point in time, that it would have an impact on the first quarter as well.

I do want to comment on that, because I know I was a little disappointed in reading some of the analytical reviews this morning, where the claim was that SDI was -- that our prognostication for the first quarter was below analyst estimates.

I would characterize it quite differently.

There were a number of analysts that did not revise their estimates.

Some of that data was still made up of September/October estimates for the first quarter, in spite of the fact that we warned that the quarter might be off a little, as did Nucor and others.

The first-quarter estimates were not revised by some of the analysts.

For those analysts that did the work, they probably were very close to the range that we threw out in this press release, which was $0.85 to $0.90.

There is a possibility that obviously we could do better or worse, but I think probably the way the market's starting to shape up, we certainly shouldn't miss those numbers in the first quarter.

So I think if everybody would have revised their numbers, our forecast wouldn't probably have been a lot different than what the analysts on a composite basis would have been forecasting.

During the quarter, the average consolidated selling price decreased to $720 from $733.

It was actually up 16% over the fourth quarter of the prior year.

I don't know that that data is all that relevant.

The cost of steel scrap per net ton charged, as you saw in the press release, decreased by $28, which certainly helped the freefall in pricing that was taking place in the latter half of the quarter.

The shipments grew to 4.7 million tons.

I'd like to mention that all three Indiana mills set annual records for sales and profitability, as did the Roanoke operations.

The Structural Division topped 1 million tons for the first time, and our Engineered Bar Products Division in Pittsboro shipped slightly over 500,000 tons of material, which was a little more than the initial rated capacity of that facility when it was built back in the 1998/1999 timeframe.

So we, in three short years, have achieved capacity.

Glenn and his team actually believe that they can probably wring another 50,000 tons out of it next year.

So we will be operating above old capacity limits, but within the boundaries of what we thought we could accomplish with that facility in the SBQ marketplace.

We also believe that Dick has a good chance next year of producing 10% more than he did this year.

We're at 1 million tons roughly this year, and next year could be 1.1. million tons of production.

The operations of Steel of West Virginia should remain in the same ZIP code -- 300,000, 325,000 tons of production next year.

The Bar Division at Roanoke, Virginia will likely see about -- we hope -- we're hopeful for a 100,000-ton increase in year-over-year capability.

We must all be mindful of the fact that their results were not in our first quarter of last year, but will be in the first quarter of 2007.

Those results could be in the 200,000 ton vicinity in terms of impact on the year, just including their first quarter, and then the growth could be another 300,000, 400,000 tons, such that that year next year could end up, we think, in the 5.2 million to 5.3 million tons of steel shipped range, if you will.

The integration at Roanoke has really went very, very well.

CapEx spending is underway relative to modifying and upgrading much of the equipment at the Roanoke merchant mill, if you will, and we're underway with those modifications.

I think we're going to spend something over $40 million, maybe approaching $50 million in modernization and revamp at Roanoke, Virginia.

We'll probably spend a more modest amount of money at Steel of West Virginia, with an eye on the future of spending more and upgrading their capabilities as well in the future.

But I think next year, probably a $10 million ZIP code is probably about right for CapEx for Steel of West Virginia.

So the integration is going well, and the output is very strong at those facilities, had been throughout the year.

I might make a comment about pricing, as we see it, in the first quarter, is probably going to be off in the vicinity of $10 a ton at this point in time, with flat-rolled being down more than $10, and shapes and bars being up-pricing quarter over quarter, if you will.

But the net result for the Company will be that selling values, we think, in Q1 will be down about $10 over Q4, which make sense when you reach the bottom of a cycle.

Scrap costs will probably increase by $10 a ton on a linked-quarter basis.

Scrap will have gone up much more than $10, but I think most of you know SDI had substantial stocks of steel scrap that it bought during a falling market in the fall -- well, during a declining market -- and have the ability to work some of that inventory off yet in the first quarter.

So even though scrap costs, on a perhaps end-of-quarter to end-of-quarter basis, could be up $40 a ton, it will not have that kind of an impact on SDI in the first quarter. $40 a ton is pure speculation.

I think last month, scrap costs were up for premium grades of scrap about $25, and for the cut grades, maybe $15 and shredded maybe $25.

So we are expecting that scrap will increase -- again, potentially, for delivery in February, bidding end of January for February, and it's anybody's guess.

I think the scrap community is signaling an increase.

Whether or not there is a need and demand for that kind of scrap to generate, to allow that kind of increase to materialize is a different matter.

But I think we are expecting scrap will probably go up $10 to $20 for delivery in February, which added to the January increase, gives you the number that I thought it might be up quarter over quarter.

I suspect that actual March bidding or late February bidding for March delivery could potentially be sideways to down.

So our industry is going to experience a bump in resource costs on a go-forward basis.

But selling values, I think, in the non-flat-rolled segment are going to be up nicely and respond to the increase in scrap costs and margins could be maintained, broadened, if you will.

A word about the flat-rolled market.

It is rebounding at this point in time.

We have had very good bookings the last couple of weeks.

Some of those bookings came a little late to allow us to operate at full capacity in January, so we will not be at full capacity in January.

When we talk about capacity, this might be a good point in which to mention that I think the industry probably jawboned supply-side constraints in late 2005, and actually not only jawboned them, but realized supply-side constraints in late 2006 and early 2007.

So I think the outages were very, very real, supply was diminished, imports have been declining.

I suspect December will be down, could be as much as 20%.

I expect January and February imports will be down as well.

So as the buyers look at their steel stocks declining, they're going to want to replenish those steel stocks what they believe would be the bottom of the cycle, and I believe we've reached bottom.

I think there is now pricing momentum going the other direction.

We will see how far that goes.

I know this morning, when we announced to certain of our clients that we had already closed February, they were in shock that February was closed.

They couldn't believe we couldn't take tons in February.

So we will see where all that goes.

Obviously, the complaint was that other mills still have open books and can take the tonnage, and our response was we're sorry, we're closed.

But the bookings, as I've said, have been fairly strong the last couple of weeks, and are strong as we march through this particular week.

So we expect now to run February at closer to our capabilities, and we also expect to run full in March.

Those are our expectations.

We actually modeled January short and February short in our modeling process.

So as I said, the impact, if there's any decline in earnings, is really born out of the softness in the flat-rolled market.

I think we've, at this point in time, made the turn, if you will.

Volumes, which are in our supplemental data, as you can see, we're down from 644,000 tons in flat-rolled to 580,000.

I suspect we're not going to be materially different than the 580,000, I don't think.

Even with strong bookings right now, we certainly operated less than our capabilities in January, which will impact flat-rolled shipments in the first quarter relative to our capability.

I don't think they will be down a lot over what the fourth quarter was.

The Structural and Rail Division will probably ship -- I would guess 10,000 tons more in Q1.

They're operating at an excellent level of capability.

Engineered Bars could ship 10,000 tons at least more, and so could Roanoke, with shipments at Steel of West Virginia being in the same ZIP code that they were in the fourth quarter.

So all of that said, we're probably going to be in the 1,200,000 ton shipping vicinity for Q1.

As we said in the press release that we are optimistic about 2007, I would point out rather than looking at the glass is half-full from a consensus perspective -- and I think I commented that I think consensus was not updated, unfortunately.

But looking at it from a quarter-over-quarter perspective, I believe the first quarter of 2007 could be up 15% to 20% over the first quarter of 2006, which is reflected in our numbers.

It's about what you're seeing in our prognostication for $0.85 to $0.90.

So it will be a little stronger quarter than the previous year, and should the economy remain strong and stable, we really believe that we could generate another record year.

So we believe we could certainly top $3.77.

We don't have a number for anyone, aren't going to go out on a limb that far, but I would expect that we're going to see a fairly strong second and third quarter.

The fourth quarter is a always one of those mysterious quarters, where you never know whether it's going to be up, down or sideways.

We don't have a crystal ball that goes out that far.

But certainly, we're looking for a better year in 2007 than we had in 2006, and we had our best year ever in 2006.

So having said that, I will end the introductory comments at this point in time, and allow my other colleagues to make a comment or two about their specific operations.

We're going to start off with Mark Millett in the flat-rolled arena.

Thank you.

Welcome, everybody.

From a Flat Roll Division up in Butler, for a mature mill, our year-over-year results were absolutely outstanding.

We had record earnings, substantially over 2005, and significantly over even 2004, which was somewhat of an aberrant market.

Obviously, the market played a role in that, but also we have significantly higher volumes and a much better value-added product mix.

Shipments, both shipments and production we're about 6%, 7% higher than [2004].

Those values -- again, shipments about 2.5 million tons or thereabout.

It could have been a lot higher, were it not for the market softness, and [we joined] that the market discipline throughout America preferred to hold prices down rather than chase production.

Our production was off somewhat quarter over quarter.

We produced about 638,000 tons in the fourth quarter of 2005, and we were about 602,000 in 2006.

So we were about 6% off.

So from a year in a strong market, we could have had generally a much higher [volume].

Obviously, that softness was manifested by the long positions of our customer base, with about -- maybe got up to about 3.6 months, 3.8 months' worth of inventory, driven by by that prolific amount of imports last year.

As you all know, we [brought in] about 45 million, 46 million tons of imports.

I think it's important to note that the market consolidation and the discipline was even more evident in [incenting] values.

If you look at the similar softness in 2005, hot band pricing went down to roughly $400 a ton, whereas it's been held, our values, to around about $500 a ton in this recent market.

As Keith said, we think we're in a trough right now, for sure, and we see glimpses of recovery through the rest of this quarter.

On a conversion cost structure basis, on unit consumption, we're definitely in control of the plant mill.

We did see some appreciation in commodities, in alloys, in lime and in electrodes, partially offset by lower natural gas costs.

Obviously, the zinc market has been a wild ride for the last 18 months, going up to almost $2.12 a pound.

It's settled back around about $1.70 currently.

But fortunately, the market allowed us to pass through much of that increased cost.

Project-wise, caster modifications went incredibly well and we should see the anticipated throughput that we want.

As we optimize the mill, we will achieve a 3 million ton rate through this year, and hopefully [be there for] 2009.

So the value-added Galvalume project in Jeffersonville is on schedule for a second-quarter startup, and the paint line also is on schedule for a Q3 startup, so things are going well there from a construction basis.

But all in all, it's an absolutely fantastic year.

The mill continues to run well.

The esprit de corps is strong.

We continue to see record-breaking performances in almost every line.

It's the safest year we've had since 1998.

We had an unconditional approval of the change to the ISO 9001 quality system, and we've got phenomenal community involvement.

So it's just a great group of guys doing great things.

Keith?

Thanks, Mark.

We will turn to you, Dick.

Dick runs our Columbia City, Indiana Structural Division.

Thank you, Keith.

Good morning, ladies and gentlemen.

Again, as the press release stated, we're very proud of the efforts of everyone at Columbia City for 2006, produced over 1.1 million blooms through the melding and casting arena, and rolled and shipped over 1 million tons, so excellent performance.

A lot of the excitement at Columbia City involves new projects that we're working on.

A quick update on some of those -- the melt shop and caster expansion, the steel's going up as we speak in the melt shop.

Caster modifications, some of them were made during last October's maintenance shutdown.

Some additional ones will be made during this April's maintenance shutdown.

The final installation of the four-strand and the second containment for the casting machine will be in this coming October's shutdown.

As far as rolling mill, the second rolling mill expansion project, foundations are in for the shipping bay and the roll shop and they're going in for the rolling mill.

Excavation for the second reheat furnace is underway.

The steel's -- of course, we rolled the steel, and have shipped it or are in the process of shipping it in the fabricator, and expect that back in -- some of it in February already, and the rest throughout the spring.

It's just exciting.

We're still looking forward to an end-of-the-year debugging and commissioning, and a real good jump at 2008.

Some of the other projects that are going on, our rail welding facility -- we tested the welder for the first time last Friday and made some successful welds.

We'll continue to debug the equipment there for the next week or so, and then we'll start putting some of our rail over there, and allow us to start welding some rail for February.

Dynamic Composites, LLC, our little joint venture for the production of railroad ties -- we're anticipating the last shipment of a major component here in the month of January, and we expect the production of ties to begin in February.

So we are excited about what's going on.

As Keith mentioned, our goal for 2007 is 10% higher than we achieved in 2006.

Thank you, Dick, for a good report.

I might just comment on a couple of our other arms of our business, if you will -- one of them, New Millennium building systems.

That's our fabricating and role forming divisions.

Their order books remain fairly robust, especially given the time of the year.

They believe they're going to have an excellent year in 2008.

About half of our $60 million CapEx spending has been accomplished.

The other half will be accomplished in roughly the first half of this year.

So the revamp of the Salem, Virginia facility; the Florence, South Carolina facility; and the Continental, Ohio facility will be complete by midyear, and we think they will be bigger contributors to our earnings in the second half of the year.

I would suspect that we would have a real opportunity to triple our earnings capability year over year in that business.

There might be a question or two about Mesabi Nugget.

We are looking at opportunities to resurrect, I guess would be the right word, to resurrect that project, with the eye on going alone, if you will, making it an all-SDI project.

We're still very, very high about the technology, and as I said, looking at opportunities to push that project forward potentially in the year 2007 as well.

Turning to Pittsboro again, we have finished our engineering study, and we'll be submitting to our Board a capital expenditure authorization to increase the capabilities of the SBQ facility.

From the 500,000 ton, 550,000 ZIP code, if you will, to about 750,000 tons, we think we can do this for a very modest investment of $30 million, $35 million, and we think that would obviously be the prudent thing to do.

Glenn and his team are doing an excellent job.

I think just recently, they were given the Supplier of the Year award at Caterpillar for zero defects -- defect-free SBQ bars that were supplied to Caterpillar.

That's an outstanding accomplishment by Glenn and his team.

We're making just excellent progress in those markets, and are very proud of that team's results and looking for an even better year next year.

Our scrap processing projects are moving forward.

We will have more to report on that probably in the second quarter than we do today.

So with those brief comments, I will turn it over to Gary for an update on certain financial data.

Thanks, Keith.

The shipments for the fourth quarter for the Flat Roll Division would break out as follows.

We've got hot-rolled shipments of 255,000;

P&O, 28,000; cold-rolled, 18,000; hot-rolled gal, 110,000; and cold-rolled galvanized, 106,000.

In the fourth quarter, we had 64,000 tons of painted materials shipped, giving us a Flat Roll Division total of 581,000, representing in the fourth quarter about 49% of total shipments, which is an interesting observation.

If you go back to 2005, it was 67% of our shipments, so you're seeing the impact of diversification of the business coming into our shipment mix now.

Of course, in this fourth quarter, that has been very helpful to us.

Structural and Rail Division, 266,000;

Engineered Bar Division, 122,000.

That represents, for Structural and Rail, a 23% increase over 2005, and for the Engineered Bar Division, it's a 41% increase.

So you can really see those businesses becoming major, major players as they've matured and grown and further penetrated their markets.

So big successes for those guys.

Roanoke at 146,000 and Steel of West Virginia at 71,000 -- also major contributors.

So shipments for the quarter, 1.1 million tons, a very good result.

CapEx for 2007, we are expecting about $400 million.

Now, the timing of projects will drive a lot of that.

As you know, we've got a large number of dollars being invested in significant expansion projects, and that number can shift around a bit.

But as we expect timing to play out now, we're looking at $400 million for 2007. 2006 ended at $129 million, as you know.

Depreciation and amortization for 2007 should be about $30 million a quarter for modeling purposes.

Interest expense, we expect to maintain about as we are today, barring any major transactions or other events.

So about $9 million a quarter, $10 million a quarter would be good estimates for you.

Our effective tax rate for 2006 turned out to be 37.2%.

We paid cash taxes in the fourth quarter of $70.4 million, and that put us at 2006 cash taxes of $226.4 million.

An update on our share repurchases -- we repurchased 3.2 million shares in the fourth quarter, getting us to 9.4 million for the year.

That leaves us with an authorization to purchase an additional 5.6 million shares.

Keith has spoken to that many times.

We will continue as it looks opportunistically advantageous to buy shares.

Shares outstanding at end of the quarter, 97 million.

The dilutive impact of the remaining convertible notes would be about 4.4 million.

So that puts us at 101.4 million fully diluted shares outstanding at end of the quarter.

We had 5 million shares issued through note conversions this quarter, and as you know, we saw significant conversion this quarter.

So from a working capital standpoint, working capital is stable.

We haven't seen any major swings one way or the other.

We have very healthy scrap inventories, as Keith alluded to.

We've seen finished good inventories up at Structural Division and at the Engineered Bar Division as a result of those businesses growing.

But inventories, receivables -- everything is in good shape, and I think inventory levels are healthy but not excessive.

That's it, Keith.

Thank you, Gary.

I might make one additional comment that one of the analysts had commented that our SG&A costs were up substantially.

I think that does bear an explanation.

We paid out $8 million in special bonuses to our employees at the end of the year, rewarding them for their outstanding 2006 accomplishments.

That is worth about $0.05 a share, and it is the main reason for the SG&A increase.

When we re-forecast the fourth quarter, we did model that into our numbers.

Therefore, it was not a surprise to us, but for those of you doing the modeling, that would be the logical reason why SG&A was up.

I think there was another $0.01 impact, Theresa, was there not?

Yes, when the convert converted in December, we had to write-off financing costs of just under $1 million, which was another $0.01 in --

Which is another $0.01 a share.

We certainly couldn't have forecast that the converts were going to continue to convert, although we expect that [here] the converts will probably convert shortly.

So with that, that concludes our formal remarks, and we will open it up to Q&A now.

(OPERATOR INSTRUCTIONS).

Kuni Chen.

You mentioned that you're already closed for February.

Is that across all product lines, or just certain product lines?

Then, as far as the pickup you're seeing in flat-rolled, can you talk about which end markets, whether it's automotive or construction, you're seeing the pickup?

I can tell you that with probably the sole exception of Steel of West Virginia and potentially our SBQ division at Pittsboro, which tends to receive their orders from commitments on a rather steady-state basis, they probably haven't booked everything at Pittsboro yet, or haven't received it.

But for all practical purposes, they're likely closed in February as well.

Steel of West Virginia might be a little short of February commitments at this point in time, but that's small tonnage.

Structural is sold out well beyond February, probably into April at this point in time.

So very strong demand there, and flat-rolled currently is sold out through February, and we have a good start on March already.

So John, I will let you address the strength by segment.

I would say surprisingly, automotive is a piece of that, and certainly nonresidential construction, particularly the racking market.

Mark, anything else come to mind?

Those are the principal (multiple speakers).

Principal, right.

Just a quick follow-up.

As far as the overall inventory position of the market, do you still view it as a 3 million ton problem that needs to be worked out in the first quarter?

What are your expectations sequentially, as far as production imports and demand goes to bring that back into balance?

I don't have any idea whether or not we truly have a 3 million ton problem or not.

So I really can't comment on it.

I'll ask John for his thoughts.

I would certainly suggest that the order activity we've seen in the past couple of weeks would suggest there's much less of an inventory problem than we all perceive in the market at the moment.

Again, in terms of timing, very difficult to project when we might be back to levels that would support -- let's call it robust quarter activity in production.

I'm talking on an industry basis now.

But we're certainly encouraged by what we see in the last couple of weeks.

What we've seen in the past also, as the inventory draws down, the inventory that someone may have in-house may not be the actual inventory they need, particularly when a lot of it is import material that was ordered two or three months ago, four months ago.

Six months.

Yes.

So you start seeing order pickup, just as we're seeing now, as sort of a prelude to regular buying.

Michelle Appelbaum.

First of all, I just want to comment on the timing of your shift from being primarily flat-rolled three years ago to being about 50/50 currently.

That was incredible, given the strength in the long products business this cycle.

So congratulations on that.

The second thing is speaking of long products, they're have been some absolute price increases for February -- $25 on beams, $15 on bars.

Could you talk a little bit about how you expect prices for those products to work relative to resource costs the next couple of months, and as we head into construction season?

I suspect that in beams, beam pricing will keep up with any resource cost movement, and I would think that might be the case for bars as well.

It certainly will be the absolute case in the SBQ universe, if you will.

In flat-rolled, as you know, we have so many different types of programs, tied to different indices and tied to the spot and tied to this and tied to that, that it's hard to predict.

But I would guess the movement in pricing is probably going to surpass the movement in scrap costs in time, although scrap may get there faster than the pricing.

So you're saying in the short run, scrap may move faster but longer-term?

Longer-term, I think pricing will certainly outrun any movement in scrap.

That's my belief.

In the quarter, as we said, pricing will be down in flat-rolled, and scrap costs, at least on a purchase basis, are going to be up.

But as I commented, we have a lot of inventory at Butler.

That has yet to wash through the system, so we're going to be matching up some of these lower selling values at the bottom of the cycle, January/February type numbers, with better scrap costs than the purchase activity.

Brett Levy.

First off, can you talk a little bit about sort of when the $40 a ton scrap increase probably does start to impact your numbers, and do you think you really will, by the second quarter, have all the price increases implemented in order to have that not become a factor in 2Q numbers?

The second one relates to the drop in the call price in the 9.5's, and what your thoughts are with respect to those notes going forward.

I'll let Gary handle your second question.

I'll try the first one.

I believe the $40, which you saw for January -- or $25 you saw for -- talk about premium grades and flat-rolled for a second, that you saw for January delivery, and perhaps the $10 to $20 that you might see -- could see.

It's possible you might not see anything.

But you could see at the end of January bidding for February delivery.

A lot of that material will start to come through the system probably in March/April timeframes for us, would be my guess.

I do believe the flat-rolled pricing will have recovered beyond those moves by that point in time, and margins will start to grow and expand during that timeframe, rather than contract.

Gary, I'll let you handle the second part of the question.

Thanks, Keith.

The issue with the notes is something we look at constantly.

We are confidently evaluating what we should do with those notes, and clearly the drop in call price is an important milestone, and something we continue to look at.

But we're not at a point where we've made the decision to take those notes out.

There are significant costs in spite of the decline in call price.

There's significant costs doing that.

We think the market would very favorably receive a high-yield offering from us, if we wanted it, to refinance those notes.

But it's still a significant cash chunk to pay to get them refinanced.

So I would say that we're going to continue to analyze it.

We will let you know if we come up with a different answer.

Thanks very much, guys.

Congrats on the strong quarter.

David MacGregor.

I wonder if you could talk a little bit about the alloy price exposure you have right now, and the extent to which you're succeeding in terms of passing that through.

You had made some comment in your prepared remarks about zinc prices, but you cut out a little bit and I didn't quite get that.

So if you go back and maybe just give us a feel for where you stand on alloy prices, also [hitting] in the first quarter, that would be helpful.

On alloy pricing, we had some sort of hedges or committed volumes through December.

They were having to pay spot, so it's probably just $2 or $3 a ton, depending on product mix, impact to us.

As I said, it's been a little offset with lower gas costs and a couple of other things.

Regarding zinc, as you know, it peaked up to about $2.12 or thereabouts.

It has dropped off since then.

It's in the $1.68, $1.70 -- I didn't see what it did yesterday.

But fortunately, what we were able, as did most of the industry, were able to pass that over to our customer base from a zinc [extra] perspective.

As I was recently going through your Butler plant, you had a very substantial inventory of zinc.

Is it going to be a positive or negative for you here?

That inventory currently is a positive -- obviously because it's been purchased over periods of softness, so to speak.

That's what I would have expected.

With respect inventories, you made kind of a passing allusion to OEM inventories.

I wonder if you talk a little bit about where you're seeing you customers stand -- kind of beyond the service centers into the metal benders, and where their inventories stand right now.

Probably the best indication would be one of our Directors, John Bates; he owns and managers manages Heidtman Steel.

He told us that in the first half of January, his rate of shipping was up about 25% over the average for November and December, so his outbound is moving pretty good, and consequently his inventory is coming down.

Kind of hard to quantify exactly what that is in an absolute sense, but again, based on the order activity that we've seen, I think more companies than just Heidtman are having that experience of the channel distribution.

I ran into one of our clients out in Arizona, and he indicated the same thing.

His outbounds were up about 20%.

So it was pretty much parallel to what John just indicated Heidtman -- the arena Heidtman's in.

Timna Tanners.

Thanks for the really thorough remarks and for reading our notes.

Hope that Keith is feeling better soon.

Just a couple questions.

A lot of them have been touched on already.

But I wanted to know if you could discuss a little bit more about the sheet market and what you're seeing, particularly in light of kind of looking maybe a little further out.

There's some restarts not just of your own capacity that have been out, but certainly of some of your colleagues or competitors.

Then if you could talk a little bit about SeverCorr's startup and what that might mean going forward for you?

There's also more SBQ capacity that's coming on -- I know it's not immediate, but further out.

If you could talk a little bit about what that will mean for the markets in your view?

I'll try and tackle them all in reverse.

The SBQ marketplace is not an easy market to break into, if you will.

It wasn't for us, and won't be for any new mill.

There's a learning curve one goes through, and there will be disappointments here and there.

So I would expect that any new SBQ capacity would certainly not be very material to 2007 or 2008.

Beyond that, it certainly could have an impact on the industry, not just from a pricing climate, but it could have an impact from the perspective of shuttering older facilities as well.

The SeverCorr thing is -- they're not expected to -- last conversation I had with John Correnti was that they wouldn't be starting their hot mill until probably June.

Obviously, ramp-ups take some period of time, so I think there's a minimal impact from a new entrant in 2007, if you will.

He's actually going to be a customer of the industry for the first four, five, six months.

He will be buying steel to feed his cold mill startup.

I believe he started his pickler up, and I think in February they were going to start their -- they've already started the pickler, and I think in February they were starting to ramp up their cold mill.

So he will be a client of the industry for some period of time, with de minimis impact.

I really can't speak for others who have idled blast furnaces.

As the market starts to come back they will re-light them, and certainly we would hope there is good prosperity for all in the forthcoming market.

On the SBQ side, though, we're not talking about an entirely new entrant; we're talking about Nucor.

But you still think that probably not material in the near term?

Look, we think we're pretty experienced steelmakers as well, and you just don't jump out of the box to an SBQ standard and qualify yourself with all of your clients overnight.

That's a year-long process, at least, before you get qualified in some of these major consuming houses, if you will, just as it did for us.

They may be there at one mill, but the fact they're at a specific location would not be relevant, I don't think, to a new location.

I thing each location would have to earn its spurs.

Finally, are you worried about what this might mean for scrap impact, in terms of the new mills eventually coming up, of course, maybe second half or into 2008?

What might that due to your scrap prices?

We've been exporting a lot of scrap recently, and I'm not going to tell you everybody's belly is full.

But I would think that as much buying activity as we've had shouldn't prompt additional buying activity at that level.

There's still going to be buying activity.

But as we come into the spring marketplace, the flows will improve.

I think the scrap people will tell you that.

Absent a super-strong export market, I think the scrap market will behave according to the laws of supply and demand.

I don't think there's going to be a scrap shortage out there.

I wouldn't tell you there's going to be an opportunity for us all to run out and by a five-month supply, either.

So I think it's kind of steady as you go.

Andrew O'Conor.

Keith, I think a quarter or two ago, I thought you suggested that Steel Dynamics might consider back-integrating into scrap in some fashion.

Can you bring me up to date on any action the Company has taken to back-integrate into scrap?

Yes.

We have an option on two properties -- I won't be specific -- and have acquired a third property, all in different geographies, if you will, and are contemplating moving into the processing business, either by ourselves or in a joint venture with others.

Those plans are still in place among and proceeding forward.

I wouldn't really care to comment any further than that.

We have two operating scrapyards now in the Virginias, and in time we could have five or six.

So is there a goal, or what percent of your scrap needs would you ultimately consider providing internally?

I don't know that there is a specific goal, and these yards -- two of the bigger yards potentially could produce 30,000, 40,000 tons a month.

So all in all, you could end up with potentially collecting and processing 1 million tons of scrap, which is significant, but not all that significant when you need perhaps as much as 6 million tons.

Maybe for Gary, can you break out how the $400 million in CapEx will be spent this year?

Obviously, a lot of that is going to be for expansion projects.

I would say -- this isn't perfect math, but probably $250 million of that is going to be expansion projects, $150 million probably for what we would normally be investing, would be a good allocation to use.

With that estimate in mind, would you expect the Company to be free cash flow positive in 2007, and if so, what was your priorities for the free cash flow be?

We will have some free cash flow in 2007, and what we have done in the past, I think, is a good indicator of what we will do in the future.

We have consistently invested our free cash flow in either capital projects or share repurchases.

We have, from time to time, issued special dividends to move cash back to shareholders.

So what we haven't done is operate it as a money market fund and just kept it on the balance sheet.

We kept our cash working.

So I would say that we will likely be more of the same.

As I said earlier, we do still have shares authorized the repurchase, so as we can advantageously take advantage of buying opportunities, we will.

I would think we would probably lean, between dividends and share repurchases, towards share repurchases.

I'm not going to tell you we wouldn't increase the dividend, but we've done a good job in that arena recently.

We'd probably look more towards share repurchases.

I believe our stock to be still significantly undervalued, and therefore we believe that's an opportunity.

Aldo Mazzaferro.

I'm wondering -- really more for John, I guess.

But in terms of the tone of conversations you've been having with your customers, I know you talked about this right upfront, but I'm wondering, are you seeing anyone that's getting -- I guess you'd say more concerned about supply than they are about price?

Or what is the stance?

I know you're booking out to March or into March, and if you fill March up, I think a prospects for a price increase might start to look good.

I'm wondering what you think about that.

I believe the perception and the mindset in the market is still that it is a buyer's market.

So the lean is towards oversupply.

That's got to come down.

I think, again, just to underscore, buyer's think they're in the driver's seat, and their reaction, as Keith addressed in his opening remarks, was surprise to our closing February.

I don't think anyone is thinking about shortage right now.

Because they actually saw their inventories dip down a little bit in December, despite a 20% decline in shipments to end users, sequentially.

Now, that's reversing, from what I heard you say.

Again, that's our reality at the moment.

We can only -- we look at the market through the order book, and the order book is telling us something that isn't consistent with what you're hearing, or frankly, what we are hearing from some sources.

So it's a little early to really determine just what to make of it, but we are encouraged.

It would be nice, as we move through the quarter's earnings release, to get more color from everyone.

I know.

That's true.

Gary, I know you just gave us the $250 million as expansion.

Is there any way you could break the $250 million a little bit for us, in terms of the items on that list, what we should watch for to see if it all comes to fruition?

This is Dick Teets.

Needless to say, the vast majority of that is being earmarked for our $200 million (multiple speakers) at Columbia City, which involves both melding and casting, as well as a second rolling mill.

So a little bit of it was spent in 2006, getting earth preparation done and initiating our foundation plans and so forth.

There will be some carryover, like holding back our percentage from equipment suppliers, as they debug the equipment and so forth.

But the vast majority of the $200 million is going to be spent in 2007 at Columbia City.

We also have about -- I think we got approved about $27 million additional capital program at Columbia City for product quality, as well as capability expansions in sizes and in quantity.

So of the $250 million, I'm proud to say that about $200 million -- meaning as little as 2006 and 2007 -- is coming to Columbia City for structural sections.

About probably $35 million or $40 million will be for the paint line and Galvalume expansion down in J'ville.

Some of the upgrades that we're doing to Roanoke and the New Millennium facilities that were formally Roanoke facilities will not only reduce comp down there, increase efficiency, but those will also give us additional capacity over what they had in the past.

So it really is going to be spread throughout the organization pretty broadly.

Then just two little follow-ups on the -- have you noticed any impact at all yet from the removal of the tariffs on galvanized?

Second point, Keith, are you viewing this special dividend that you've been paying as a sustainable special dividend?

I'll let John tackle the first side of that question, or the first question.

The second, we've made no decisions relative to special dividend.

That will happen at our February Board meeting.

Regarding the tariffs, I would tell you nothing discernible at this point.

John Tumazos.

Keith, congratulations on everything.

It's sort of been a surprise to watch the industry environment in the last few months and see Wheeling-Pittsburgh and Oregon Steel and NS Group and Corus get taken over, be the subject of takeover battles.

Their equipment and machinery isn't as good as what you've got at Butler or your other locations.

Presumably, you must have gotten innumerable offers to sell your company, since you have the most modern steel mill in the US.

Could you talk about your preferences to acquire assets, given the competition, the prices, things you're selling for, your preference, your willingness to sell the Company -- if these other companies went out at two times replacement costs, you must be worth four times -- and what the right size of your steel company is?

There's another Brand X that sells 2 million tons a month.

I don't know if that's good or bad, could be a problem.

But could you just talk a little bit about your long-term vision for Steel Dynamics, and things like that nature?

We, along with many others, have been discussed in both veins, if you will, being potentially acquired and/or acquiring.

We'd rather view ourselves as acquirers and/or greenfield constructors.

The Company is not for sale, and will not likely be for sale.

Therefore, we're going to continue the path of adding capacity where prudent at existing locations, considering greenfield projects and looking at assets that would become available or are rumored to be available on the market that max sense for make sense for Steel Dynamics.

We've done so in the past, looked at opportunities, acted upon some, have not acted upon others, and that will continue to be our MO going into the future.

Do you think the right kind of transaction is to buy a relatively small operation that can be enhanced, like a Steel of West Virginia, or just to make an example, a big company like Nucor that maybe you could run better? [What style], 400,000 tons or 25 million tons, ignoring antitrust for a moment?

I'll leave the last part of that alone.

The pickings, if you will, are slimmer these days.

There are some quality assets out there that are worth considering, but there are also projects that we're looking at initially that might make some sense from a growth perspective in flat-rolled.

I can't really comment specifically on them, but we are looking at some significant growth opportunities that, let's just say, aren't generic or vanilla-natured steels, which will allow us to continue to grow in the flat-rolled universe, if you will.

We likely, as I've said, will broaden our horizons from a merchants capability in time, and that likely would be greenfield.

There are very few older merchant facilities on the auction block that are probably worth investing in, for one reason or another, and that reason may not always be the condition of the equipment.

It would relate to whether or not they're unionized or not unionized.

Our preference is not unionized, as you know.

We've done very well with the integration of Roanoke, and we are living in peace and harmony with the Steel Workers Union at Steel of West Virginia, and hope to continue to enhance that relationship.

But it would be our preference not to get involved in any more relationships of that nature.

Thank you and good luck.

(OPERATOR INSTRUCTIONS).

Mark Parr.

Congratulations.

Great performance, great quarter.

It was nice -- it's been a long time since I've had a positive delta on my estimate because of greater share repurchase activity.

So the shareholder initiative side of your strategy is really paying some dividends here, I think.

Thank you.

Most of my questions have been answered.

Gary, you didn't mention an outlook for the tax rate in 2007, or did you?

Did I miss that?

No, I don't think I did mention it.

I would be happy to ask that, then.

You should use 37.6%, but this is going to move around a little bit.

Obviously, our tax situation is more complicated now than it was five years ago when the Company was smaller and simpler.

But we are using about 38%.

I'll use that.

Another question that -- just to follow on to some of the comments and questions that John had.

Keith, I was curious in terms of right now, based on what you're seeing out there in the market, what's the potential that the return potential on acquisitions versus the internal growth that you're doing?

Have you run any analysis on that that you could share or talk about?

I have not.

Obviously Roanoke was accretive, an accretive transaction, and we certainly keep that in mind when we're looking at opportunities in the market.

We really expect, whether you acquire the asset or build it from a greenfield perspective, we certainly want to generate at least a 20% return on assets -- not on equity, but on assets -- if not greater.

Our mills are certainly doing that at this point in time, and we see no reason why we would invest in a project that had a potential for 5% or 10% returns.

It's not us.

Based on what you're seeing, you said it was, what, a $35 million upgrade to Pittsboro will get you 200,000 tons?

That's a home run.

That sounds like a $20 million plus annual kind of return on a $35 million investment.

Yes, that's right.

So is that kind of the norm of what you're seeing with your operations still?

If you look at the J'ville upgrades, and looking at the --

I'll just chime in real quickly that the Columbia City expansion isn't that lucrative, but it's well within -- it exceeds our threshold.

So I don't want the Pittsboro project to be the new hurdle rate, because we have some very good projects that are a little bit less than that, but still tremendous return.

The Pittsboro thing is kind of -- that's one of those just (multiple speakers).

That basically is -- when you're at capacity, and that's day one out of the gate, but if that capacity was realized, that would be on a straightline basis probably something on the order of a year and a quarter payback or something.

That's obviously of very strong interest to us.

Congratulations again, and look forward to next quarter's update; appreciate it.

Leo Larkin.

Just a question on -- you have some long-term debt coming due.

Will that be refinanced?

That's actually not coming due.

That $80 million that you see as current just our revolver that we classify as current debt.

Anything else, Leo?

No, most of my questions have been answered.

(OPERATOR INSTRUCTIONS).

Charles Bradford.

Can you talk a bit about your (technical difficulty).

We didn't catch the last part.

Talk a bit about what?

Give me just a moment.

I think he was on his cellphone, and we probably lost him.

I do see his line is not established at this moment.

Any other questions?

At this time, I do not have any other questions.

Super.

Let me just thank everyone for quality questions and for your support of our company.

We think we've got an exciting future, and look forward to chatting with you in the near term about growing and expanding markets.

Thanks again, ladies and gentlemen, and thank you to all of our employees who made this possible.

That does conclude today's presentation.

We thank you all for your participation.