Steel Dynamics Inc (STLD) 2007 Q1 法說會逐字稿

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

Today's conference is being recorded.

Joining us today are Mr.

Keith Busey, President and Chief Executive Officer; Mr.

Mark Millett, Vice President; Mr.

Richard Teets, Vice President; Mr.

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

Theresa Wagler, Vice President and Corporate Controller; Mr.

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

Fred Warner, Investor Relations Manager.

For opening remarks I will now turn this over to Mr.

Fred Warner.

Please go ahead, sir.

Covering results for the first quarter of 2007.

We are webcasting the conference call today, April 17, 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 results and events may differ materially from statements or projections that are made today.

You may 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 and on our website, SteelDynamics.com.

The latest 10-K report is also included as a part of our 2006 annual report that was recently mailed to shareholders and is available to others on request.

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're welcome to ask additional questions later as time permits.

Now let's begin with introductory remarks by Steel Dynamics President and Chief Executive Officer, Keith Busse.

Thank you, Fred, for your introduction.

And thank you, Michael, for your kind introduction.

And, Michael, we failed to inform you that last night we also had a press release that spoke to substantial restructuring of the Company from a management responsibility perspective, so I want to take this moment to congratulate all the members of my team who have new operating and/or corporate assignments, if you will.

As most of you have read in the press release Mark Millett is going to head up our efforts in Flat Rolled Steels and Ferrous Resources, which will include more organic growth in some of these arenas.

I will certainly include Iron Dynamics, Shredded Products, our Mesabi Nugget effort, our effort in metals -- or mining and minerals and things of that nature in the future.

And so he will have broad operating responsibility for that particular business group.

And Dick Teets, as you read in the press release, is going to have responsibility for our other major segment and/or business group that has to do with Steel Shapes and Building Products -- fabricated steels, if you will.

Both Dick and Mark, are executive -- have been appointed Executive Vice Presidents of the Company and are President and Chief Operating Officers of their respective operating groups.

We have also, as you read in the press release, traded an office for Strategic Planning and Business Development -- business development, kind of an all in term that obviously address the subject of mergers and acquisitions as well.

And Gary has been doing a terrific job for the Company in that regard.

And we have actually on our plate today quite a number of perspective deals -- I mean, in the double-digits, if you will.

The opportunities abound for the Company as in regard to future growth either organically or by M&A.

And so these organizational changes are designed to enhance the Company's flexibility and pursuit of current and future growth opportunities.

Theresa Wagler is going to be our new Chief Financial Officer.

And John Nolan, Glenn Pushis and Barry Schneider are each going to be given operating assignments.

Mr.

Pushis was in charge of our cold-build at Butler, and has been with our team for, my goodness gracious, going back 20 years now, and is a very capable individual.

He knows the flat-rolled markets in and out, and was the individual that we asked to champion our cause, if you will, at Pittsboro, Indiana as with regard to the Company's position in special mark quality steels, and he has done just a terrific job.

And he is going to be running the Butler operating facility.

He will report directly to Mr.

Millett.

Mr.

Nolan is taking Dick Teets' seat at Columbia City.

He will be responsible for the structural division at Columbia City.

And Barry Schneider, who runs our [coke] mill now today in Butler, Indiana, is going to be moving his family to the Indianapolis area and taking over responsibility for our Engineered Bar Products Division down near Indianapolis, Indiana.

Taking Theresa's job as Vice President of the Company and Corporate Controller will be Tom Hartman.

Tom was the Division Controller at our Butler Division, a very capable young man, excited about his new opportunity.

And he is excited about joining us here in the corporate environment.

And Mary Fink has been with us for a number of years, and her responsibilities have continued to grow and expand.

She is doing a terrific job, and she is now going to be our Vice President of Taxes and Benefits.

Those really outline the changes, and yours truly just picked up a slight title change from President and CEO to Chairman and CEO.

So again, congratulations to all of our team, some of which are present today, are here with us in the conference room.

Turning to the press release as it regards our first quarter earnings and outlook for the future, I think it is fair to say we had a fairly strong quarter.

We had revised our estimate for the first quarter from $0.85 to $0.90 to $0.94 to $0.98, and came in comfortably above that level.

Our results were substantially ahead of the first quarter of '06, and slightly ahead of the forecast.

We certainly enjoyed good and robust results in the shapes ends of our business.

And we are in the process of recovering from substantial market drift as it would regard flat-rolled products during the quarter, but nonetheless our overall shipments, even on a sequential basis, were 8% higher than the fourth quarter.

So a pretty good quarter from my perspective.

Our operating margin was 20%.

And our operating profit per ton was down from $150 to $136.

And I think I might just take a second to break that down for you.

I think most of you can see from the press release that revenue was down about $31 per ton, yet operating profit was only down $14.

But the mix of products at Standard was substantially different in the first quarter than it was in the fourth quarter, and we enjoyed pretty good cost compression in most arenas.

From a cost perspective we were better by $23 a ton from our perspective, offset by scrap, which was up, as you saw in the announcement, about $15 per ton on a linked quarter basis.

Our SG&A cost were $9 a ton better than they were in the fourth quarter.

And you might ask, why were they so much better?

The reason was, if you might recall, we paid a special bonus, something slightly in excess of $8 million to our employees in the fourth quarter to thank them for the outstanding year we had in 2006.

Obviously, we don't have that expense in the first quarter, thus the $9 drop.

If you take the $31 drop in pricing and a $23 improvement in cost position ex scrap, a $15 decline -- or increase in scrap costs, and a $9 improvement in SG&A that nets to $14.

And probably just gives you a little bit better picture of what made up of the $14 drop in operating profit per ton.

I might mention that our tax rate was up just slightly from where it was in the fourth quarter.

I think we had about 37.6%, and we were at or near 38% during the first quarter this year.

Our net income was still approaching 12%, which is an awfully good bottom line.

As you know, we repurchased some shares during the quarter which did take the average shares outstanding down from the level they were at during the fourth quarter of '06.

When you look at the weighted average common shares that are not diluted, they actually went up quarter-over-quarter, but that really had to do with the fact that the converts, or some of the converts, converted late in the fourth quarter of '06, and therefore didn't average in hardly at all, you might say, and obviously did so in the first quarter, yet we bought shares back.

But when you look at diluted, diluted actually did go down.

The Flat Roll Division, as you can tell, was recovering from a 581,000 ton pace in the fourth quarter up to 612,000, but obviously pretty far behind the 663,000 tons that they enjoyed in the first quarter of '06.

Yet the performances at every other operating unit were records for the Company.

So the Long Products Divisions performed extraordinarily well in a very, very strong environment.

I would tell you that from a flat products perspective that we are seeing a spotty recovery.

We didn't use the word strong demand, because I wouldn't characterize it as strong demand.

I would say it is just sort of moderate demand at this point in time.

One week we have a good book, the next week we have a weak book, and it is kind of up-and-down and up-and-down.

But on the whole, we think order entry is improving, and market conditions are improving, and pricing is improving, albeit slow.

And you may actually take three steps forward and one step back, and then two more steps forward and so on and so forth.

But we have improving conditions in flat-rolled.

As with regard to long products, we have very strong backlogs in wide flange, very strong backlogs in SBQ bars, a very good backlog in merchant shapes, and a rather stable backlog was how I would describe the market conditions for specialty shapes at Steel of West Virginia.

So looking forward to continued strong results from the Shapes Divisions throughout the remainder of the year.

And I believe that going forward margins will begin to expand for flat products as the year progresses.

We gave you our best early of where we thought earnings were going to be in the second quarter at $0.95 to $1, and that is net of $0.08, which is probably a see-through item that is related to taking out our 9.5% notes, $300 million of 9.5%s, and reborrowing $500 million of 6.75% notes.

I think we hit the market, you might say, at almost precisely the right time, and it is a very good rate.

Now you might ask what makes up the $0.08?

We've got unamortized cost of the previous deal that have to be written off.

Obviously you don't take out the $300 million worth of notes until the end of April, and you are putting on $500 million at the beginning, so you kind of got double interest.

And we were upside down in a swap, which we need to correct during the quarter.

So all that kind of packaged together related to the notes offering is about $0.08.

If you took the middle of our estimated range and said $0.97 and added $0.08 to it, you would see -- you would calculate a figure of $1.05, which is $0.04 better than the numbers we just reported.

So it is progress as we see it.

The second quarter is going to be impacted from things that you can't see in this release.

What you can see is the notes.

What you can't see is just the margin squeeze we enjoyed -- or going to have early in the quarter relative to scrap costs sort of getting wildly out of control for a period of time, and its impact on the Company early in the quarter.

Although scrap costs are abating, and I think they will continue to abate, they fell in April anywhere from $20 kind of thing, $15, $20 for the prime grades, up to $40 for certain other grades -- $45.

You might recall that they won up $70 the month before that, so for March delivery scrap was up $70.

If I think back, February delivery is up $40, and January delivery might have been up $30.

There was a sharp escalation of research cost during that timeframe, but they are backing off just as sharply.

And some of the folks in the industry, it is amusing to listen to them.

They claim that sometimes they are their own worst enemy.

The cart gets before the horse, and when it gets this far in front of the horse it tends to backup rather sharply.

I think you're going to see some decline in resource costs in May.

How sharp is anybody's guess, but I don't think the drop is over yet.

It could drop anywhere from $25 to $50 in May.

There is a correction underway, and all that is going to feed into the cost of ferrous resources in our furnaces during this quarter.

You had a little bit of squeeze, as I said earlier in the quarter, followed by margin expansion late in the quarter.

So it is a little bit of the mixed bag from that perspective.

The other thing I wanted to mention is that the only operating group that took a major outage, and we take two of them a year usually at each facility, was our Engineered Bar Products Division.

It had its outage in the first quarter.

And the plant -- and these are planned outages, they're not market-related outage.

But right now Columbia City is in the middle of a four-day shutdown.

Butler is going to be going be rolling into a four or five day shutdown here next week for maintenance.

And Roanoke is down for about five days for maintenance.

These are all planned outages, as is Steel of West Virginia.

So we've got four steel mills, you might say off-line for a week or so in the early part of the quarter, which would have some small measurable impact on Q2 as well.

As we look forward we still think that 2007 is going to be a great year for the Company.

I suspect that our strongest quarter will be Q3.

I think we're going to enjoy very good results in Q3.

And I suspect decent results even in Q4, which continues to lead me to believe that 2007 will be a stronger year for Steel Dynamics, as I have said earlier, as opposed to 2006.

We made mention of the fact that we integrated Roanoke into our system in April of last year, so obviously their results were not in our numbers last year but are in our numbers this year.

As you look forward, what is the outlook kind of thing for -- you might ask for pricing and scrap costs for the quarter?

This quarter scrap only went up about $15.

I suspect scrap will be up on a linked quarter basis quarter-over-quarter, the second quarter versus the first, by probably $40 or $50.

Again, very heavy in early part of the quarter, abating in the latter part.

And prices are going to be on a consolidated basis perhaps in the -- who knows, $45 to as broad as $60 range -- probably closer to $50.

When you pack all that together and you say there's a little bit of margin improvement, you multiply that times volume, that is why you end up with kind of the calculated numbers that we just walked through with everyone today.

We're really excited about the Company's future.

The Company has a terrific future.

And as I have said, we have a lot of things on our plate today that weren't there three or four months ago.

I think they represent good opportunities for the Company, thus some of the moves we have made.

I think you might remember that we bought two scrap yards in the quarter -- or actually we closed on them in the second quarter.

But now we have four operating yards and are looking at a number of other opportunities as with regard to ferrous resources, as well as nonferrous resources, and backward vertical integration.

I think that really concludes my comments for the morning, and I am going to turn to Mark Millett now and ask him to make a few comments about his new operating responsibilities.

Thank you, Keith.

To be honest, I don't have a huge amount to add.

You are as articulate as ever.

The Butler mill is running reasonably well.

We're having some growing pains from the modification into the casters the latter part of last year, which probably cost us about 15,000 tons of production for the quarter.

But nonetheless those should be rectified here in the next six to eight weeks and shouldn't be a major impact.

Jeffersonville should be restarting on Wednesday of this week.

As you may remember, we made a major modification there to put in a galvalume pump to further diversify and give us value-added product down there.

The folks have done an incredible job.

It is going to be starting up probably 6, 7, 8 days ahead of schedule, so we're looking forward to that.

The paint line in Jeffersonville is still on schedule.

The construction is underway, and we should be on schedule for a Q3 start up there.

Iron Dynamics is proceeding relatively well.

It is consistently making around about 20,000 tons of product a month, and we will slowly ramp that up the rest of the year.

Things are going okay.

Thanks, Mark.

Dick, I will turn to you right now.

Thanks, Keith.

I would like to say thank you to the men and women in Columbia City who truly did perform extremely well in the first quarter and had record production in melding, casting, rolling, as well as shipping in March.

And so we had a tremendous performance by all at the plant.

As you have mentioned, we are currently shutdown for our semi-annual maintenance shutdown.

We have a good handle on that.

Nothing major to repair, mostly preventative maintenance and a lot of checking and reporting.

The status on our projects, the new mill is on target schedulewise.

As well as financially, we have -- the steel work is hung for the shipping bays, and the roll shop is being installed.

Foundations for the reheat furnace, the cooling bed area and so are proceeding as well as all the building foundations for the facility.

Equipment begins to be delivered end of May, beginning of June, and we will be ready for good stolid foundations.

Rail welding, we have welded rail together.

We have our first rail train coming in here before the end of April with an order to fill it up with 1,600 foot welded rails.

We aren't welding our own rail, we are actually tolling for one of the major class 1 railroads, welding their rail -- supplied rail on our facility, and just wanting to put those assets to work.

I am also proud to say that the Thai facility, our joint venture on Dynamic Composites, has been practicing making ties.

We're still trying to get the formulation for the coating just perfect, but we have some, and we're going to use them internally within the plant during our expansions.

So things are exciting at Colombian City.

And after the shutdown we look to get back after it and have some more profitable quarters.

You mean Mr.

Nolan gets to get back after it.

I guess that's the case.

Gary, even though these appointments aren't official until May 1, this may well be your last chance to -- you'll be here with us in our conference calls in the future, but not in the capacity you are today.

So would you kindly report on the financials for us?

Sure.

I will run down the numbers.

The shipments for the flat-rolled mill breakout as hot-rolled at 303,000; pickled and oiled, 27,000; cold-rolled, 33,000; hot-rolled galv at 96,000; cold-rolled galv, 98,000; painted, 55,000, for a total of 612,000 tons for the quarter.

Of course the shipments for the other divisions are in the press release.

Capital expenditures for the quarter were $54 million, and for the year we are still in that range of $375 million to $400 million we mentioned earlier.

The biggest chunk of that obviously the expansion at Colombian City, but lots of other projects going on throughout the Company, improving and expanding facilities.

Depreciation for the quarter, $29 million, and again it should remain about that level throughout the year.

The interest expense, we had Q1 interest expense about $7 million.

And we're thinking probably about $9 million for third and fourth quarters, but in the second quarter it will be a bit higher due to the refinancing of the notes, probably a little over $11 million.

With regard to taxes, we have an effective rate of 38%, and that should be the rate for Q2 as well.

Cash taxes this quarter very low at just $0.5 million.

We will pay a lot more on our cash taxes this second quarter.

The projected for year-end cash taxes will be probably -- well, we will leave that for later.

Share repurchases, this quarter we repurchased about 2.8 million shares.

And there were no conversions from the convertible notes, so there are about 4.4 million shares remaining to convert.

And the shares outstanding are about 94.5 million as of the end of the quarter.

Those are the numbers, and thanks very much.

John Nolan is here with us today, and John has -- his position in the past has been Vice President of Marketing and Market Development.

We have always asked John to make a few comments.

Due to the growing bench strength we have at the operating divisions we have very, very competent young man involved in the marketing roles there.

We're not going to replace John at the executive level, but rather increase John's responsibilities, as he is going to have an opportunity to run our Structural Division at Columbia City.

But, John, you might just give these folks your comments on the markets today.

Good morning ladies and gentlemen.

I think Keith captured the current tone or sense or psychology of the market when he used the expression market drift in the first quarter.

I think there are a number of drivers for that, automotive production has been down slightly.

I think the number as currently published by [Wards] are somewhere between 8 or 10%, whether you're looking at month or a quarter.

Residential construction has been down some -- appliance, HVAC.

We're still working off something, I think at the beginning of January, like 10 plus million tons of carbon flat-rolled inventories.

But all these things are happening.

Certain improvements in market segments are -- I would say noticeable in the last several weeks.

And probably more significantly is the reduction in import volumes.

I think if you talk to traders even more importantly the fact that in the coming months I really do believe we will see remarkably low levels of imports relative to the historical averages that we have been looking at.

We would like to be a lot more enthusiastic about where we see the market in the next few weeks, maybe a few months, but we've see it moving probably as is, maybe a little bit stronger.

And I think about is probably an appropriate way to end my remarks on that this morning.

Thank you very much.

Michael, I think it is time to turn this ever to our audience and give them an opportunity to ask questions of the team.

(OPERATOR INSTRUCTIONS).

Kuni Chen, Banc of America.

First should be granularity you provided on operating profit per ton, and the sequential change there, the $14 per ton decline, versus fourth quarter.

And you talked about some of the impacts there from costs and scrap in SG&A.

Can you give us a sense as to that delta as you go from let's say March to April?

It is going to be squeezed in April for a wide variety of reasons.

All the outages are occurring there, but that is where the highest scrap costs for us during the quarter will occur.

So I don't have a number for you there, but it is certainly less than this number, and then it is going to be expanding from that moment forward, if you will.

You mentioned as far as price and expectations up maybe $40 to $60 for the second quarter.

It could be -- it is hard to forecast that, but what we modeled was we did a lot of sensitivity analyses and we modeled anywhere from up $45 to $55 is what we modeled.

We had a whole range of models and it is hard to know where it is really going to shake out on an average.

But it will be up, we're fairly confident of that, as will scrap costs.

Can you comment on backlogs in flat-rolled at this point?

Flat-rolled is probably only halfway through May is the way to describe it.

We have been staying about a month ahead of the game, and that has been fairly consistent for the last couple of months.

We're certainly not sold out for the quarter, but the order entry rate continues to equal the production, if you will, pretty much week in and week out, with some weeks being ahead of our capability and some weeks being behind.

Mark, you would add to that?

Yes, and it has been somewhat typical for perhaps the last six months or thereabouts.

Obviously the market over the last two or three years has gone through quite a change, whereas most mills used to at one time book out on a quarterly basis, we typically now, given the volatility of scrap and pricing, are just going out literally three or four weeks forward.

Then just lastly on Mesabi Nugget, can you just bring us up-to-date on what needs to happen going forward from here, and what your timeframe is, and what milestones you hope to achieve?

I think the -- we're continuing to develop the transaction amongst the prime partners.

I would say we're optimistic, although there are some critical hurdles yet to overcome.

From a timing perspective, I would foresee us resolving those issues hopefully within the next four weeks.

Then it is a case of finalizing the financing and then going forward.

Michelle Appelbaum, Michelle Appelbaum Research.

A couple of things.

First of all, congratulations to everyone.

A couple of questions on the management changes.

I noticed that, Keith, apparently you have been promoted to Chairman and CEO, but that leaves the President of the Company title open.

Am I reading that correctly?

Yes and no.

The operating platforms, both of which there are two right now, I suspect in the future we will have four major operating platforms in the Company.

One of them will deal with resources, both processed resources, as well as mining, minerals and virgin iron production.

I think that will be a substantial platform.

I think flat-rolled and all affiliated operations with flat-rolled will be a sizable platform.

I think shapes will be one of the other sizable platforms.

And I think downstream well be the fourth major platform.

What does that ultimately mean?

Well, it might mean that Dick and Mark give up components of the current platform.

But you might notice in the press release that they have another title for their operating groups, and that is President and Chief Operating Officer, so it is sort of subtly covered in that thing.

Then the other thing was, I noticed that you're moving one of the best commercial people I have ever worked with into an operating job, and I was wondering what that was about, John?

That is really nice.

Would you say that one more time?

Your last check bounced, so I am sure I'm going to say it twice.

What is moving John into an operating role all about?

John has for a number of years had a desire to show us that he can very successfully run an operating unit.

And you might note in the press release that he has a background in metallurgical engineering.

He has been --.

I have never held that against him.

Affiliated with the commercial side of the business for a number of years.

So I certainly -- he is a good administrator.

He understands engineering and accounting and commercial subjects very well.

And he wanted to have an assignment like this, and we gave it to him.

We think he going to do very well.

Thank you, Keith.

I wanted to ask another question.

Going back to the market, I noticed already we had seen the prices -- we will talk long and flat separately.

On the long side resource costs went up X, and steel prices went up something like 0.9 X.

So scrap prices outpaced steel prices even for long.

Is it fair to say that as resource costs come down on the long product side you're going to see prices at least flat?

You're not going to see give back of that?

That is my guess, but --.

And that is what we just saw that for the coming months that even though there was a decrease in scrap, we basically took the scrap surcharge down that amount and raised the base price the exact same amount for a leveling effect.

And I think as long as the scrap movements are -- have moderated, that is what you're going to see from a stability in our structural world.

Now I would not tell you that it is beyond the realm of imagination that prices wouldn't go up.

It is a strong, strong market.

That would be a consideration.

And I think in all the escalating and deescalating of surcharge and escalating and deescalating of the base price, somewhere along the way I think $20, $30 was left behind, so to speak.

Right.

That is the 0.1 X I was talking about.

So therefore there well be an opportunity to play a little catch up there in time given market conditions.

But we didn't model that, we modeled the latter scenario.

So you actually modeled flat prices, and resource costs down for May and question mark for June?

They will be down again for June, very definitely.

Because I did notice that --.

June's melt is really driven by you might say May deliveries.

And May deliveries will come in -- from a scrap perspective will -- they will be down on a cost per ton, so that will flow through into June.

On the flat side, where business has been okay, or whatever euphemism we are picking here to say stable, not great.

(multiple speakers).

Then I think there have been some [reached] numbers I have heard out there well in excess of $0.30.

What kind of numbers would you -- it didn't doesn't look like those reached numbers were happening anyway.

What do you think is going to happen on the basis of the recent declines in scrap prices on the flat-rolled side?

I think that is just what they were, reach numbers.

I don't think they were achieved.

They might have been for some, but I don't believe they were achieved.

I think we're still working our way up off the floors of $500 on the way to $600.

And I think the reports that you all read and have been part of perhaps publishing through your market intelligence, which is then suggesting that flat-rolled is hanging out recently in the 565, 570, 575 area is probably fairly accurate.

Could you see it going to higher than that in May?

I think so and even higher in June.

I think you can play this game too long and be caught short.

I believe, as John stated, inventories are going to continue to decline.

The supply constraints domestically are perhaps behind us.

There are outages and things like that which will occur.

But as John said, I think the imports are going to abate.

I think inventories will come down.

And I think what you're seeing is natural resistance to that kind of price movement in a short period of time, no differently then we resisted how fast resource costs moved in a short period of time when we declined to buy kind of thing.

Sometimes people are going to take that position.

But I think what is going to happen is we're going to get it -- as our economy -- I don't think it is going to falter, and you could see improvement throughout time in autos and housing.

I think as we continue to move forward at the -- whatever it might be, 130 million tons pace in terms of demand, I think people could be caught short.

And you know happens when that happens, everybody is in a panic.

Everybody tries to fit through the same knothole at the same time.

Prices go wild.

But I'm not predicting there going to do that, but I think they're going to migrate up.

And I wouldn't be surprised at all if you saw by June hot-rolled slightly north of $600 a ton.

So you are saying even with scrap prices declining in the near-term here by a reasonably high amount, double-digit percentage, you would expect that flat-roll will continue its slow but steady upturn?

I think it is returning to a more normalized level in a normalized market or universe.

I think scrap, as I said earlier, the cart went well, well beyond the horse there, and everybody got carried away and got giddy, and maybe for good reason.

We had a tough winter, exports were strong for a while, etc., etc.

But I don't think there is that kind of demand.

And I sense in talking to the people that operate in that climate that many believe this thing has peaked and it is falling.

And some are a little unhappy that it got that far ahead of itself because it always falls pretty hard later on.

So I think resource costs just went crazy, and they are backing up into a more reasonable zip code.

I want to say it again at the risk of being overly friendly to you, that going from 100% flat-rolled a few years back to 50-50 long and flat-rolled was -- especially when you did it last year -- was just incredible timing.

I don't know if you're lucky or smart, but it was a great move.

Dave MacGregor, Longbow Research.

I have a question with respect to your guidance on the $0.95 to $1.

And we have been talking a little bit up here about ASPs and your scrap price and your total volume.

I wondered if you could just pull that together for us and just share with us what are your assumptions on the dollar move, and your consolidated ASP to scrap, and the total volume for second quarter?

I think I said earlier on a linked quarter basis we think scrap costs will be up $40 to $50.

That is about as definitive as I can get.

And prices are going to be up somewhere in that same zip code if not a little bit more, providing some increase in margins, or allowing some increase in margins to occur.

As I said earlier, the sort of $0.95 to $1 -- pick a middle number of $0.97, you have to consider the impact on the notes thing.

If you look through that event as being an extraordinary onetime item, margins actually would be expanding if you added $0.08 back to $0.97.

It would be at $1.05.

But as I said earlier, I think they would have been -- it doesn't mean they couldn't be broader, but they can be weaker too, but I don't think by a lot either direction.

Then your volume assumption?

Our volume assumption is that flat-rolled is still not as robust certainly as it would have been in the second quarter the previous year, but it is going to increase we believe from the 612,000 ton level that it was at in the first quarter.

And structural shipments should be up probably quarter-over-quarter only slightly.

Engineered bars should be up slightly.

Roanoke will probably be down slightly, because we took the old antiquated furnace off-line and all employment associated with it at the end of Q1.

We furnished a heck of a lot of billet material with that furnace -- with that furnace to our operating unit at Steel of West Virginia.

We're about to get involved with cranking up their capabilities, but they have a heck of a stockpile of billets, which is really what led to the very, very strong shipments that Roanoke had in Q1.

So without that furnace their volume is going to come down a little bit, and they are going to be really better matched to what they can roll.

They are still going to be a billet supplier.

I might add that Roanoke really had a terrific quarter, and we believe will continue to have very good operating results on a go forward basis.

I think Steel of West Virginia is probably kind of flat in terms of quarter-over-quarter.

You are not going to see a lot of growth there.

Some of that is due to the truck and trailer industry being -- having a flat tire by comparison to earlier parts of last year, if you will.

I think New Millennium is going to do better in the second quarter from a volume perspective.

And most of our improvements, I might add, at New Millennium are about to be in place in this quarter, and we should really see some strong results from that in the third quarter.

That is kind of a synopsis of blow by blow where we saw the volumes going in the second quarter.

That is really helpful.

Thank you.

I guess I just wanted to go back to Michelle's question, and you have been talking about the outlook for flat-rolled and trying to get past that 565, 575 level, and you thought by June we could be slightly above $600 a ton.

Is that predicated on the view that auto and housing will improve?

It just seems like you cited those as being big drivers in that space and (multiple speakers).

Housing would have somewhat of a positive impact for us.

We don't sold -- not a lot of our steel goes into that market, and we're not big in the stud game or anything, but we are big in HVAC, and so any improvement and housing could help us probably from a painted products perspective as well.

You know, we do a lot of garage door material, a lot of painted panel material for HVAC.

We could get -- with housing coming off the bottom, we should could get a little help.

Autos, how long are we going to be stuck in the lag there?

I don't know.

I don't think -- we're not huge there.

We probably do a lot more with truck and trailer than -- and some off-road stuff than we do with cars.

You're not saying you need to see a recovery in those two end markets in order to get north of $600?

That's correct.

No -- this is John.

I think you have to look at it a couple of ways.

One, supply is the sum of capacity used, inventory and imports.

And so we have two aspects or dimensions of supply that I think are moving very favorably.

So look at it in that sense.

The real key, and [Al] is going to likely -- or like to hear me say this, is to look at how U.S.

domestic prices are positioned relative to other world market prices, and where -- I should say other world sector prices -- and there is some room there.

Again, the U.S.

market is a market will bear experience.

And I think we have not yet determined what the market will bear relative to global pricing.

This morning I had someone tell me that REVA, a large producer in Europe was moving its flat-rolled up substantially into the $700 zip code.

If you look at it on a dollar basis and short ton basis over $700 a ton.

Those are rather strong numbers that I think Europe continues to do okay.

China, as we all know, has always been somewhat of a wild card.

But even our government is starting to get it, and I think put a lot more pressure on the Chinese relative to their sort of over-baked steel capabilities.

And the Chinese I think haven't solved their consolidation problem or shut down a lot of antiquated capacity, but I believe they will in time.

And I think their internal demands will continue to grow.

It doesn't mean they won't be the fellow that is a bigger supplier to the U.S.

market or to Europe, they probably will be where others, who have been suppliers I think will lag sharply behind.

The last question is just on conversion costs.

As we move through the second quarter and into the second half of the year, how much further improvement do you think there is for you in terms of getting your conversion cost down more?

I think there's room, because obviously a lot of our costs are the costs of other producers.

Some of that tends to be rather fixed and driven by volume, so as volume increases in flat-rolled there are certainly very, very good opportunities in flat-rolled to see some cost compression.

As it regards shapes, I think with the improvements that we're doing at Roanoke they will take some time to work through the system, but we're continuing to drive much better cost structure there.

People continue to retire.

They're not being replaced.

We're still producing more with fewer people.

So I think our cost structure at Roanoke is going to get better.

And Dick's team just continues to hone in -- or John's team now -- on cost reduction at quarter in and quarter out.

Their margins were nothing but awesome during the quarter.

I think they can squeeze a little bit more orange juice out of that orange.

And Glenn and his team continue to do better and better.

And we continue to be favored with more and more business in SBQ bars.

A lot of it tied to our finishing capability.

People love the fact that we can not only eddy current inspect the bars, we can soft cut them to precise lengths.

We can turn them, grind them, polish them.

We can heat treat them, quench them, and on and on.

We can do a lot down there to add value to those products and make us a more valuable supplier in the SBQ world.

Thanks guys and congratulations with all the progress.

Brett Levy, Jefferies & Co.

You mentioned that you're looking at a number of potential acquisitions.

I realize you're somewhat limited, but one of the big guys got into the news.

IPSCO is obviously somewhat in play.

Is that at all a fit?

Is it too large for you guys to acquire?

And can you just talk thematically about the types of -- whether it is upstream, downstream, competitors better in terms of what your acquisition priorities might be?

You're going to find this unusual, but I'm going to put you on mute for just a second.

Okay?

We're back.

We didn't want to say things that could be construed wrong one way or another, so we had a little caucus about it.

Obviously there are a lot of opportunities out there.

I think we have said we're interested in backward vertical integration, both in process resources and virgin iron, and we're going to continue to establish a major growth platform in that arena.

Without commenting on any deals, we have nigh at hand, we think we're at the end of the trail relative to a couple of expansion efforts in that arena that we will be talking about in the near term.

We're looking at downstream opportunities.

There are quite a number of them out there today, and we're looking at that.

We're looking at organic growth.

And certainly we're always looking at other opportunities with established companies that might be of value to our shareholders.

You mentioned IPSCO specifically, and we're not sure at this point in time whether we're going to get involved with that transaction.

We may or may not.

And so we're not just trying to be cute.

We're really not sure that we're going to be.

We think it -- the valuations there are fairly rich.

I don't have to tell you that.

You only have to look back a few months ago and look at the price of IPSCO stock, and look at it today.

And is that a choke point for people?

I don't know.

There are a lot of considerations out there relative to IPSCO.

When they acquired NS the color of the company started to change a little bit.

We're not all that familiar with the strength of that acquisition, etc., etc.

We are still just kind of evaluating our options there.

It is an awfully big number, I don't have to tell you that, and we're not sure our position is going to be.

Thanks very much.

IPSCO stock neither moved during the silence nor the commentary.

But thanks for the color.

Okay, that's it.

Timna Tanners, UBS.

Wanted to -- I guess Brett touched on my question, but I think I would, I guess, poke a little harder.

You have been very good over the years on giving detail on your growth prospects, but can you give a little bit of color perhaps on what kind of opportunities you might be looking at downstream?

Would you be looking at distribution, or how much value adds, and what end markets do you think look attractive at this point?

I do believe, probably a little differently than others, that distribution --processing and distribution will probably play a more prominent role in a steelmaker's life in the future than it does today.

I'm not one of these guys that is just going to stand up and say, look, the European model just isn't going to work in America.

In time you find creative ways to work with opportunities like that.

And I think we and others will find ways to work with those opportunities in time.

We are going to continue to grow our building products platform, no doubt about that.

And we're actually looking at opportunities in the metal building arena and elsewhere, in components and things like that, which is all downstream.

There are a number of things we're looking at there.

And we have already commented on the upstream.

We are looking at organic growth as well, as you know.

Mark Parr, KeyBanc Capital Markets.

I just had a couple follow-ups.

First of all, could you give us an update on the timing of the startup of the new mill at Columbia City?

We're still working with our construction schedule, reflecting a completion of construction at the end of the year.

And our goal is to do it before that, but the weather has been a little surprising this spring to us, so we had some extremely cold weather when we were trying to pour concrete and it put a little damper on it.

We are actually running a little faster than our engineering can keep up with from a construction standpoint.

So we're trying to work through those issues.

But we're looking to a -- and what I have said in the past -- is a startup in the first quarter.

And if we can pull back into this quarter or maintain it, we will do our very best.

Dick, is there anything you can do to front-end load the order book for that new mill?

It looks like you're doing a little toll processing right now.

I don't know that is in your strategy, but could you talk a little bit about how you would expect that to ramp up?

The ramp up will be basically -- just basically a load sharing opportunity that when we open our books up right now for orders with our existing facility, we're looking three months out.

There are weeks where we don't take all of the orders because we don't have the capacity to maintain our very structured scheduled approach to production, which is highly appreciated by our customers.

And so I look at it as any of those times when we have an excess opportunity, those would be the prime hours of production that can be allocated then to a product that we're currently making on the existing mill, without even having to go preload it or presell it.

We can go over and start producing similar products, the identical product on new mill, that we can then take those hours of production and dedicate them to the tons that we normally would turn down.

Because the vast majority of the products we are going to make in a new mill are products we have already made, and the customers are there, and we know them, it will be an opportunity to make some inventory.

We haven't made inventory in like a year, and so inventory sells, and there will be no problem in my viewpoint of coming up with as rapid of a startup as possible.

Is it still fair to think that you could load that new mill say 30% with rail product?

We continue to practice making rail.

And as I said, we have a rail [loading] facility that is raring to go.

So we will continue to make -- we have orders on the books for both industrial rail, as well as older orders for prime rail that people are willing to take a look at.

And so we are going to be bringing rail to market, and we will continue to expand our offerings in the structural side.

Certainly that is helpful.

I had another question, Keith --.

A point of clarity, the rail would not go on the smaller mill, it goes on the big mill, the original mill.

Thanks.

I appreciate that.

That's right, I should know that.

Keith, I had another question on Roanoke.

I know you have been doing a lot of capital projects to enhance that operation.

How much of a cost reduction do you think you could get in, say call it, '08 versus '07 as far as your conversion costs are concerned?

I have never actually tried to study that personally.

But a lot of it is going to revolve around labor content.

Some will revolve around overheads associated with the second furnace, which we believe was basically an unneeded battery.

So that will certainly -- without damaging capacity too much -- will be a big boon to the cost structure, but --.

You don't like [tip] furnaces?

Is that --?

It is just a -- it is an older battery, and even though the caster wasn't in all that bad a shape -- we may find a way to use that caster over at Steel of West Virginia for that matter.

But we think that in time with enhancements that we will probably get 800,000 tons just out of the one furnace they have down there.

And that is more than they could roll still.

That won't come tomorrow, but it is probably capable of at least 600,000 now to 700,000, and we think we can improve upon that in time.

Another question, if I could, on exports.

Are you seeing -- given the shift in the dollar and the fact that we've got some pricing here that may be less than some other markets around the world, are you pursuing any export opportunities for flat-rolled products in the second quarter or the second half?

This is John.

We have had a number of inquiries come at us, but we have declined all of those at this point.

I will share with you, Mark, though that the structural mill has taken two orders and shipped one.

I don't believe the second has shipped to the Asian market.

I know it had been very successful.

Is that an area you think might become a measurable mix going forward of your business, or do you look at that as strictly an opportunistic scenario at this point?

I look at it as opportunistic, because needless to say, we're not located in a prime export location sitting in Indiana.

But because of our rolling schedule and our promptness to delivery and so forth, we worked on those projects, and so I think those will be evaluated on a case-by-case basis by the individual project managers.

I appreciate it.

If I could just make one last comment.

Keith, I want to congratulate you and Mark on the supply discipline you are continuing to exhibit in the flat-rolled market, and congratulations on the earnings.

I look forward to a great second quarter.

(OPERATOR INSTRUCTIONS).

Aldo Mazzaferro, Goldman Sachs.

I had a few questions.

Most of them got talked about, but I just wanted to say I think what you guys are saying is that the supply seems to be driving the steel price more than the demand or the scrap cost.

I wonder if you would agree with that or not?

This is John.

From my perspective I would be incline to agree with you.

John, could you tell us a little bit about your pricing strategy right now?

I know your backlog is about one month or so.

Would you say that is due to any differences you might have in your asking price relative to the competition right now?

It certainly suggests that.

And I would tell you that, again in keeping with Mark Parr's complement to Keith, we're trying to do the right thing.

I think there's another dimension of this.

And we took a beating from our customers last year regarding a decision we made to go long when we anticipated the market was frankly going to weaken in, I think, sometime in the second, early third quarter of last year.

We're very focused today on performance, particularly on time performance, so we have kept a very, very tight leash on the orderbook for that reason.

I would ask Mark to maybe comment to underscore that.

I think that is the case.

We certainly let our customer base down in the late second quarter and third quarter last year.

And that is not a performance that we're going to repeat.

I think that is a good strategy.

It seems like if I was a buyer right now, you could probably have a lot fewer opportunities to buy imports at an attractive price.

One of the things we are seeing is -- well, a couple of things.

Firstly, inventory isn't necessarily just inventory and the tons that you need.

As one's inventory draws down, and I think the distributor-based inventory is drawing down obviously, that they will be seeing holes in their inventory and will want immediate supply.

I think we're hearing that the integrated mills, particularly in coated, because of the shift in auto, electrical and things into the commercial market, they are actually long out into June.

So as the customer base needs tons, we may be the only place to shop eventually.

If I could just ask a quick second question on the acquisition strategy you might be pursuing in the balance sheet, I'm wondering what you think your debt capacity might be on the balance sheet right now?

And secondly, I know if you did something large, you might need more external financing.

I'm wondering how you would think about using equity as part of an acquisition payment?

Our debt capability in terms of our ability to raise cash is absolutely huge.

We are that well respected.

I don't think we would have any trouble whatsoever getting our hands around $12 million if we needed it on a bridge basis.

That would obviously lever up the Company substantially.

But -- if you did huge things you're going to then have to go out and do an equity offering to have the appropriate balance on the balance sheet.

But I think our access to funds for growth purposes is substantial.

We will always continue to demonstrate prudent behavior relative to our balance sheet.

And you are not going to see us lever up this Company to the hilt, and not attempt in some fashion, even if it was very temporary, to not then delever.

But we have rather sizable borrowing capability.

That was $12 billion, you said?

It could be a that high.

I don't think we would have a problem if we had projects of that nature getting that kind of money, but you would have to rebalance it with equity, of course.

And a lot of the acquisitions still might pay for a lot of their own costs because of the cash flow.

Anyway, thank you very much, Keith.

Congratulations.

That does conclude the question and answer session for today.

I would like to turn the call back over to Mr.

Keith Busse for any additional or closing remarks.

Thank you.

As I always do, thank everyone for following our Company.

I think we're probably one of the more followed companies by the analytical community.

And we have always enjoyed a substantial position in the markets that we serve, and we have had terrific performance throughout the course of time.

And certainly looking at a different environment for steels ever since 2004.

But we want to thank you for showing interest in our Company.

And I just want to say we will continue to responsibly grow this Company.

You're not going to see SDI do something terribly irresponsible.

But we're focused on growing this Company, as we have in the past.

And I think all you have to do is look at our track record to know that we have delivered, not just from a growth perspective, but also from an earnings perspective.

Thank you for all your kind comments, and hope to chat with you in the near term.

Michael, that's it for us.

Thank you.

Ladies and gentlemen, thank you very much for joining us today.

That does conclude the presentation.

Have a great afternoon.