Steel Dynamics Inc (STLD) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Steel Dynamics Third Quarter Earnings Conference Call.

Today's conference is being recorded.

Joining us today are Mr.

Keith Busse, Chairman and Chief Executive Officer, Mr.

Mark Millett, President and Chief Operating Officer, Flat Rolled Steels and Ferrous Resources, Theresa Wagler, Vice President and Chief Financial Officer, and Fred Warner, Investor Relations Manager.

For opening remarks I will now turn the 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 third quarter of 2007.

We are Webcasting the Conference Call today, October 17, 2007, from Fort Wayne, Indiana.

Later today, this call will be available for replay from our website and 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 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 10K as filed with the Securities and Exchange Commission.

Specifically, please refer to those sections in our 10K report entitled Forward-looking Statements and Risk Factors.

This 10K Annual Report and other reports we've filed from time to time with the SEC are publicly available on the SEC website and on our website, Steel Dynamics.Com.

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 keep your questions brief and you're welcome to ask follow-up questions later as time permits.

And now, we begin with introductory remarks by Keith Busse, Chairman and Chief Executive Officer.

Good morning, ladies and gentlemen.

Thank you for joining us again this quarter to review our results for the third quarter and take a peek into the future.

The first paragraph really of our Press Release deals with the subject of our earnings and later on in the document, we talk about earnings on a go forward basis.

We were within the range that we had guided to and I would point out that we're one of the only companies that takes a stab at where we're going early in a quarter, and then come back and revise it at the time that certain other parties generally provide some guidance.

so we provided $1.02-$1.07 guidance on August 30th and we ended up at $1.06.

Our impact from the text in terms of purchase accounting adjustments were negligible in the end.

They were actually a penny and a half which rounds to a penny and so it was fairly inconsequential which one could conclude that on a go forward basis you're looking at $1.07.

We did have another penny in non-recurring charges associated with the prior acquisition that was not the text and that affected us by a penny also so I guess you could look at it as $1.08 which was a little short of the early mark of $1.10-$1.15 which I would tell you was impacted primarily by outages experienced at our Flat Roll Division and at Columbia City in the month of August.

We had very severe weather come through the Midwest during that point in time and it knocked out Columbia City three times and it knocked out Flat Roll three times, for sometimes an entire day before the mill came back up.

So there were violent storms Electrically and it had a fairly significant impact on production and obviously, our rate of earnings per day is fairly high in those operating units so it did have some unexpected impact on us, not to use an excuse, it's just a fact.

That's the way the weather was and it took its toll on us in this region, to say the very least.

When I read the early morning reports relative to earnings guidance, I probably was never more taken aback than I was when I read some of the comments about negative news.

There were some analysts that got it right.

I think Chuck Bradford and Mark Parr got it right and there were certain other ones I don't think understand where we are, where we're going, how we're going to get there, and viewing our early announcement that our earnings and it's very early guidance would be essentially the same as our August 30 guidance of $1.02-$1.07, interpreting it as rather flat would be the appropriate way to interpret it, but I need only to remind all of you that generally, the Fourth Quarter is historically, not in every case, but historically a weaker quarter.

So having a quarter that's equal to the third, I didn't see it as negative news, I saw it as positive news, especially given the trend line as we march into next year, so I think this short-term focusing on what one quarter may or may not be gets a little bit silly.

We seem to lose sight of the growth prospects for this Company and the under pinning, the underlying assumptions relative to those prospects and we have so much going on.

I think Chuck Bradford pointed out that our earnings could be 6.25 and when I read that, I said gee, we don't have our budget in process done yet but I wonder if that's within the realm of reality, and I looked at it through the eyes of an improvement in earnings at structural due to the new rolling mill that should be commissioning in March and April, the March/April time frame ROI and the impact it might have, it could produce another $60 million pre-tax, $40 million after- tax and it's not impossible to achieve those kind of goals even in a start up.

We're through with renovation of our fabricating operations and that impact should be felt next year.

That could be at least $10 million after-tax.

The scrap yards we purchase could have an impact of a modest amount.

The tax could have an impact in the $10-$15 million range.

Any kind of movement in flat rolled could send pre-tax up by $150 million which lets you figure out what it is after-tax, and Pittsborough should see some continuing improvement, and with the Omni acquisition and that organization being a part of our family next year, I would say its contribution to be-- after-tax, it could be rather significant.

You have to discount what could be after-tax $90 million perhaps to something less than that because of the impact of carrying additional interest around on our shoulders.

But I just took a rough stab at it and added all of that up and added it to this year's suspected earnings which should be just slightly better than last year's physical earnings, certainly better on a per-share basis by a lot, and a lot of that having to do with the repurchase of shares and I divided it roughly by 100 million shares, which is is where I believe the Company will be without any major repurchase programs in '08 and that put me well north of $6, so I guess I don't know that it's going to come out that way.

I'm certainly not making a forecast, I want to say that right now, but certainly it's within the realm of reason, so still on (inaudible) future on a go forward basis is really in terrific shape.

I don't think the Company has ever been in better shape from a growth perspective.

So I think the outlook is very bright and I think Fourth Quarter earnings being if you want to interpret them as flat is a good thing, not a bad thing since historically as I said earnings in the Fourth Quarter in this industry have been down.

But I also mentioned in our Press Release we talked about the fact that we have major outages and we do at Columbia City, at our Flat Roll Division and these are planned outages.

Some of them maintenance related and some related to upgrades and also at Steel West Virginia during the Fourth Quarter.

That obviously is going to have somewhat of an impact on earnings because those outages were not there in the third quarter, so any growth in earnings that we could have anticipated, we're going to get improved market conditions and I think that would have grown our earnings just quite naturally in Flat Roll but when you consider the outages, we thought a fair early guess was $1.02-$1.07 flat.

I'm sorry that some people see that as negative, but some people always look at the glass as half empty and I prefer to look at it as mostly full.

So, I think our earnings performance is going to be good.

As I indicated in the Press Release, there's a possibility that Omni in just the two months that we might aggregate their results, could be actually accretive, even after purchase accounting adjustments.

And I think that's also very big plus.

Turning to our Third Quarter revenues, turning to revenues and volumes and things of that nature, obviously revenues increased 1.2 billion which was 27% higher than both the year-ago quarter and the Second Quarter of this year.

Consolidated shipments were 1.6 million tons, increased 26%.

Much of that increase came from the Techs and we tried to explain in the report that The Techs when purchasing substrate from others aren't going to have the same results because they're locked in margins that belong with providers , rightfully so and that will have somewhat of a margin impact.

I wouldn't tell you all of our margin impact was from The Techs but a good bit.

I wanted to at least say look, a good bit of that comes from The Techs because the selling values are very high, but the cost inputs when you buy substrate from others are also somewhat higher and that is going to impact cost of sales.

The integration of The Techs was really going quite well, and we think will continue to go quite well.

I think we said last time we saw this as a major move, major step in the right direction to capture these marketing channels in advance of growing the Company in flat rolled production which could positively affect The Techs, not negatively affect The Techs, so it's like putting the back end together before you put the front end together, but at the same time, it's a very positive event that at least is viewed through our eyes.

Our earnings on a nine month basis are at $3.02, 11% ahead of last year and I did comment on the fact that a lot of that is due to share repurchases, but we saw it as an excellent way to increase shareholder value as we purchased shares at I think very attractive prices.

So we're very pleased with our results and hope you will be in time, too.

I think one of the things that we kind of lose sight on is or sight of is the impact of both Mesabi Nugget project which will involve mining and minerals, it will involve mining, it will involve concentrating and it will involve producing nuggets, pig iron at that site, which we believe, given the total direction in the market for resources when you look at global growth and global growth-- China is now forecasting some people are saying 800 million tons of production in the future.

Well, that's as big as world production was three or four years ago.

Whether or not that really will materialize or not remains to be seen, but clearly, China and other world growth markets are having an impact on resource costs, whether they're scrap or whether it's pig iron or pellets or what have you, the price of iron units in effect is going up, and so as we look out in the future, I think Mesabi Nugget is going to just have a whole lot of positives for the company.

We enumerated some of them resulting in operating advantages, impacted by being able to better manage our residuals' lower electric utilization, improve yields, increased output by reducing cap times.

That's just the operating positives, but the cost positives could be enormous.

Not only are more of the inputs going to be pure of nature, allowing us to produce a wider variety of products, but I think they are going to be very cost-effective inputs as you measure it against the purchase price for iron units in the global market.

As I said earlier, this could get done for $250 a ton plus a reasonable return plus freight, and I think that's going to really, as you measure it against global pricing of competing resources being a very, very attractive bargain which puts SDI in an even better position relative to its peers in the marketplace for the bottom line perspective.

The other major event obviously was OmniSource and not only does that help us with certain periods when the industry goes through supply chain shortages, it should anchor any heartburn that we see as a result of volatile markets, but it really becomes a platform for future growth.

It's hard for me to conceive of how we could keep growing our steel-making efforts whether it's flat rolled or merchant shapes without having backward vertical integration into resources.

So we believe that OmniSource is a premier provider in the nation, and I think that they are one of the largest providers of ferrous and non-ferrous resources and they are not only one of the largest, they are one of the most profitable.

So given that it's an industry that has a slightly lower margin, I'll remind everyone you don't have to look back 10 or 12 years ago or less than that to 2004 when the steel industry had no margin.

I think those days are over.

I think the margins at Omni can be improved since we have our interests aligned and we're all marching in one direction.

So I think we could see margin improvement but some of that margin improvement I think is going to come from increasing global demand and a softer U.S.

Dollar.

I think the United States is one of the richer scrap resource markets.

It isn't the net exporter it is.

Japan is a net exporter but the rest of the world are net consumers and where are you going to go shopping for resources?

Well with the weaker dollar, certainly great possibilities it will be here and that will from time to time create some supply chain anxieties and therefore margins could be improving in the future in the resource business.

So we think Omni represents a critical step in future growth in steel making.

We're not going to end up utilizing all of Omni scrap in our furnaces.

As we said in our earlier calls we perhaps melt 15% of our ferrous purchase resources from Omni currently.

That could increase, who knows, 25%, 30%, but when you consider that they combined with the SDI operations are going to be over 6 million tons of ferrous in the future and if we're consuming 30%, it's still only a couple million tons.

We still have other providers that we value who have provided resources to the Company on a continuing basis throughout the course of time, who've been excellent providers and we see ourselves continuing to buy from those who have been with us, furnishing us resources very consistently in the past.

So for those that believe that we're going to suck up all of Omni's resources and there aren't any available for anyone else in the steel community is really silly thinking, and I think most of the Steel makers that buy from Omni will continue to buy from Omni, and we will continue to grow that business and as we grow that business, probably consume more of that growth in our own furnaces.

Flat Roll Division, I might point out did experience some growth from the Second Quarter, about 110,000 tons which is a very positive sign in what had been a rather lackluster marketplace throughout most of '07, but most of the steel growth came from including The Techs output of 231,000 tons in our results.

During the quarter, we repurchased 4.9 million shares at a cost of $198 million and I think that maths out to about $40 or something like that per share.

And at the end of the quarter, the Company had 5 million shares authorized for repurchase and we had 87 million shares outstanding at that time.

So I see our future as probably in a more positive light than I've even seen it in the past and I think I've always been pretty upbeat and pretty positive.

I think most of the backward vertical integration that we advertise that would be a major focus for the Company has been put into place.

We'll continue to grow the resource processing business.

We won't see results from Mesabi Nugget until 2009-10 time frame, but I think that's going to have a very powerful and a very positive impact on our results in time.

As we look forward, we still see ourselves growing in downstream.

We're nearing the completion of the retrofitting and renovation of the fabricating divisions that we purchased when we bought Roanoke Electric Steel, and as those challenges come to an end, we will look for other future opportunities in downstream.

We do see ourselves growing in flat roll and we do see ourselves growing in shapes in the future and certainly, we have very good front ends in place to allow us to move forward with great confidence in those arenas.

So I might tell you that Mr.

Teets is absent today, he's out of town, and so I will just briefly give you his report.

Most of the equipment deliveries, as we said earlier to the second mill at Columbia City were running behind schedule.

That schedule hasn't changed.

Mill stand deliveries are going to be January timeframe, mid-January, we hope with cooling in February which means we won't be able to commission the mill until middle of March, perhaps even as late as April, but we had already announced that news.

That's old news.

Construction activity will start to button up by Thanksgiving, so we're just waiting on equipment to be installed and it should be a very speedy installation and start up because the mill is ready for it, if you will.

And as I said earlier, the new mill could make an earnings contribution in '08.

The business climate at Columbia City is very, very steady.

We're booked out through the end of the year.

We haven't even opened up '08 yet, but we certainly have good backlogs that will take us through the end of the year and really not much of a change there.

I would tell you that it's probably not quite as frenzied as it has been, but good solid order entry, and I think we're really seeing a slowing and a lack of imports which could be a positive for next year's results as well.

I see non-residential construction continuing bust throughout '08 with a resulting positive impact on shapes both big and small.

We will continue, we think, to improve, have improved results at Pittsborough next year.

We're looking forward to the truck/trailer beam business coming back in '08.

At least that's what the being signaled right now.

We've shipped a lot of our manufacturing and still West Virginia to other products but should be returning to our core business in '08.

We saw improving results there as well.

So I think that really covers fabrication and shapes which Dick was responsible for and I will turn it over to Mr.

Millett for some comments about flat rolled and mining and

Thanks, Keith.

Good morning, everyone.

Perhaps-- you covered most of it already, Keith, but I'd just like to underscore our market there.

As Keith suggested, our shipments improved about 60 9,000 tons for the Flat Roll Division sequential increase of about 110,000 tons, and that was manifest principally by improved market demand relative to Q2.

Although the order rate was stronger, with an extension of lead times, the market strength wasn't sufficient to materially impact average selling prices or values.

As spot pricing for hot band did improve through the quarter , it was largely offset by our CIU based contract price for coated products and as spot pricing for galvanized material remained relatively flat, there's a consequence of the anemic residential construction market.

However, I think all of the parameters appear to be in place for a stronger market assuming a reasonable economy is sustained.

The relative global pricing to the American market, steep ocean freight rates and the retention of hot band tariffs and obviously the weak dollar has and will continue to inhibit any material pressure.

If you saw the MSCI data yesterday, it continues to indicate a downward drift in service center inventories to levels that have historically proceeded up with market inflection, so it's a very positive signal, I do believe.

And I think it should be noted that this inventory liquidation has been concurrent with the domestic industry running at a relatively healthy pace, 90% of utilization.

However, nonetheless, the buyers seem content to continue to drain inventory while they experience and enjoy short lead times.

And I do believe these market dynamics should set the stage for a slight improvement in the short-term and certainly long-term once the demand returns, we would see some rapid increase in pricing, I do believe.

As for the health of the Flat Roll Division as a whole, productivity was impacted by the power outages that Keith suggested, and we're off probably a little bit there, but we remain somewhat healthy.

The Techs integration has gone well.

We've confirmed the quality of that organization and its personnel and there's no doubt that combining the strengths of the Butler facility and The Techs will bring material benefits in the future.

But generally, Keith [healthy circumstance, the market will

Thanks, Mark.

Before we turn to you, Theresa, I usually always give you my outlook on the cost of ferrous resources going forward and I'm speaking for SDI and certainly not for OmniSource relative to these comments, although I think that the total direction that we're looking at for deliveries in November bidding at the end of October is probably going to drift south.

I think the markets were perceived to be down $10-$15.

For October deliveries, they could be down easily that much, I believe, for November.

But I do believe you're going to see market improvements perhaps in the December-January-February time frame but I do think as I said earlier, I think the outlook for margins in the ferrous resource business are very positive.

How does that impact us on a near term?

Well, I would tell you that anywhere from flat to up $10 could be the result of our results in the fourth quarter.

We had an awful, awful lot of inventory on hand, more than we generally carry, and some of that was at values higher than the certainly October-delivered values and you have to work that off, so I see flat roll may even be up $5 or so in the quarter but possibly our shapes divisions being down $5 to $10, certain other ones being up 5.

It really depends on how much inventory each division had but somewhere between flat to up $10 would be my prognostication for the scrap effect if you will in the fourth quarter.

So having said that, Theresa, we'll turn it over to you for comments.

Thank you, Keith.

BrieflyI'll go through some of the financial aspects for the quarter.

Keith mentioned the impact of The Techs being about a penny or a penny and a half.

On a pre-tax basis it was $2.3 million.

You'll find about $1.6 million of that in cost of goods sold and about .7 or $700,000 in SG&A.

On a go-forward basis, currently where we're at with our estimations on valuations, I think you could probably model about $1.5-$2 million worth of increased SG&A related to the amortization.

Early in the quarter, in September, we refinanced some of our outstanding borrowings on the revolver with the term loan A facility.

That facility is congruent with our revolver and it's (inaudible) with the collateral and it's $550 million and it prices at LIBOR plus 100 basis points.

Also, early October, we issued $7 hundred million worth of senior notes unsecured at 7.38% and that's in anticipation of the planned OmniSource acquisition.

Gross interest expense in the third quarter was $20 million.

For estimates for the fourth quarter, I think you should probably use something in the vicinity of $30 million, but that's exclusive of any capitalized interest we might have.

The tax rate you'll notice in the third quarter was 37.1%, down from the 37.5%.

We had additional build in our reserves which, as you are all aware, was the Genesis of the FIN 48.

You don't keep any additional reserves that you can't identify, so we brought some of that back into income, but for the fourth quarter I would still use 37.5% as an effective rate.

Keith mentioned that we were able to repurchased 4.9 million of our common shares in the third quarter for approximately $198 million.

At September 30, we had 21 million shares in our Treasury at an average price of $31 per share.

We had 87 million shares outstanding and we still have 4.4 million shares of available, excuse me, 4.4 million available conversion shares related to our note which we would anticipate could probably actually convert in the fourth quarter.

For flat rolled shipments, I will give you some of those details.

Hot roll shipments were 327 thousand tons, pickles and oils were 59 thousand tons, cold rolled 47 thousand tons, hot rolled galvanized 97 thousand tons, cold rolled galvanized 87 thousand tons, painted 57 thousand tons, and Galvalume, which this is Second Quarter production of Galvalume for us, was 15 thousand tons for a total of 690 thousand tons of shipments from the Flat Roll Division.

Our depreciation and amortization for the quarter was approximately 34 million, again for estimation purposes I would use 35 million for the fourth quarter.

Capital Expenditures were 100 million.

About 50% of that was related to the second rolling mill at the structural and rail division.

15% was related to the continued construction of the paint line at our Jeffersonville facility, and 15% was related to the renovations that Keith spoke to earlier related to our new millennium facilities.

For the Fourth Quarter, it's a little difficult to judge but I would estimate between $75-$100 million worth of capital expenditures.

It's really dependent upon some of the timing of the equipment deliveries that Keith mentioned earlier related to the second rolling mill.

From working capital perspective, I would just point out a couple of things.

Exclusive of the acquisition of The Techs, our accounts receivable decreased $13 million.

From a days outstanding perspective, we actually improved from 96% to 98%, that are under 60 days.

Our inventories decreased $35 million, and that was within the realm of raw materials and whip, and our accounts payable increased about $42 million.

Again, that was just timing related.

From a credit statistic perspective, I would point out that we're still about 1.5 times levered which is incredibly strong.

From a liquidity perspective at 9-30, we still had over $650 million available on our revolving credit facility, and when you add the $700 million to that that we've issued in notes in anticipation of the completion of OmniSource, we're in a very strong position.

Keith?

I might mention, Theresa, that the Term A facility which is at 100 basis points above LIBOR, if that is repaid or retired next year, which is not out of the question, we would return to revolver of 50 basis points.

That's correct.

And as I said on one of the earlier calls, relative to the OmniSource acquisition, knowing where your meals are going to come from month in and month out on a more consistent basis, could probably put us in a position to de-lever our inventories to the tune of $100 million.

That's a lot of money.

It's going to take time to do that but we have a lot of inventory and certainly see ourselves operating with a little bit leaner platform there so we could actually have a $100 million improvement working capital related to that.

Having said that, Sheila, we're ready for the Q & A component of the call.

Yes, sir, thank you.

[OPERATOR INSTRUCTIONS].

We'll take our first question from Kuni Chen, Banc of America Securities.

Please go ahead.

Hi, good morning, everybody.

Good morning, Kuni.

I guess just to start off, can you just walk us through what are the expected Fourth Quarter Impacts from the production outages?

Whether that's days or tons of production impacted?

Well I don't have production numbers for you, Kuni, but Columbia City was probably down for five days, where they're normally down for three in this quarter, so about two extra days.

I think the specialty Steel division in West Virginia would be down for an entire week, about seven days, which is-- a good bit of that is normal maintenance but a good bit is related to improvements.

And Butler will be down for about four days in the quarter, of which two to three would be normal quarterly maintenance and about an extra day or other projects that we're doing.

So it's having some impact but don't want to advertise that it is massive either.

Okay.

No, that helps.

And as far as your comments on the scrap market goes, I just want to make sure I understand exactly where you're coming from there.

You mentioned that the market prices are coming down in October and November, but with your inventory cost of scrap flowing through in the Fourth Quarter that you should be flat to up as far as your scrap is?

That's correct.

Okay, so flat to up $10 a ton you said, right?

Yes, we'll see some impact from October in the quarter but we'll be able to see very little impact from either November or December given the amount of inventory we carry and the way it averages in.

So it could be anywhere from 0 to like I said in R up, I don't expect it will be up much over 5, but it could be up 10.

Okay, and then just one last question.

Just on imports, obviously freight costs around the world continue to move up and the dollar continues to get weaker.

How much of a premium do you think U.S.

prices would have to be versus let's say China, to attract more imports into the market?

Well, I don't know that China is a good measure.

I think other World Market pricing is a better measure.

It isn't that we should ignore China, but China is trying to do everything they can to limit exports to some degree and they've made some significant steps in the right direction.

It doesn't mean that Chinese imports would be escalating.

The realities of the Chinese market pricing, every time I look at those numbers, I wonder how realistic the home market numbers are because they're a different set of numbers than you see for export.

But world market prices would probably have to be over given dramatically escalating vessel costs, cartage costs, freight, would probably have to be over $100 north of where the other market would be to be impacted by additional volume.

In other words, I think people for $125 would still be shopping here.

Okay, got you.

Thanks a lot and good luck on the quarter.

Thank you.

We'll go next to Michael Gambridella, JP Morgan.

Please go ahead.

Hey, Keith.

Congratulations on keeping all of those growth ideas going and bringing some new ones in while still executing on the share buyback plan.

That is a good juggling act and I think we've managed it well.

Yup, sure have.

Let me ask you something, though.

I know you can get big savings on working capital with OmniSource in terms of reducing the inventories scrap, but what about for like The Techs and for some of the downstream businesses?

Are the opportunities there to cut working capital and also maybe do base loading for some greater efficiencies in the future?

I think relative to fabrication, we're getting our arms around that now.

Some of what we do will be switching from angles to slip flat rolled, and in that transition, probably a little more inventory is going to be carried than you'd normally see when the transition is completed, but it's not all that much orange that's going to be wrung out of the orange juice of the fabrication work front.

I'll let Mark Speak to The Techs.

I don't think they carry a lot of inventory, and a lot of it comes from U.S.

Steel the Mon Valley who's been just an excellent provider and will continue to be an excellent provider.

Michael, it will be very little impact on working capital, actually.

And would you expect The Techs to continue to maintain the same types of feedstock vendors?

Yes.

Okay, thank you.

Sure.

We'll take our next question from Brian Yu, Citigroup.

Please go ahead.

Thanks and congrats on the solid results, Keith.

A question about shipments.

It looks like shipments out paced production by almost 60,000 tons in the quarter.

Would you say that inventories are tightening up at the Mills and also, can you give us perspective of how the order book and lead times have evolved through the quarter?

The inventories were probably a good 20-25,000 tons lower at flat rolled, so a third to half of that answer was at flat rolled inventories I think came think came down a little bit further at Columbia City as well as at Roanoke and at Steel West Virginia, so we just really were-- I think the demand speaks to the shapes end of it.

The reason for the fall is solid demand.

Really, we just had good shipping results which pulled our inventories down at flat rolled at the end of the quarter.

And can you comment on how the order books and lead times at the Mills evolved through the quarter?

Yes I think quarter or so ago, I was laughing and saying they've improved from three days to three weeks and three weeks is now six to seven weeks, so it's certainly better in flat rolled than it had been at mid year, so gradually improving market conditions.

I think everybody is saying that.

I think it's true.

There's-- the slope of the improvement is, I wouldn't call it flat, but it's not a steep incline.

It's just improving and at some inflection point, as the backlogs get out to perhaps eight weeks, you're going to see a buying frenzy, probably.

That's what usually happens but the backlogs at Columbia City as I said were basically sold out through the end of the year and the backlogs at Specialty Steels in West Virginia are a little hand-to-mouth-ish, if you will, because of the nature of the business and the historic consumers of those steels being impacted significantly.

The merchant business both at Roanoke and the SPQ business at Pittsborough is really just steady.

The order entry is very good.

Shipping rates are very good.

Backlog seems to be growing modestly but not hugely.

It just seems to be turning week in and week out.

I think the shapes division has probably six weeks or thereabouts backlog, maybe eight weeks might be fair, somewhere in that area.

And Pittsborough is kind of an anomaly.

They have more December business, or I think the December business right now and November than they had October although we have a lot of fill as we march through a month in SPQ and really don't see any real problem there.

They also have orders going out into '08 which is kind of interesting, so a lot of people have a lot of confidence in what we've accomplished at the SPQ division in Pittsborough.

It has a very good reputation in the market and for people to be placing orders that far in advance is kind of interesting to me.

Okay so it sounds like you're getting pretty close to that point where your service center customers might start getting a little bit nervous about securing supply on a timely basis which probably supports the idea that you'll get stronger demand heading into next year, right?

Yes, I think you're going to see the numbers, days in inventory drop at the end of October, just going to see the absolute inventory drop even further and it's pretty darn low, as a lot of you have been pointing out.

At some point when the lead times continue to extend little by little, there will be a lot of people not want to miss the boat and we think order entry activity will aggressively pick up.

Thank you.

We'll take our next question from Michelle Applebaum, Michelle Applebaum Research.

Please go ahead.

I have a bunch of questions.

I wanted to start with the-- it was a nice quarter, considering what's going on in the markets, and I think it was great that you acknowledge you were $.03 off and being only $.03 off from where you started in July, which is quite remarkable considering the frenzy in some pieces of your business and then the decline in frenzy, and then the weakness in the sheet side, so it is kind of amazing to me.

When you don't have backlogs that go out more than three weeks in July when we are given our early prognostication, it's a real stretch.

It's a guessing game at that moment in time.

Yes, I'm amazed that you and the other companies even companies that may give guidance later or even qualitative guidance can even do that much compared to what might have been going on five years ago.

It's just astonishing to me, so my first question is, Keith, you just got back from IISI, right?

Yes.

Do you have any thoughts to share about anything you might have learned that's new and different from the conference in Berlin?

I think the upbeat, the conference was upbeat relative to Markets, generally speaking, looking at it from a global perspective.

I think everyone felt that '08, at least the forecast for '08, it was presented to all the constituents at the conference, was upbeat.

Clearly you saw through the aggregation of numbers that North America was the only negative as you look at aggregate numbers.

As you look at the brick countries, as you look at Europe, as you look at Asia, everybody else was up sharply.

The U.S.

was down I think 1%, so you can see why '07 was a little tougher year to manage but the forecast for NAFTA countries next year was up 4-5%, so when you go from down four to up four, that's a pretty substantial change in a short time frame, so it was a positive outlook.

I think most of the conference, most of the time or a lot of the time the conference was spent talking about carbon footprints.

Talking about what?

Carbon footprints.

Oh, okay.

The effect of CO emissions.

Uh-huh.

And where are we going with that subject and where is the world going with it, how is it going to be managed and what's the impact going to be on energy costs on a go forward basis and who are the polluters and are we going to get engaged with cap and trade, which I think is a terrible idea.

The Europeans reported that it wasn't working in getting a better mechanism and I certainly agree with that.

But I think as you look at carbon footprints, it's really transportation.

Planes and autos are the biggest global impact followed by power plants, etc.

Steel was not that big of an impact.

It doesn't mean Steel is going to be impacted.

It's going to be impacted.

Clearly some of those emissions controls and power plants, those costs have to be passed on, and they will be passed on to the industry so good bit of dialogue at that conference about that subject which was enlightening to most of us.

Okay, my other question was, can you elaborate on the arrangement with Omni in terms of disposition of their shares?

You're putting 10 million shares into historically friendly hands and they can't sell it for awhile?

Yes, they have restrictions that really go out I think 15-18 months, something like that, but they requested shares.

People need to understand that.

A lot of people thought well, the Company was owned by a gentleman whose elderly and he's not going to want to hold on to these shares and really, that's just not the case.

The ownership of the Company was really mostly in the hands of Leonard's sons, Marty, Ricky, and Danny, whom all have good work ethic, excited about this combination, excited about their own personal growth.

They wanted shares because they saw great upside in the shares and I do, too, given our future earnings growth.

Chuck took a stab at '08.

Can you imagine what '09 and '10 might look like with everything in place and the impact of Mesabi Nugget?

And I don't care what multiple you sign, 10, 11, 12, to the industry I think surely deserves a multiple in that range.

They saw good upside in those shares and they intend to be shareholders.

There was enough cash compensation there to I'm sure keep any family happy for a long period of time.

Okay, but I mean, I've known Leonard and Danny for over 10 years and I know they've been part of and fans of the Company, so I'm not questioning that at all.

I can see why they would have an interest, but at this point you're going to pay up close to 25% of your shares, something like 20-22 in somewhat insider hands, and I'm just wondering because you've talked a lot about never selling the Company.

Well, I never said never.

Okay, I thought you've said never and that was my specific question would be, you know, I understand in my opinion the stock has been structurally under valued this cycle, consistently, so I can understand frustration with that.

Could you give me some idea of what your friendly potential merger situation might be as we watch kind of partnerships increasing, especially on the global side in the United States?

What would be something-- you've said we're not for sale and you've made comments about starting another company right next door and I think the market has taken those seriously.

What would be a scenario that you actually would approve of a potential sale of the Company?

Well, let me say that a lot of our shares are in, if you want to call it, friendly hands, and it probably is at least 25% of the shares outstanding, I would guess.

I'm not so sure that it's larger than that because I'd like to think we have a lot of friends, institutional investors, value investors who have stayed with us during a period when we've consistently delivered 20% compounded annual growth rate.

If the early prognostication for next year are even close to being correct, that's huge growth opportunity which should impact share prices.

Relative to the other subject-- I think what you're alluding to, are there other people out there that you could do things with?

There are, I'm not at liberty to talk about those efforts, but there are expressed interests in steel making as well as in mining and minerals.

So think are strategic alliances that could be part of our future, which I think would even more strongly anchor future growth for SDI and all affiliated parties.

So you really would be looking for somebody who would partner and scratch the itch that you might not have and you might have an itch that you can scratch that he might not have, where there's kind of a fit, you do something for each other.

So it's kind of a, the attractiveness of a potential failed partnership would be kind of a strategically driven --

I just think-- as Dick Teets said so many times, when people ask him about his concentration, why don't you sell any shares?

I know who is driving the bus and where it's going and I know how it's going to get there and the built in future growth.

And also if somebody else is driving this bus or you're owned by somebody else, I'm not so sure our plans for the future would be enacted in the same fashion which could be detrimental to the Company.

But to say the Company is never be for sale, nobody has ever said that.

Clearly, the opportunity for partnerships exists, but I'm just not at liberty to comment on anything we're doing in that area.

Terrific that's great.

Thanks, I'll let somebody else have a turn.

We'll take our next question from Mark Parr, KeyBanc Capital Markets.

Please go ahead.

Thanks very much.

Hi, Keith, good morning.

Hi, Mark.

You guys did a great job as usual.

Congratulations on the results and I think, Keith, I also want to congratulate you for making some candid comments about the potential for '08 and all I can tell you is that the market really responded positively as you were making those comments and shortly thereafter.

So I think the stock is acting more in line with the strength of the operations that you've exhibited and the outlook that you talked about for the fourth quarter.

Yes, I think we've got to look at the long term prospects rather than what does the next quarter look like.

Next quarter looks pretty good to me.

It just may not look as good to others.

Well, I think the next quarter looks good as well.

I would tend to take your side of the coin on that discussion.

One question I had, you talking about some upgrade activity to the mills in the fourth quarter and involving some extra out age time.

Could you give us a little more color on exactly what things you're looking at and what's the probable outcome as far as the upgraded mill capabilities after these upgrades are completed?

Without Dick being here I don't know that I could add specific color for Columbia City at this point in time, Mark.

We would be happy to talk to you about that.

It's not a secret or anything.

Mark may want to comment on things they're doing in flat rolled.

Just the primary thing, Mark, is adding an extension that will allow us to construct a new[bag house system for our melt shop at the higher operating rates, where we're having some emission issues that we want to control, so it's extending our three-day outage to a four-day out age.

Okay, so I guess there's nothing really major, then, in terms of incremental capacity or incremental capability as a result of these outages?

As for the flat rolled, the bag house, we're finding that to be a requirement to get up to our 3 million ton rate but we've suggested that (INAUDIBLE).

Okay, terrific.

Mark, I had another question if I could just follow-up, and I realize that anything you would say regarding potential for future flat rolled pricing is speculation in your opinion, but could you give us a little more color on your thought process in terms of how much upside you might see through the end of the first quarter on spot price announcements or realizations?

Mark, while he's thinking about that for a second, if I heard what Mark was saying-- and I think you heard it-- in order for us to achieve 3 million tons or better, we need more bag house capability and putting the platform in place for that.

Okay.

[INAUDIBLE] next May, probably?

The full installation is next May.

And to provide a little bit more color on Columbia City, Mark, before Mark answers the second part of your question, we are installing another strand during this outage at Columbia City.

The new casting will come later in '08, but the fourth strand will be installed during this outage, which will increase our capability.

Okay, so are you going to end up with seven strands at Columbia City?

When is the second caster?

Oh, yes.

The second caster is what, another three is that right?

I think it's three.

Okay.

Relative to the market, Mark, you operate the same crystal ball as I, and I don't think anyone has a very good experience predicting here of late.

All one could say is again all of the drivers are there, and they have been there for two or three months now, and given a little bit of market discipline out there, I think you're going to find a $10 or $20 increase in the short-term.

So as we said before, the buying community tends to be, not to be critical of them, but somewhat herd-like.

They stop buying at the same time, and they start buying at the same time, and they are, in my humble opinion, getting into that dangerous territory.

Because as Keith said, as soon as those lead times stretch out another two or three weeks, and a little, with a little spark in the economy, they are going to be without steel, and we're going to see that opportunity again.

And one thing to note is the (INAUDIBLE) inventories are at a very low level currently.

As I said earlier, that's always precedent of an upward inflection and when you couple that with the fact that our domestic industry is running at a healthy (inaudible,) 90% utilization rate, it's pretty damn healthy.

And so when there is demand uptick, the Mills aren't going to be able to turn the profit off and in the past, obviously that demand would be satisfied through imports and the import scenario right now is very bleak, positive for the industry but bleak for the buyer.

Yes.

And once that inflection occurs, I think we're going to see quite a violent swing.

Well, okay, I appreciate that color.

Thank you very much and congratulations on the great progress, guys.

Thanks, Mark.

We'll take our next question from Timna Tanners, UBS.

Please go ahead.

Hi, good afternoon.

I'm mindful of the time the call is taking now.

I guess I just really wanted to get a little more color on the underlying demand issues, because clearly the volume growth and initiatives you're doing are offsetting that.

But I was curious about the comment about merchant buying in your Press Release.

If you could comment-- and Keith has commented on non-res stability-- and if you could comment a little bit more on what your customers are seeing there, please?

I think the non-res probably affects the big shapes more than it affects small shapes.

Roanoke just has a very good market position, very good reputation and continues to enjoy very healthy order entry week in and week out.

There's-- the backlog is growing modestly.

It's not at a record level but it's in good shape.

Pittsborough is probably seeing more orders further out in time than it ever has, which is a very positive sign, so more of the base operating numbers are already in place, you might say, relative to the future.

There's a strong future demand there, it looks like.

Somebody is making a bet, anyway.

As I said at Columbia City, that's really just been a strong market that continues to be a strong market.

Lateral, yes, our lead times have pushed out from three weeks to whatever they are, five, six weeks somewhere in that neck of the woods right now, which is not going to cause people to panic by any stretch of the imagination yet.

But as Mark said, if it gets out to eight or nine weeks, 10 weeks, people are going to start to-- 11 weeks, it is a herd mentality, unfortunately.

What markets are driving that in flat rolled?

Well, I think it's as steady as you go in autos.

Non-residential is still having a positive impact on flat rolled.

Appliance markets are off a little bit because of housing.

The other markets that historically have-- we've done well with, in construction would be raised garage door panels and HVAC and arenas like that which tend to be negatively impacted by housing, so the're not as strong right now.

I can't tell you when they're going to come back.

Some people are now saying we think we could see an uptick in residential construction starting in the spring of next year.

I don't know about that, but we certainly would welcome that.

If that's the case, that will put the mill over the top.

Because as Mark pointed out with the operating rates being at 90%, there's only so much more juice they are going to be able to get out of it and if there's a lot more demand out there, you know what affect that's going to have on price.

Finally, on the flat rolled side also we're hearing there's a good amount of availability still and some people are citing some of the smaller mills as undercutting prices a bit and the discipline that we might see maybe at this time of year with seasonally softer demand hasn't really materialized.

Can you comment on that?

I clearly would tell you there are folks out there that speak with forked tongue.

They raised the price and then backed up.

There's just no doubt about it and-- but we're not one of them , frankly, and it may have hurt us in the order entry a little bit.

We've pretty much held the line on our price

So are they making a dent in the price increases for now or not really?

Well, yes.

September's numbers on hot rolled were up over August and October's are going to be up over September's and it appears like each month will sequentially increase.

November will be a little better than October and December a little better than November.

Okay, great.

Thanks, Keith.

Yup.

We'll take our next question from Brad Levy of Jefferies & Company.

Please go ahead.

Hi, guys.

Two bigger picture questions.

First off, I get from the fact that you bought OmniSource and continue to move forward with Mesabi Nugget that you guys are, I don't know, perhaps thinking there was a presentation at World Steel Dynamics mentioning perhaps even if all of the DRI, HBI and pig iron projects came on the world would probably still be short supplied for metallics.

This is a lead in to say are you guys continuing to focus your acquisition strategy going forward in that end of the spectrum?

With the acquisition of Omni and other tuck-ins and fold-ins in the ferrous arena, I think the major surge is over, but there are going to be other surges we intend to continue to grow the ferrous resource business.

We see it as a very good business with stable margins and continue-- we will continue to direct capital in that direction.

Although with the purchase of Omni, I will tell you that was the major spurt, as I said.

Relative to pig iron or DRI or HBI, as I said, I think that it could get worse before it ever got better.

I certainly don't want to be the guy paying pig iron this country right now.

It's over, depending on the [in-venue], is over $400 a ton delivered to most people.

It could be $450, it could be $500 easily if it gets out of control, and so Mesabi Nugget looks pretty darn good in relation to those.

Should those surges occur, that project, I think, is really going to anchor us some strong results versus our peers.

Got it, and then the second big picture question, I mean, if you look at the nature of the Steel come capacity coming on from China, overwhelmingly sheet oriented, if you look at the nature of the projects coming on in the next three years in the U.S, overwhelmingly sheet oriented, you guys obviously seem to be expanding in the areas that seem to be a little bit more attractive lately like bar and beam.

Can you venture a thought as to why so much capacity is being aimed at sheet and are you worried longer term for the outlook of that space?

Well, most of our demand shortfall is in sheets.

And where we get most of the surges, there's no rule that says that we shouldn't service or be able to service the market needs and demands in North America with North American production.

Obviously, there's more capacity in Europe than there is demand, and can you imagine the United States where there is more capacity than there was demand?

We might have a problem.

China will continue to grow and absorb much of its production in time.

They're going to be rough periods but I think with China slowly but surely backing away from a peg, and I think that will happen, it certainly is not going to make that market as attractive as it would have been last year or at this point in time, but I think that the flat rolled projects that are in the process of launching and/or will launch in the future such as the Tisson project are good projects.

Tisson was a major provider of material from Europe to the United States historically, and therefore, transporting pellets or iron all the way to Germany with today's costs of transportation, and (inaudible) today's cost of transportation, lack of vessels, et cetera.

et cetera, making a product , offloading it, sending it to the mill, manufacturing a product, reloading it, sending it back to the port, sending it to the United States, probably didn't make a lot of sense.

So putting the casters on the coast to (inaudible) probably a good play.

They're going to make slabs and bring them up here to a rolling and finishing environment.

So to me, cuts a lot of cost out of transporting raw materials with moisture and oxygen content in them, all the way to Germany and then making a product with all of the-- transferring it back when you can shorten that supply chain dramatically.

So I think-- I don't know how much more capacity that's going to be, whether it's another million tons over what was already being supplied or 2 million, but we still have, and I think we will in the future, be short of the demand numbers and with the lower cost profile of domestic mills, they're more able to compete globally, and if not complete globally at least do a very good job for the constituents at home.

So we have to remember we're still under supplied, not over supplied over

Again, maybe I just need to put a finer point on it.

You're not concerned about dislocation or discounting as all of this capacity comes on in sheet?

Oh, there's always going to be, let's get into the market and pushing and shoving and elbowing, and it will all settle out.

Hopefully, I'm betting on it's all going to settle out in time with fewer imports.

Doesn't mean somebody is going to attempt to break into a market with a better number, but in time I would tell you we're going to experience 4 million less imports or 5 million tons, that's how I see it.

I could be wrong, Bret.

Got it.

Thanks very much.

But from our perspective, the Tisson facility, for instance, I think it's going to be focused on a different market than us.

Obviously, they may offset or not get some integrated production that will fall into our markets.

But nonetheless, they are fully automotive appliance high end, super high end focus.

And kind of a strange benefit from the Tisson mill, obviously they're bringing in perhaps three or four million tons of slab.

And that's actually bringing iron units into the country, because they are going to get (INAUDIBLE) loss attempt and they are essentially bringing 400,00 tons of scrap into the country.

I'd also point out as you know, I don't see the dollar strengthening significantly in the near term, and which is going to make it tougher for others to ship to this market which says to me imports are going to be somewhat limited relative to history.

Well, good points.

Thanks, guys.

We'll take our next question from [Andrew O'Connor, Millenium Partners].

Please go ahead.

Thanks, Operator.

Good afternoon.

Hi, Andrew.

Wanted to know, at current U.S.

dollar exchange rates, what's the competitive potential for U.S.

exports of Steel?

What's reality here?

I've read where some other domestic producers are considering or pursuing exports of sheet and bar products.

I think the climate for that has obviously dramatically improved but it takes time to knock on the door and be accepted as a Steady Eddie supplier.

So are there spot market opportunities?

Yes.

And certain suppliers who are better positioned relative to water, if you will, are taking advantage of strong market opportunities.

Is it going to grow 4 million to 6 million tons of exports?

I don't know.

We'll wait and see.

Certainly could.

So at the moment you'd characterize it as spot opportunities only, is that right?

Well I just don't think you open up channels of distribution overnight.

Remember, that in Europe, the channel of distribution is owned by the mills.

Well, you know, breaking into that marketplace with your product with the mills on the channel can be tougher.

Now not all distribution is owned by the mills and not all traders are going to respond overnight.

If you think the dollar is going to become stronger tomorrow morning when why bother to develop these relationships, qualify the product and begin just when the dollar strengthens by 40% or something like that?

So I think there's just, it takes time to access these markets and there are people that are probably doing that as we speak.

Thanks for your thoughts, Keith.

We'll take our next question from Bob Richards, Longbow Research.

Please go ahead.

Good morning, guys and thanks for taking my call.

Welcome.

Can you give us a stab at what Columbia City shipping volumes with will be for 08?

Have you given any guidance on that?

I think we took a stab at it somewhere.

It's possible that in a strong market that Columbia City still runs at a 1-1 to 1-2 type pace with a strong market, the existing platform and the new mill, even though delayed could probably get up 250-300,000 tons.

So maybe take a stab at it, a million four.

Okay, thanks for your thoughts and best of luck.

Thank you.

We'll take our next question from Nate Caruthers, Michelle Applebaum Research.

Please go ahead.

Good morning.

Hi, Nate.

Hi, guys.

You know, Republic recently announced a $30 hike for SPG prices.

Have you guys followed that increase?

Well if we haven't, we should have.

(laughter) I would think we have, Nate.

I really, I don't know, when you ask that question, I assume we keep up with the Joneses in that regard.

All right.

That's all I had.

We'll take our next question from Charles Bradford, Bradford Research.

Please go ahead.

Good afternoon.

Hey, Chuck.

Hey.

You really stimulated my thinking this morning with your comments.

I got my calculator out and went to work.

Well hopefully, I'm reasonably close.

(laughter)

But my question involves Columbia City.

Pretty clearly, you're making large beams and medium beams on the existing belt.

When you get the new mill going, won't you be able to concentrate more on the large size on the existing mill and thus increase supply of large beams?

Well, I don't know that the supply of large beams is going to increase, but the supply of rail hopefully will.

Okay, so whatever would have been medium beam from the large mill will go to rail?

Yes.

That's right.

The smaller beams will go over to the medium sector mill and the gap that that leaves on the big mill will be filled, we believe, by rail.

And that's still a couple 100,000 tons a year?

Yes, well that's the target, certainly yes.

And that won't develop overnight, but again, between industrial rail standard rail and eventually [INAUDIBLE] we should get up to 300,000.

Ultimately get there.

And what's the status of all of that equipment?

Is everything in place now for rail?

Yes.

We have had some problems with the stamping machine, which I think I corrected in the last outage so I think relative to standard rail, we're in a good position to move forward there.

And we're evaluating other technologies besides our own and you say why would you do that?

You haven't even tested your own.

Well, that's true and we will test our own, but we think that perhaps there are better opportunities perhaps than the one we purchased which was really bought for a song and if it works it will be a home run and if it doesn't we're looking at other opportunities for [add Arding].

Well thank you very much.

We'll take our next question from John Tumazos of John Tumazos Independent Research.

Please go ahead.

Congratulations on all the progress.

Two questions.

Could you describe the difference in price of Galvalume as opposed to a zinc Omni coating for comparable thickness, weights, gauges, etc.

First, and second, I had the pleasure on October 4th of going to Mesabi Nugget location while going to the old Erie mining 100,000 ton a day iron mill, and I wondered if you could talk about infrastructure, permitting, community support, and pace at which you might be able to expand the Mesabi Nugget beyond the scale you plan for 2009 or 10 if all goes well.

Yes, John.

The hope would be for Galvalume that you could get a $20-$30 ton higher but for comparable products there.

And we have been seeing that in the marketplace, even though perhaps some of our, while there aren't that many competitors out there making that material, but nonetheless, they're squeezing that market a little bit, but a good $20-$30 a ton would be our intent.

Relative to the Mesabi Nugget, obviously, we have permitted the facility for one module, 500,000 tons a year.

The site work, as you may or may not have seen, is under way.

We're actually preparing the debentures and we should be pouring a little bit of concrete next week for the [INAUDIBLE].

We have, I think, built a tremendous relationship with the state of Minnesota.

I think our people and their agencies, the environmental agency and the Department of Natural Resources work well together and I think Republic has identified with us and with the Steel Mesabi Nugget technology.

Because it is relative to any other iron making (inaudible), a very environmentally friendly way to go.

For us to permit the mine, we have to undergo an environmental impact study.

The engineering application is underway currently, and we would suggest that could be as short as 18 months and perhaps as long as 24 months to get that through prior to us proceeding with the mine site itself.

And in that same study, we will concurrently apply for expansion of the Mesabi Nugget for another two modules.

Could you compare, if you would, Minnesota, Michigan, and other venues in terms of timing, amount of documentation, and other environmental paperwork?

I presume it's similar, but maybe it's not.

We have not had a huge amount of environmental interaction with the state of Michigan.

I would suggest that it's going to be somewhat similar to Minnesota.

I'm sorry, maybe it was Indiana you considered as another site.

Indiana, I would suggest, is a little easier to permit a little quicker.

They're a delegated state whereby the EPA has given them more flexibility in the permitting process, speeds that process up.

Thank you very much.

We will take our next question from Aldo Mazzaferra of Goldman Sachs.

Please go ahead.

Hi, Keith, how are you?

Hi, how are you, bud?

I'm okay.

(laughter)

I just want to remind you, I have the highest earnings estimate on the street for '08.

(laughter)

But I also want to ask you, in terms of your The Techs acquisition, in terms of improving the margins of that site, could you talk about what you would have to do as a company to, for example, supply substrate to that place yourself or improve the cost somehow?

Well it isn't that we can't supply substraight.

We could not supply all of it and as I said, the Mon Valley has been a good supplier and probably will continue to be.

If they should become an operating arm of another subset of the company, then obviously, a lot of the product would marshall through our own system, then it would be from an accounting perspective handled more like a cost center, at least parts of it or at least the transfer cost would not include the margins, if you will, that need to necessarily and obviously be included when the substraight is provided by others.

How big do you think that number is, Keith?

Oh, my.

Aldo, I don't really know to tell you the truth.

But I guess we could do some work on that and be suggestive of what it might be in the future.

It's not all of the reason why the operating margin declined.

It's just a component of it.

It gets squeezed by scrap costs and other subject material and it gets squeezed by pricing and it squeezes the margins.

I mean, it just, a lot of subjects at play and at work here, but wanted everybody to understand The Techs do have an impact because it includes others' profits.

Okay, thanks, Keith.

Yup.

We will take our next question from Sal Tharani of Goldman Sachs.

Please go ahead.

Hi, Keith, how are you?

A couple of things on The Techs.

Can you give us an idea of what kind of, how much of the business is contract business?

Mark?

The Techs, you're saying?

Yes.

It's relatively --

Pardon me?

It is relatively little.

Oh, okay.

They have, in all honesty, a very loyal, very broad customer base.

They tend to sell individual customers much smaller volumes than we have historically, and so they don't have necessarily formal contracts but I will suggest that they have got incredible loyalty, and those relationships have been maintained for a good number of years.

And I assume that generally, their selling prices move with the market price of hot roll or cool roll?

Yes.

And on OmniSource, Keith, can you give us an idea of how you would run this operation?

I mean, if you look at OmniSource over the last year and a half, they have positioned themselves in the ongoing consolidation of the industry.

They bought, I believe, KNS industries, (inaudible) industries, capital metals in the Annapolis area over the last year and a half, and they sold their East Chicago business.

So is the nature of business going to change now as part of the dynamics?

Are they going to grow or continue to consolidate the way they were running separately or will it be dictated by the needs of scrap for Steel Dynamics?

They will continue to operate as a separate platform, a separate arm of the company, governed by Danny and I don't see a lot of change there.

There's some synergies from administrative perspective that could occur, but not necessarily from an acquisition and disposition of iron units perspective.

They have an excellent team.

Their plans are to continue to grow.

We want to support that growth, where it would have been their own homegrown capital or our capital.

We believe it's a good space to be in and we'll continue to look at opportunities in that space.

Okay, thank you very much.

And we'll take a follow-up question from Michelle Applebaum, Michelle Applebaum Research.

Please go ahead.

Hi.

Did I hear you say that you would buy Mon Valley?

No.

You said you'd buy something.

What did you say?

I didn't say anything about buying anyone.

Merely said that Mon Valley is a good supplier to The Techs.

And you said that if you were the supplier instead you'd capture that?

Well you're not going to replace all of it.

Yes.

The integrated mills can still do things from a Rockwell 's perspective that many mills can't, so they're going to be a good natural supplier to The Techs for some time to come, but it doesn't mean that some material that was supplied by others wouldn't now be supplied by us.

Got it.

So how would you or what would be an example of how you'd supply it and build a new facility, buy a facility?

How would you do that?

You don't have capacity at Butler to do that, right?

Well, in certain market climates, we do.

In others, we obviously don't, so you have to find a way to increase in time, we intend to increase our flat rolled presence in the market.

Got it.

Somebody is going to say well, oh jeez, there's another million or two million tons.

I would just say it's another million or two million tons in an underserved market which when the elbowing and pushing and shoving is done, I would tell you results in another million or two million tons pure imports.

You know, probably-- the question I was going to ask before I kind of misheard that, the question I was going to ask was probably the most value-added 30 minutes I've spent for the last six months was the discussion we had with you and Theresa and Dick a couple of weeks ago where we talked about your frustrations in getting equipment, how long it takes and the delays.

And I was just wondering, when we're talking about all this new capacity coming on in the United States, which I really don't know other than a lot of rumors and Press Releases, other than Sever Core, can you just comment a little bit for us, you're all kind of assuming the 2010 (inaudible) is actually a number.

Can you just give us a nutshell of what it's like now to actually buy steel making equipment?

Well, you wouldn't want me to repeat what it's like.

Obviously, the lead times have stretched out, and I don't know that today's deliveries are quite as ready out of the box as they used to be.

The lead times are certainly pushed out.

I think sometimes the providers have trouble servicing all of the equipment they provide.

I don't think-- there's some frustration there.

Has China influenced that and tied up all of the mill building shops around the world?

Yes, to some extent that's impacted, but you're right.

If you plan to have a brand new facility, it would be several years before you got delivery of bearings, let alone mill stands.

But I'm sure Tisson had their mill stands.

It was already planned and they were in the supply chain a good long time ago.

So I'm sure that the time frames that they're advertising for start up are probably very accurate.

Okay, and then also, I just wanted to mention, I've been over $6 a share for most of this year, so Aldo actually isn't the highest estimate.

(laughter) Okay.

We don't put our numbers on First Call so I just wanted to correct that, not that that's right.

Okay, thanks.

All right

Bye.

At that time, we have no further questions.

So I would like to turn the conference back over to the speakers for any additional or closing remarks.

Well, again, as always, a lot of great questions.

Thank you for causing us to think about these answers more deeply sometimes than we come prepared to do, but thank you for following our company and providing coverage and for those of you that are shareholders, we won't disappoint you.

For employees that are listening, we want to thank you for helping all of us build what I believe is one of the great steel making enterprises in North America today.

And we look forward to talking with you next time.

Bye-bye.

Ladies and gentlemen, that does conclude today's presentation.

We thank you for your participation, and you may disconnect at this time.