Steel Dynamics Inc (STLD) 2007 Q4 法說會逐字稿

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

Today's conference is being recorded.

Joining us today are Keith Busse, Chairman and CEO; Richard Teets, President and COO, SteeL Shapes and Building Products; Mark Millett, President and COO, Flat Rolled Steels and Mining and Minerals; Danny Rifkin, Executive Vice President, Metals Recycling; Gary Heasley, Executive Vice President, Strategic Planning and Business Development; and Theresa Wagler, Vice President and CFO.

For opening remarks and introduction, I would now like to turn the call over to Mr.

Fred Warner, Investment Relations Manager.

Please go ahead, sir.

Thank you and welcome to today's Steel Dynamics conference call being webcast January 29th 2008 from Fort Wayne Indiana.

This call will be available for replay from our website and will also be available for downloading as a pod cast.

Today's management discussion includes forward-looking statements.

We caution that actual future results and events may differ materially from statements or projections that are made today.

You may obtain additional information concerning a variety of factors and risks that could cause actual results to differ materially from today's forward-looking statements by referring to our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission and in other reports we file from time to time with the Commission.

Specifically, please refer to those sections in our Form 10-K and Form 10-Q reports entitled Forward Looking Statements and Risk Factors.

These reports we file from time to time with the commission are publicly available on the SEC website and on our website, steeldynamics.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.

We'll begin with remarks by SDI's Chairman and Chief Executive Officer, Keith Busse.

Thanks Fred.

Good morning, ladies and gentlemen.

As our tag liner, headline of our Press Release states, our fourth quarter was a little stronger than we had anticipated when we talked about mid-quarter guidance that we had put out and we had good annual results as well.

I think that's significant in the face of considerable weakness that persisted in the Flat Rolled arena throughout the year which is, as most of you know, is on the uptick or upswing at this point in time.

But Flat Rolled was the weak spot because of, with regards to steel earnings at least in our camp last year.

Our net income was essentially unchanged, $395 million in '07 versus $397 million in '06.

Earnings per share reached a record of $4.02 versus $3.77 although it was principally a result of the share repurchases.

I think most companies in the sector were probably engaged in share repurchases and we're no different than any other company but it did positively impact the earnings per share calculation.

During the quarter, the net income was $98 million or $1.00 per share versus $105 million or $1.03 per share in the fourth quarter of '06 and $101 million or $1.06 in the third quarter of '07.

OmniSource was dilutive to our earnings by $0.07 as advertised during the quarter and of the $0.07, a penny of that was due to purchase accounting adjustments.

Therefore, if you remove Omni from the calculation, we ended up with income for the quarter at the high-end of the range of $1.07.

I think we originally forecast $1.02 to $1.07.

Our mid-quarter guidance was about the same although we guided to the low-end and had better results, so without Omni in the mix ,we would have had about $1.07 for the quarter which is a fairly good result.

We go on to talk about the fact that our results are to some degree indicative of our growth strategies and diversification and that's true.

During the year, and later in that paragraph, we talked about the fact that our Flat Rolled shipments actually declined by 2% but out Structure Steel volume increased 15% and Engineered Bars increased 9%.

These are original Indiana operations and I think a 4% year-over-year increase in steel shipments from the Indiana mills.

We did not have Roanoke as part of our family throughout the entire year 2006 but they had a great year as well and our total steel shipments including acquired operations grew to 5.6 million tons in 2007, a 17% increase over '06.

I would point out to you that our scrap costs increased 3% quarter over quarter.

I think that number is very similar to that that was reported by Nucor during their conference call, although on a year-to-date basis, our scrap costs were up 9% per annum.

Theirs were up a little higher perhaps due to pig iron moving rather aggressively throughout 2007.

The outlook is very good for the future.

We see our earnings in the $1.10 to $1.20 range in the first quarter which is a little bit of an anomaly.

Growth in steel earnings at a time when we're perceived to be in a recession or there is some market weakness and there is market weakness out there.

I think Brian Yu's comments from Citi that I read this morning really summed it all up, talking about a manufacturing weakness but good results potentially available to not just Steel Dynamics, they should be available to all steel makers due to structural supply shortage creating a gap that's not being filled by imports.

I think Nucor talked a lot about that on their conference call as well so we had a situation where domestic pricing was far below world market prices and as high as some areas greater than $150 a ton but some of them are between $100, $200 a ton.

When you factor in the extensive cost of creating products from other environments to the United States, is one of the only times I can remember in history where domestic pricing was well below international pricing.

It is usually domestic pricing is above international pricing but when you think about the impact of the weaker dollar, and the fact that there are no import surges of any significance to deal with, in fact there are just almost no imports to deal with.

We probably do have a structural shortage and supply.

As I said before, I think the industry is increasing its capabilities but yet may only be able to ship 105 million tons of steel less exports which have increased from 4 or 5 million tons to perhaps as much as 8.9, 10 million tons.

So what's available for the domestic market may well be actually below 100 million tons and even though the market may not be at 130-million-ton consumption level, it may be significantly less than that given the weakness in the economy that gap is still not being adequately met by imports which have historically or at least recently been higher-priced than domestic products.

I think most of you know that we've all experienced a very positive increase in revenues or will be in the first quarter as a result of price increases that are holding in the market.

And they are varied.

And I know there are some people wondering whether or not that impact shouldn't have a greater impact than perhaps the 15% impact we're forecasting.

Now I deduced that by merely taking the middle of our range and compared it to our dollar reported number which is a 15% increase.

But you have to remember, scrap costs have escalated rather dramatically for all producers in late December and in January, and we'll let Danny talk about the environment in the scrap universe on a go-forward basis.

But scrap costs will remain high in relation to where they were throughout most of the year, which will eat up much of the margin increase gained by the price increases yet there will be a margin gain.

I think the other factor that's maybe impacting these numbers to a greater degree than some people have contemplated is the fact that much of our pricing is tied to a lot of our pricing; somewhere between 30 and 40% of our pricing is tied to CRU and CRU is moving but it certainly hasn't move as aggressively as the hot rolled numbers have moved.

And the impact of where CRU has moved is really only going to be felt by most of us in the month of March -- the last month of the reporting quarter.

So it's a little slower as you're traveling up the hill and you get the benefit from up to too longer as you travel down the hill so for some people that may have been expecting a buck and a quarter or something like that, I don't know that that's not out of the realm of possibility, but it's not likely as we see it.

So we see our earnings between $1.10 and $1.20 on a go-forward basis.

We did the (inaudible) about 2.1 million shares during the quarter and from a steel segment's perspective, I'll offer a few comments before I turn it over to Dick and Mark and Danny that you'll note that -- and I think we're offering a lot of information in here now that we're doing segment reporting that's going to help many of you model the future.

I think it certainly gives you a clearer picture from a Steel Scrap substitutes and fabrication perspective.

But our shipments in the Steel Operations segment were about 1.5 million tons which annualizes the 6 million tons.

I suspect next year, we'll probably ship at a rate given the -- if the economy doesn't just totally collapse, we should if the order entry environment continues to be positive, we should ship about 6.5 million tons of steel with all of the growth plans that we have set into motion if you will.

I would also point out that in that paragraph, we talked about our operating income being $131 per ton shipped excluding profit sharing costs of approximately 8% -- so you can do the math on that to see what the net is -- but I would tell you that our primary operations where we melt steel and process it through hot rolling and finishing probably would have been closer to $150 a ton.

We have the Techs results in here and that does drag down the operating profit we've done because As we stated it's just a margin gained on a number converted by purchasing steel in the open market.

I would tell you that Omni was dilutive.

During the quarter, we do expect Omni to be slightly accretive -- it's not getting massively accretive but slightly accretive in the year '08.

Normally their fourth quarter is one of their weaker quarters, historically.

I might also point out that volume in that segment of our business -- if you look at 5 million tons of ferrous shipments and only 5 million tons of Omni ferrous plus our own ferrous margins in the scrap business -- somebody said why are margins so low in the scrap universe?

I don't know that our primary operations -- they're all that low.

But when you mix in, I think in Omni's case nearly 2 million tons of brokerage activity, it does hamper margins and without brokerage activity I think those margins would be greater.

So all in all, I think that our company is going to have a very good year.

Some of the data we've provided to you during the quarter is -- does not include iron dynamics which by recollection produced and shipped out 50 to 60,000 tons of [cold rolled] during the quarter.

That's not in there.

The wording is very careful total.

Total ferrous scrap shipments during the quarter were 831,000 tons and during that quarter, the company scrap operations supplied 239,000 tons.

Now the company includes our own ferrous scrap operations as well as Omni's resulting in about 22% of the tonnage purchased by our mills in this operating segment.

Steel fabricating operations, I would only point out that we have finished renovating the three Roanoke divisions which were older facilities and operated on a very marginal basis, whereas the two Steel Dynamics' operations were very, very profitable enterprises.

When you blend that all together, you can see that we've made $141 per ton shipped.

For some people, I think that's a good number but I think it's certainly a number that we expect is going to grow as we bring the Roanoke operations online in our own image.

That number should grow throughout time.

So that's my comments about the segments.

In the last page, we talked a lot about our project statuses.

We expect to see some volume expansion in Flat Rolled and are currently experiencing that especially now that we have a better order book in hand.

And we'll let Mark address where we are relative to our order book.

In cold rolled steels, we note that we will see some benefit from Galvalume and painted products all throughout the year and we're currently in the process of commissioning our second paint line at Jeffersonville.

I think most of you heard about our expansion at Columbia City and Dick will talk a little it more about that and we expect to grow our business in Engineered Bars in '08, yet I would point out that our expansion plans will principally impact '09 as equipment delivery will be very late in the year.

As I said, we have now repositioned New Millennium from a competitive posture and expect to see some results there.

Omni will contribute to our earnings during the year as we see at this point in time, and we're moving forward on Mesabi Nugget and there are no -- there are only positive events going on there but we will not put that division on until -- the Nugget division will come online until sometime in mid-'09.

And we'll let Mark talk a little bit more about that.

So I will concluded my comments with those comments and turn it over to Mr.

Millett.

Thank you, Keith.

Good morning, everyone.

Keith alluded to despite the weak underlying demand by end users, (inaudible) inventories still remain very low necessitating a sort of steady purchasing of their immediate needs as speculating or building inventory at this time, and the recent market strength and resilience supply site driven, which only have some domestic production issues in the integrated mills with strong export activity and obviously minimal on imports.

Currently, we're fully booked through February and we've got rapid order entry through March, and depending on the product, we lead times at either mid to late March on our order book so we're in great shape.

'06, '07 shipments for the year were 2% off principally due to the very soft market through August.

During this period we had some short backlogs that requires some additional down time and prevented efficient mill scheduling.

In the Q4, that backlog did come back although I was to get our performance remained a little disappointing.

We had some design issues relative to the cast and modifications which prevented the full implementation of the new (inaudible).

These issues are now substantially resolved.

In the past, this demonstrated operating rate in excess of 2.8 million-ton annualize rate that we previously advertised and given a solid market, we would hope to ship 2.8 million-tons in '08.

We have had further capital expenditure approved for this regard modest modifications to expand the shells there and that should allow us to fully exploit the cast and modifications to get to probably 3 million-ton rate in 2009.

Galvalume modification started up well.

We shipped about 47,000 tons last year.

It's been well received by our customer base -- excellent quality and widths up to 61 inches.

We remain the only mill with double wide capability toward expanding roof which gives our customer base some prime efficiencies.

(Inaudible) is being half-commissioned as we speak.

It's been delayed dramatically,unfortunately, through the late delivery of equipment and also there was a critical component that was actually missed amount of time that we have to retrofit and it's caused us several months.

But it's commissioning today and we hope to be shipping painted product next month.

By last year, in total, the Techs produced 910,000 tons given that the combined Techs SDI end of the 2 million tons of galvanizing capacity, that's roughly 25% of the non-automotive galvanized market which gives us a strong market presence there.

It's become very apparent that their product mix is very complementary to the established SDI product portfolio although they are increasing on our market diversification and further more, the focus on end-user accounts complements their SDI focus on service centers across.

Their ability to serve that market has been amply demonstrated just recently.

They were rated number 1 rank in the Jacobson Customer Service Satisfaction Survey this past year.

The integration is proceeding well.

Techs employees are being patient as we introduce new employee benefit and incentive programs and in fact, they're responding to it very well.

They are operating at record rates and the Q4 operating income was actually a record for the Techs organization.

It's a great combination, two groups of dedicated hard working creative people.

It's going to be a wonderful, wonderful synergy.

They will look strong with lead times for sets into April as we speak.

Just a couple of comments on Dynamics.

We produced 252,000 tons of iron last year.

That's about up 7 to 10% over the prior year.

But more importantly, that the mix of HBI to liquid iron changed dramatically.

We produced and shipped 120,000 metric tons of liquid iron that's up 46% over prior years and principally due to better availability than truss.

We have the 66% on that piece of equipment so there's still plenty of room to move and improve.

Cost structure remained very consistent through '07 even though we had inflated prices for iron ore and coal but natural gas consumption went down dramatically and we utilized substantial at a mill scale -- our recycled mill scale which our iron unit costs.

Currently, we're a little challenged on the cast system through a very hard ferrous.

We've had Cap Ex approved to retrofit that system which will happen probably in Q3 of this year.

And that should be able to take the facility up to probably 30,000 tons of DRI or 23,000 tons of product shipments for the month.

So Iron Dynamics is doing very well.

Thank you.

It is indeed, Mark.

Thank you for your comments.

Iron Dynamics since November has produced an excess of 20,000 tons.

Two months in a row, 23, 24,000 tons which is as good of operating rate as it's ever achieved and if it continues at that level it ought to be profitable.

The only other comment I would add is that we just opened our order books.

So we're going to talk about margin.

We've opened at Friday and it's only Tuesday morning so we're halfway through the month essentially in terms of bookings and feeling very positive about our future in the out months if you will.

Dick, let's turn it over to you.

Thank you, Keith.

Good morning.

As the Press Release stated, we had a very good year, 2007, for the long products Steel Shapes group.

A couple comments about each one.

The structural mill at Columbia City continues to improve.

2007, as we stated, was a 15% improvement in shipments over 2006.

And we look to improve significantly over that even in 2008 as we bring on our second rolling mill.

From a backlog perspective, I would tell you that the first quarter of '08 compares favorably to the first quarter of '07.

There has been a lot of questions that I get asked about the market and so forth, and I would just tell you that as we see it right now, it continues to be as strong as it was in 2007 so we're very pleased with that.

And as stated, the second mill is scheduled to begin commissioning cold commissioning in May of this spring and continue into June with hot commissioning and then start bringing some of the smaller Steel Shapes to the market off of that mill.

That complements our other divisions at Pittsborough again at about a 9% improvement in shipments when comparing '06 to '07.

The expansion up there is going well.

All the equipment has been on order and the mill stands are scheduled to arrive in July.

As Keith said many of the major components with casting will show up in October and November and therefore, the expansion capacity improvement will not be realized until '09 but things are going well there.

I'm also happy to report that from a quality perspective, Pittborough continues to make a great headway and we did earn the Caterpillar Bronze Certification.

Congratulations to everyone.

And we also received the Lloyd's of London Certification for production which opened up new opportunities for us from a sales perspective.

In Roanoke, we continue to have good bookings and excellent shipping and production levels.

Our customers in those bar divisions, from that bar division continue to, I'd say, have lower than average inventories and so even with the recent price increases that we've seen and announced, we're continuing to see bookings steady.

Production levels for 2008 have started off at record levels at both in the mill shop and in the mill and we look that to carry that division through 2008 with record performances.

Some capital projects we have going on there are modernization in the scrap handling arena and also from a work-life quality perspective with improved bag house evacuation and that looks to help us with our expansion and tonnage down there.

From our Steel of West Virginia group, we had our highest income in the history of that company, and that was really in spite of our core market and the truck/trailer business being in a separate downturn.

With that shows the ingenuity and resourcefulness of the employees putting back on to that mill section, that they had that made for substantial periods of time and came back very successfully with it.

We do have about $25 million worth of capital appropriations at Steel of West Virginia which include a new mill shop transformer and some new straighteners and those will all improve our reliability and reduce our operating costs.

Some good things going on in Huntington.

And finally, the New Millennium building systems group.

As stated, the construction is finally basically behind us in the three acquired organizations and all five of them are posed to see a higher performance and contributions in 2008 versus 2007.

Keith --

Thanks, Dick.

Now we'll turn it over to Danny Rifkin who leads our new operating segment -- ferrous and non-ferrous resources.

Thanks, Keith.

Good morning, everyone.

Scrap markets in both the ferrous and non-ferrous areas continue to be characterized by higher levels of volatility and look to continue that way for the foreseeable future.

In the ferrous world, pricing is higher by historical standards.

We expect generally for that to remain over the next few months.

Exports are continuing to move at record levels based on strong overseas demand and the weak dollar.

Domestically, from a supply side, we see volumes down as compared to historical level last year, primarily based on diminished industrial production, especially in the Midwest and seasonal reductions in flow from obsolete scrap.

On top of that, (inaudible) and processors have relatively low inventories and when faced with solid demand that will lead us to the higher price environment that we're experiencing today.

Over the last few months, our shipments to our own mills have increased somewhat but OmniSource has been able to maintain consistent supply relationships with our other long time consumers.

In terms of '08, we look to continue the integration of the SDI into the OmniSource organization and OmniSource into SDI and expect to ship somewhere on the order of 5.5 million tons of ferrous scrap and about 900 million pounds of non-ferrous scrap.

Thanks, Danny.

Theresa?

Thank you, Keith.

I'll briefly review some of the aspects of the quarter beginning with the balance sheet.

The additional increase in the accounts receivable and inventory really is related to the acquisition of OmniSource.

Our receivables are still extraordinarily strong at over 95% in less than 50 days outstanding.

Our capital expenditures for the year were $395 million, $139 for the quarter, approximately 45% of our annual capital expenditures were related to the addition of the second rolling mill and structural mill that's 10 to 15% was related to our expansion to Galvalume and the new paint line at Jeffersonville.

Approximately 10 to 15% was related to the renovation of the fabrication plants which is now complete and little less than 10% was related to the Minnesota project purchasing the mining property and some initial construction at the Mesabi Nugget plant.

In 2008, we currently expect capital expenditures to be between $350 and $400 million.

Most of the projects that we indicated in the press release are what are comprising those capital expenditures as well as new capital expenditures from OmniSource and our related scrap yard.

Depreciation and amortization for the quarter was $42 million.

For the year, it was $138 million.

For 2008, we estimated it to be somewhere between $175 million and $180 million.

Liquidity at 12/31 was approximately 500 to $510 million.

We had $239 million outstanding on our revolver and we still have just about -- I remember $350 million available on an important feature on our revolver if we were to wish to have that committed.

From a tax perspective, our deferred tax assets are currently booked at 38.5%.

Our effective rate for the year was 37.4%.

For 2008, due to some state income tax changes, we would suggest that you model at 38% effective tax rate.

Other long term assets, you'll notice increased about $90 million.

That's due to some equity investments that we acquired along with the OmniSource acquisition.

Good (inaudible) intangible increased as well.

We're still in the middle of finalizing our first accounting adjustments for OmniSource.

We'll have those finalized by the middle to end of March where we'll report final numbers.

As Keith mentioned, we repurchased 2.1million shares in the quarter.

Year to date, we actually repurchased 12.6 million shares for approximately $534 million.

At the end of the year, we still had 3 million shares available under our share repurchase program.

We had 95.2 million shares outstanding.

We also have 4.4 million shares that are related to our convertible notes so on a fully diluted basis, we would have been at about 99.6 million shares at the end of the year.

Moving to the income statement, growth interest expense for the quarter was $31.6 million.

Year to date, it was $69.1 million.

For 2008, we would estimate currently quarterly interest expense to be between 30 and $35 million a quarter on a gross basis.

Some of you had some questions related to other income that occurred during the fourth quarter.

It was primarily composed of $1.5 million of interest income, $1.4 million from the equity investments that we acquired through the OmniSource acquisition, and $1.2 million worth of trade case recoveries.

To conclude for the Flat Rolled shipments, hot rolled shipments were 312,000 tons, pickled and oiled, 28,000 tons, cold rolled 29,000 tons, hot rolled galvanized 92,000 tons, cold rolled galvanized 79,000 tons, painted 55,000 tons, and our third quarter of Galvalume production actually resulted in 19,000 tons of shipments which would have a total Flat Rolled division shipment at 614,000 tons.

Keith --

Thanks, Theresa.

I want to -- when I was reading some of the early press releases about our earnings and for the quarter and for the year, it was noted that we did not mention or provide any further guidance for the year.

And we see that from the year perspective of being unchanged from the guidance we previously have given.

Having said that, if you look at 5 to 550 and pick the middle of that as your range and divide it by $4.02 which is what we earned this year, that would imply that we are capable of growing in a rather weak business environment 30% year-over-year which is pretty substantial growth.

And I think I read in one release, I think it was Timna's where, talk about leverage being at 57%, and managed well I would tell you what those kind of earnings is very manageable and that calculation is the correct calculation as I see it.

So that really concludes my comments, my team's comments so we'll be pleased to answer any questions that any of you might have.

Operator, we're ready.

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) We'll take our first question from Aldo Mazzaferro with Goldman Sachs.

Hi, Keith, how are you?

Good morning, Aldo.

I was just wondering if I could get a little further detail on the expected ramp up of your two big projects at the structural and at the Pittsborough mills.

I see the totals for the full year.

I wonder if you could compare what you might see in the first quarter compared to the fourth quarter and then may be help us ramp up to the total for the year.

Well, the ramp up is fairly from 500,000 to 550,000 is with existing assets and is spread fairly evenly throughout the year so it's just a month over month or quarter over quarter consistent increase up to a higher level.

As we said, the big change -- 225 to 250,000 tons somewhere in that arena will not really begin until the first quarter of '09 and its impact will be felt in '09.

Right, that's in Pittsborough where you're talking, right?

Right.

Relative to structural, it's really anybody's guess how fast the commissioning process moves along but I think the team is expecting that it could produce 350, 400,000 tons.

Is that right, Dick?

Somewhere in that arena?

That's what we originally forecast, Keith, when we showed the start of the, in January, what with it being delayed for the half of year, it looks like it's going to be about 200,000 tons in the first year.

That's what will effectively be shippable.

Production will be higher but shippable tons in 2008.

And then you just have to add that, Aldo, to where we were on the number 1 mill at about 1.2 million tons which would imply 1.4 and maybe potentially, we can get to 1.5.

I got you.

That's all I have right now, Keith.

I'll get back in queue.

Thanks.

Thank you.

Our next question is from Brian Yu of Citigroup.

Oh.

Great.

Thank you.

Keith, I remember last year when we had a similar scrap push on steel prices and there was a lot of customer push back later in the year when prices subsequently declined and that's because lot of Nocur sold for quite a bit.

Is that part of the reason you're keeping a short string on the order book this time around?

You just opened up March so it would suggest there's about a month lead time.

I think the market in the end is going to determine where pricing relative to the Flat Rolled order book could go.

Some of that would obviously by application be tied to resource costs so I think as Danny said he expects that market to remain strong and I think, if I heard it right, it's because the collective volumes out there in the manufacturing sector are a little weaker.

There's just not that great stock pile of obsolete scrap that there was a couple of years ago available to the processors as well.

So I think when you look at his forecast for ferrous which is 5.5 million tons and we're 500,000 tons of that ourselves, he is telling you his year from a collection perspective, is going to be a little short of the previous years that Omni has experienced and that's due to the weakness in the economy and the manufacturing sector which is probably with the import factor going to keep prices fairly volatile.

I do believe that as we talk to Danny and his team, they felt there could be some softening as there was last year in the spring when the flows are better but it's anybody's guess as to where we're going to be here at the end of this month, at the end of February.

Some people are betting we are going sideways, some people are betting up a little, some people are betting down a little.

And I don't think it is known yet so the commenting on it would be pure speculation.

Okay.

And then I might have missed this, but did your guys discuss the Roanoke expansion, the melt and the upgraded rolling capacity when that might be available?

We only bought spare parts and a couple of extra stands and so forth and so we really don't have any capital expenditure going on as far as the rolling mill goes.

The major capital expenditures that we have down there are supportive scrap yard area and new transformers.

We have a lot of smaller projects but no major expansion project going on there in the rolling mill.

Some of the upgrades might help through put consistency, things like that but no terrific volume expansions.

A lot of these expenditures, as Dick said, are related to castor upgrades.

If you've ever been to Roanoke, you'll know they almost didn't have a scrap yard and so we're busy excavating hill sides and putting in a scrap yard so we can do the appropriate rotation on their inventories.

Okay.

Thanks.

We'll take our next question from Chris Olin with Cleveland Research.

Hi.

Hi, Chris.

A question on the non-residential construction, I guess call it, commercial construction market which for me is the biggest question mark out there.

It seems like you have some pretty bullish comments as relates to being demand, and New millennium demand.

I was just wondering, is that related to a better supply dynamic or are you seeing any slow down in commercial construction order activity that could present a risk to you guys, maybe further down 2008?

Well, I think there's always the risk that as you continue with this malaise in housing that you could see the light side of commercial or non-residential construction perhaps be impacted at some point in time.

I think we have yet to experience that.

But I think, in terms of infrastructure and heavy construction, the order entry is really pretty good in that sector.

And so we see a good year ahead of ourselves in structural.

A lot of it again is tied to our order books.

We haven't really opened them beyond March and if we did, I'm sure we'd have order entry activity for April, clearly at this point in time but that's just not the way we run our ship.

In the case of New Millennium, they have a strong backlog as they've had in many, many years although the first quarter in terms of the approval process is generally fairly weak and picks up throughout the quarter in deliveries pick up into the second quarter and third quarter which tend to be the peak periods in fourth quarter, but as you gauge it against New Millenium backlogs of yesterday, they're not in bad shape at all.

Okay.

That's all I needed.

Thanks a lot.

We'll hear next from Bret Levy with Jefferies & Co.

Hey, you guys, a couple of questions.

First of all, you mentioned the March order book is about half full on the sheet side.

Are you getting the full price increase for the portion that you have full for March?

And then, sort of further out again, kind of a maybe a sheet question, as soon as you get Mesabi Nugget up and running or maybe before that, you guys have been saying something about potentially putting up a West Coast mill.

Will it be a sheet mill?

Will it be a plate mill?

Have you guys thought out that for and can you guys expand your thoughts in terms of the West Coast concept?

Well, we'd love to have our primary presence out there but I've said many, many times it's really tied to our ability to deliver low cost, high grade resources into that project and that would be primarily dependent on the success we have with Mesabi Nugget.

That could be a big driver for launching a primary project of some significance, although it certainly wouldn't be a 3 million ton mill and probably look at 1 million to 2 million-ton facility, if that project were ever given the green light.

What was the first part of your question?

Brad?

Whether we achieved full price increases and I would say yes, we have.

Mindful of the fact that we are behind the curve on CRU as we stated earlier but in terms of spot pricing, we are as Mark said, achieving full price increases.

And mindful of the fact, the order book has only been opened two days.

Got it.

And then one question for Dick.

The talk of any kind of further development of your rail product seems have gotten very silent and maybe that's a function of a very strong structural beam market but there was supposedly, supposed to be this transition to the new longer rail by the end of this decade.

Is that kind of on hold right now?

Or can you talk a little bit about kind of the plans and rail on the longer term?

Sure, Brad.

The fact that the structural market in 2007 was as robust as we experienced did put us in a mode of making rail only when it was advantageous for the mill.

And as we went out we made no commitments to customers and so forth for the further development of that product.

We do see the phasing in of the rail products in 2008 as we ramp up production on the second mill and start stripping off some of those products that were currently being rolled on the existing mill.

And so we do have a game plan.

We are executing to it.

We have continued to roll a 240-foot rail occasionally.

And we have been welding it on our welding line and shipping it.

So all the tools are in order.

It's just a matter of us being focused on it as appropriate for mill loading and maximum profitability.

All right.

And then the last kind of follow-up on my original question.

Is the West Coast mill contemplated to be a sheet mill or a plate mill or have you guys kind of thought about what kind of mill that ultimately would be?

We were contemplating a sheet mill with finishing activities associated with it.

Thanks very much, guys.

We'll hear next from Michelle Applebaum with Applebaum Research.

Hi.

Good morning.

A couple of quick ones.

First, when you originally guided in December to $5 to $5.50 for 2008, I really don't think that you would have anticipated -- and maybe you would have, Keith, so I don't want to say completely, but I don't think you would have anticipated to see March prices at $670 a ton for hot rolled and so I'm trying to reconcile the 5 to 550 with the $1.10 to $1.20 and the dramatically higher prices for hot roll that we're seeing going into March.

Do you understand?

I understand the question, Michelle.

Let me do my best to answer it.

Okay.

We did anticipate March pricing over 600.

We did not anticipate it being at the level that it's currently at and therefore, you would expect some improvement earnings as a result of that but we also didn't expect scrap to shoot up $100 a ton in one month, and really expected more like somewhere between 30, 40, $50 and the market just delivered a different message.

So one was a little higher than contemplated but these resources being delivered during the time frame were higher than we have contemplated would be delivered to the mills and therefore, it had its impact as well.

Okay.

And then the other question --

And the other fact we mentioned earlier is that CRU -- you're behind the curve as prices are growing and therefore what we're realizing in March is not.

It may well be behind but we actually realize in April.

Well, but offsetting that, what I'd heard in the marketplace is that you're February book hadn't even been opened when (inaudible) first announced their $50.

So I would imagine that you probably might have gotten -- which obviously a smart move on your part so on the spot side, the 70% sheet spot that you sold, you probably got -- I would imagine you got some of them in February right?

As our numbers for model for February are whereas we had pretty much forecast them and our scrap costs were too because we had sizable stocks on hand but certainly the world began to change in March.

Okay.

So clearly you're saying no upside in the first quarter to the guidance?

I wouldn't say that.

If you deliver somewhere in the range, that's pretty good upside quarter over quarter in what could be one of the weaker quarters of the year.

Okay.

Then my next question is with regard to the West Coast mill, I see press release after press release in conference call where your talk about your margins for the Techs organized product being lower because you're purchasing material and I'm just kind of wondering, you had talked years ago about that West Coast mill potentially being out there if Mesabi Nugget were probably four years ago.

Wouldn't the priority -- I'm guessing wouldn't the priority now be solving some of the procurement margin issue for The Techs?

I think that's an astute observation and we're working on that.

But it doesn't dampen our enthusiasm for having a west coast project which got delayed because Nugget was delayed for a couple of years but clearly, Nugget could be the primary driver for an effort on the west coast of modest size.

And obviously, we're going to be dealing with primary metals with the cost structure that should put us in a favorable position.

Having said that, we probably need to quit talking so much about it because it's years away.

The west coast?

Yes.

And it may well happen and it's a future growth project for us but it's not tomorrow.

We are looking at how in our expanded Flat Rolled universe we might provide more hot metal to our sister divisions over the course of time.

That's something we're looking at continually.

Well, listen, you know I beat you up a lot and its out of love and to say that your timing in getting into the long product market was either brilliant or lucky is fabulous move and we're seeing it pay off in a very large way here.

So nice quarter, nice job.

Thank you.

We'll hear next from Timna Tanners of UBS.

Hi.

Thanks.

Good morning.

I wanted to ask some quick questions really.

Theresa mentioned that there will be finalization on some of the intangible or the good will calculation in the middle of March and there will be perhaps an update.

Is that a signal that there will be mid-quarter update maybe?

Oh, no, TImna.

I didn't mean to do that.

I just meant that we made some estimations for only a month and two and month and a half that we'll have to firm up once the evaluations are final.

It wasn't to, mean that we are going to have a mid-quarter guidance call.

I got you and thanks for giving those volumes so slowly.

That was really helpful.

On the contacts, would you mind just explaining how those work for a little bit better?

How quickly are those repriced?

Isn't that 30 to 40%?

Can you give a little more detail on how those work?

Basically, we have as a range and it changes with seasonality of our customer base and also the market a little.

But there's a range of 64,000 to 85,000 tons of CRU-based contract.

Roughly 20, 25,000 tons of that is hot bound related where by the CRU price that comes out typically around about the 12th of the month would dictate the following month's price.

For cold roll products and galvanized, there's a two month lag.

So January pricing, for instance, the increase in January's CRU which was $75 gets realized for those products in March.

I got you.

That's helpful.

Okay.

That's 24, 60,000 total range of these products.

Finally, I wanted to ask if you could comment on your potential for export given the market overseas has continued to be quite strong and that Nucor mentioned big exports.

I don't if your geographical position is as supportive but if you could comment on the export, please.

Essentially, the export numbers that we have been seeing will be the port of just not been attractive to us.

Geographically, this is cheap flat products but we just can't get it there and get a margin that we want.

I think Dick may be in a slightly different.

Mostly, from the Pittsborough perspective, we do have the ongoing business relationship with a number of European customers and we've been shipping both bar to Europe on an ongoing basis throughout the 2007 calendar year and expect that to continue in 2008.

I might mention that as you know Nucor and other competitors mills may well be better positioned for export business when you look at the fact that (inaudible) is on the water, Decatur is on the water, Berkeley is on the water.

They're in a lot better position to effectively compete in that market.

Okay.

Great.

Thanks very much.

We'll hear next from Mark Parr with Keybanc Capital Markets.

Thanks a lot.

Hey, Mark.

Hey, Keith.

Great quarter.

Had a couple of questions.

First though, I was curious about scrap market.

You're talking about with lower industrial activity perhaps with the supply of prompt material or obsolete material is somewhat constrained.

I was wondering if Danny could comment on perhaps how much of an impact this could have on spreads over the course of '08 relative to '07?

Part of it is seasonal in that we usually see in the November, December, early January time frame industrial output slow and therefore scrap -- industrial scrap volume diminished.

I think it's exacerbated this year by some of the issues coming out of the domestic automotive sector and the suppliers to automotive.

It's a bit early to forecast how that might affect everything in 2008 but in the near term, the competition for industrially generated scrap is fairly intense.

Have you ever seen it this way before?

Say in the last four or five years?

I think we see it this way almost every year.

I think 2004 was quite similar.

And although I think what's different this time is not so much the issues with the generation of industrial scrap, but the fact that domestic demand has remained pretty solid in terms of demand for scrap and exports of scrap are at record levels.

So whatever scrap had been historically imported into the U.S.

is not coming in and if we're running at a 16 million-ton a year export rate, that's probably three to 4 million tons above what would be normal on an annualized basis.

That makes it a huge impact on a month to month basis in domestic prices.

Okay.

All right.

I was wondering, Keith, Danny, I appreciate that color, thanks.

And I was wondering Keith, if you could give us any details about the supply contract that the Techs have.

And what sort of cost pressure that might be creating on that part of your business for first half of the year?

Well, most of the outsourcing in The Techs is with U.S.

Steel, who has been a very good supplier and we anticipate will continue to be an excellent supplier-provider if you will, as pricing in that product environment moves up.

In the sub straight environment, we would only hope that end market prices would keep up with it in terms of finished product coated.

Mark, any other color?

There are obviously booking their mill ahead of most of the market because of the lead time for sub straight.

And so that on the way up, they have the advantage obviously, because they're buying sub straight two or three weeks ahead of the curve at lower pricing.

That obviously inflicts when the market goes down.

So the stretching of the order book at The Techs out into April is an advantageous thing in the light of the sub-straight environment?

Absolutely.

Is that fair?

Yes.

I appreciate that.

I had one last question, Keith.

I was wondering if there's been trade press this morning about whole bunch of steel mills in China that has been shutdown because of electricity shortages.

I'm just wondering if there's anything that you're hearing or seeing that could create some incremental upsight for pricing or further reductions in supply for the U.S.

market in next couple of months?

Mark, I was not aware of those releases.

I'm not up to speed on that so I can't comment.

Okay.

All right.

By the way, congratulations on a great results.

Thank you.

We'll hear next from Andrew O'Connor with Millennium Partners.

Thanks operator.

Good morning, everyone.

Hey, Andrew.

Keith, I heard your response to Michelle's question about '08 guidance.

Further to this, is it possible to identify the projects or elements that would allow the company to hit the top end of the '08 earnings guidance range, 5 to 5-1/2 per share.

What would you suggest we focus on?

Thanks so much.

Well, obviously, the market is healthy right now and should the imports continue to be constrained and the pricing environment Flat Rolled continue to improve or at least settle at the higher levels, that could have a positive impact if resource costs do indeed back off in the spring.

If they don't, it may well not have a positive impact so the two sort of do go hand in hand a little.

And even though they are probably disconnected more so today than they historically have been.

I don't think that there's going to be a lot of change in the structural market.

We do our best to forecast where we think the resource cost curve is going and we look at that through the binoculars or being able to recover that principally in the Shape's arena.

So I don't know -- we've already done that modeling and wouldn't suggest there's probably a lot of upside just unless we have a lot more access with bringing these assets on stream earlier.

That would probably be the only upside in the structural arena.

It's kind of tough to know where fabrication is going to settling out in the end with these brand new facilities becoming as just becoming active in the market and having better cost environments than they have experienced in the past that we've modeled a better year in fabrication.

We've modeled as you talk about resources, we modeled the adjusted EBITDA numbers that we saw in the past with Omni and right now in the strength of the market, we don't foresee any change in that environment one way or another.

Obviously, if prices remained at these levels throughout the year, there might be an opportunity for some increase in margins there but I think that's really too early to make that call.

Okay.

Thanks for that.

I'm looking at page 3 of the press release project status and is there anything else within the control of the company which again you think might or has the potential to a involve favorably to allow you to hit the top end of your guidance $5.50 a share?

I think we pretty much laid it out for everybody.

We thought that would be helpful to have a bird's eye view of the things we were thinking about in the timing of these projects.

So I don't know that we have any additional comment or anything we can add to that.

Okay.

And then lastly on CapEx, I may have missed the full year Cap Ex '08.

We estimate it to be between $350 and $400 million.

And the depreciation, we gave it about $180 million?

Correct.

It was that amortization included?

Correct.

Okay.

That includes depreciation and amortization.

And the largest chunk of Cap Ex, Theresa, is to be spent on which?

About 45% of that would go to the structural and rail division for the second rolling mill.

And castor, sorry.

I got you..

Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll hear next from John Tumazos.

Congratulations on the $131 operating profit margin.

This morning U.S.

Steel reported just $13 and last week A.K.

Steel lamented contract pricing terms.

It's hard to understand how their costs could be rising quicker when they don't rely on scrap.

Is the competitive dynamic that the big auto customers have ratcheted contract prices down?

Or that the integrated side of the competitive equation is cutting prices?

I don't think they're out there cutting prices in the spot market, John.

I'm not privy to specific contract results for each of these companies but if you're not seeing it on the cost side which is a fair logical conclusion that scrap prices have impacted us to a greater degree perhaps when they have certain other competitors in the integrated arena, you wonder if that margin compression isn't really occurring through the revenue side and that would be something I'd be thinking about.

But these guys don't have any picnic either with market prices prior and or going up to the degree that they have.

Some people are just in better positions than others.

U.S.

is in a very strong position there.

They probably had some operating issues if I scanned their press release that held back perhaps the results to some degree and hoping for a better quarter but I don't know if I can help you with modelling the difference between our number and theirs.

Congratulations on the good results.

Thank you.

We'll hear next from Bob Richard with Longbow Research.

Hi.

Good morning and thanks for taking my call.

Hey, Bob.

The Galvalume.

What's the end uses for that?

Is that an alternative for market galvanized or is that to be a new market, sir?

Sorry.

I didn't catch that, Bob.

The Galvalume.

Galvalume, it's a different zinc alloy.

It's a zinc and a little alloy that gives higher corrosion protecting, protection guaranteed.

It's a trademark in actuality.

And it's principally used in the building for spanning seam roofing.

And the uniqueness of our line actually being able to go up to 61-inch width we're able to make what they call a double width, a full 61-inch coil and the customer base can slit that in half and save a lot of costs and improve efficiency in their lines.

So that's nearly an assumption to put normal hot there but it's kind of like the next generation?

It's a product diversification.

It's just another market.

If you're going to paint a roof system, Bob, as Mark pointed out, most of that material is warranted for 20 years or 30 years and the preferred sub-straight would not be hot dip.

It would be Galvalume -- either exposed or painted.

Fair enough.

Thank you.

And just one quick one.

I appreciate your comments earlier on the scrap market and I understand that pricing could come down with the warmer weather pending.

Do you see enough structural reasons to we should expect scrap to be up year-over-year in '08 versus '07.

Year-over-year, I think the global environment has changed and that's what's driving the rise in domestic scrap prices.

I think over the last few years, we've been seeing continue to see more and more impact of what's happening overseas and the -- it's not just the demand coming from Asia but policies put in place in Russia and demand in the Mediterranean region that are affecting scrap prices.

So I think there's a fundamental sound rationale for us to expect scrap prices in '08 to remain high.

Thank you very much and best of luck.

Thank you.

I would agree with that, Bob, by the way.

That comment that they will be year-over-year higher.

Next is Charles Bradford with Bradford Research.

Hi, good afternoon.

Can we talk a bit about the big iron business because I understand that (CBRD) has stopped shipping iron ore to some of the local pig iron guys and the price is too high.

What do you see now for the price of imported pig?

Is that having an influence on the higher grade scrap market?

I'm not so sure it's had a major impact on the quality (inaudible), I think that's truly is driven by market and global pricing those things.

Pig iron is probably around about 460, 470 right now.

The (inaudible) we've been out of the market for sometime and we've a pretty good inventory.

And check out, we're hoping that the inventory position that we have along with improved results of Iron Dynamics will go along way to getting this closer to mid '09 when Mesabi Nugget may well take the place or purchase pig iron for us.

We hope to get a comment about net interest.

I think Theresa said -- and gave a forecast.

Would you have interest income and equity income be relatively constant or would you see that changing much?

Are you speaking of the capitalized interest?

Exactly.

Yes, that's a little harder to judge.

We're going to continue to have the construction projects throughout 2008.

So I would expect during the fourth quarter we had capitalized interest of just little over $5 million.

I would expect to see that same level throughout '08.

And one last question.

Can you talk a bit about SG&A?

Obviously that's been some quite a bit with all the acquisitions.

How should we model that for '08?

SG&A tends to run pretty soundly at 5% of our net sales number.

I would continue to see it that level.

During the fourth quarter, there were some additions related to amortization and as we get the final valuations for the (inaudible) transactions where amortization is fully SG&A.

We'll break that out separately but I would say 5 or 6% of net sales is still a good estimate.

Thank you.

It appears we have no further questions at this time.

Thank you operator.

As always, it's been a pleasure to field your questions and let me close by thanking the 6,000 dedicated people that now work for this company.

They're doing a terrific job.

I mean just a terrific job.

The company has a great culture.

The results have been great.

And we look forward to bigger and better things as we march forward.

Thank you everyone for being interested in our company and thank you for the good questions that you always advance to us and keep us on the edge of our chair or our seat.

Look forward to speaking with you next quarter.