Steel Dynamics Inc (STLD) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Steel Dynamics first quarter 2008 earnings call.

Joining us today are Keith Busse, Chairman and Chief Executive Officer; Mark Millet, President and Chief Operating Officer, Flat Rolled Steels and Ferrous Resources; Richard Teets, President and Chief Operating Officer Steel Shapes and Building Products; Daniel Rifkin, President and COO of Recycling segment; Theresa Wagler, Chief Financial Officer; Gary Heasley, Strategic Planning and Business Development; and Fred Warner, Investor Relations Manager.

For opening remarks I will now turn the call over to Mr.

Fred Warner.

Welcome to today's Steel Dynamics conference call being webcast April 22, 2008, from Fort Wayne, Indiana.

A replay of this call can be heard and downloaded as a podcast from our website, www.steeldynamics.com.

Now I will read a cautionary statement about some of the information to be discussed in today's conference call.

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 that we file from time to time with the Commission are publicly available on the SEC's 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.

Thank you for joining us this morning.

As the headlines of our press release read, SDI had record sales and earnings for the first quarter of 2008.

To say that was a very good quarter would be an understatement.

It was an excellent quarter, at least from our perspective and for those of you who still look at the earnings through the eyes of the presplit -- on a presplit basis, it was a $1.44, whereas our guidance, revised guidance was $1.25 to $1.30.

But we found continued strength throughout the quarter, especially in the Flat Rolled segment of our business.

Our net income when you measure it against the first quarter of '07, increased 40% and our net sales more than doubled to $1.9 billion.

More meaningful comparison to the first quarter would have our net income up 46%, with net sales increasing 31%.

I think we're starting to see the impact, very positive impact from certain acquisitions, Roanoke has certainly been tucked in for quite a long time but Roanoke continues to just have outstanding results throughout their entire unit and we're very pleased with the integration of that asset.

I think we certainly saw the effects of the Tech acquisition in this kind of a market, very positive results from Techs.

Been a very good integration and I would tell you the integration is about complete.

Spirits are high.

New incentive programs are in place and these guys are delivering record performances and we tip our hats to all those of you on this call listening in from the Techs.

OmniSource had a terrific quarter.

Probably going to have a terrific year.

We'll let Danny Rifkin share more of that good news with you and all of the -- all of the results from all of the operating segments, save only building products, were just really very, very strong.

As you can see in the second paragraph of our news release, our steel shipments were 1.6 million tons, that's up about 11% and fairly significant increase.

Our mills are all running fairly well.

A couple of them face minor outages here in the second quarter, two, three-day type outages which would drag shipping volume down in the affected months.

But that's all baked into the forecast that you saw us provide in this press release.

We should mention that the -- that OmniSource was accretive to earnings by about $0.09 per share, fairly significant number.

I think on a go-forward basis, we believe they will continue to be accretive and therefore it's not a subject we're going to discuss in any great depth on and ongoing basis.

The recycling division is experiencing very strong demand for ferrous scrap.

A lot of drivers for that.

Currency would be one of them, exports are at probably record levels at a time when certainly in the upper Midwest we had a pretty rough winter.

That's a question, the issue of global warming as you look at it through the eyes of our winter anyway, it was a pretty rough winter and the flow of scrap probably slowed a little bit during the winter over its normal flow levels.

Was also impacted by American Axle strike, demand for automobiles, construction market demand, et cetera, et cetera.

So a lot of drivers for some very strong demand for ferrous and non ferrous resources, which Danny can highlight a little bit later on during the conversation.

Our outlook is really fairly positive as we go forward, as you can read.

I think scrap -- I think Mr.

D'Amico and his comments last week was fairly spot-on when he said he thought there would be some moderation in the cost of recycled or ferrous resources on a go-forward basis but he couldn't predict exactly when.

Certainly demand right now, today, demand is still fairly strong.

So any moderation could be a month or two away but likely to occur.

At some point in time, as flows continue to increase, and I think the flows into the scrap recycling yards all across America have dramatically improved as we move into spring.

But with the continued weak dollar and world market pricing being equal to or greater than domestic prices, it's not likely that prices are going to abate all that much, if any.

You could see a situation where pricing may have reached a peak number.

It may not have.

I just don't have a crystal ball that big.

But I see no reason for it to recede, other than demand dropping off rather dramatically in the recessionary environment that we're all experiencing and that our customers are experiencing and so therefore the customer's having a pretty rough time with all of this but their inventories are down somewhat.

I think people are generally speaking buying on a month to month basis.

But you know, when -- I think credit is an issue.

When you used to be able to buy two apples for the price of one, credit becomes an issue and becomes a driver in how much inventory you can carry, how much inventories may well sag on a go-forward basis from where they are today.

We don't expect to see imports change throughout the course of the year all that much and clearly, shipments are down as seen through the eyes of our customers.

But with as much steel being exported today, the situation is really no different than scrap, the weak dollar is causing record imports of finished steels out of this country to other points of destination.

So when you consider the capacity that the industry enjoys today, minus the rate of export shipping activity and you add back to that finished steel imports, probably running at a 15 to 20 million-ton level, you're short.

In spite of recession, I don't think demand has backed up to that level.

Demand used to be in the probably low to mid-130 million-ton arena.

And even though the capacity of the industry is perhaps above 110 million tons, it generally doesn't run and is not capable of running at that level.

It may well run at 106, 107, 108, we may well export 12 million tons and when you net the exports against the actual run rates and add back to that 15, 16, 17 million tons of import activity, it only leaves you at 110 million tons of supply, trying to feed something north of that in terms of demand.

Demand may well have slipped from 130 some million tons back to the high teens but we're still probably left -- probably looking at being steel short for some period of time.

I don't know of anyone that thinks imports are going to pick up significantly, other than people could become desperate for supply and could go abroad or may well be fed up with the pricing environment that exists here and may well go abroad for other reasons.

But I don't think there's a likelihood of huge import activity impacting the market in the next quarter or two.

So as I said in paragraph five, our outlook is fairly positive on a go forward basis.

We did take a stab at the earnings in the second quarter, forecasting $0.80 to $0.90.

You pick the middle of the road, that's up about 18% over first quarter, which would be another fairly significant increase in earnings activity and it would certainly set us on a course to approach $6 a share on old basis, or $3 a share on a new basis, although we're not trying to prognosticate out that far.

We commented on that in the past.

I don't see that that's changed much at all in our eyes.

The Steel Operations, going to the second page, remain SDIs largest segment, representing 58% of the first quarter net sales activity.

We, as I said shipped about 1.6 million tons during the first quarter and had net sales activity, $1.3 billion as it relates to Steel Operations alone.

So it was a fairly good quarter.

Operating profit, I don't think that was a record.

Fred, I would ask you that question but I don't think $148 a ton was a record operating profit, although a fairly high level of activity as you look back historically.

Selling values for Steel Operations, the average price was $782, an increase of $72 a ton from the 710 reported in the fourth quarter.

And an increase of $136 from year-ago activity.

Scrap costs increased about $50 per ton.

I noted that compared very closely with the increase some of our competitors had, about $50 on a quarter-over-quarter comparison.

As I said, the scrap division was fairly strong.

Danny will comment on that.

Mark will comment on our activities at the Mesabi Nugget.

But they're proceeding well as I understand it.

We're on target for start-up of Nugget next year and as you can imagine with today's pricing activity that exists in the marketplace, the spread between the cost of production and the selling value of that material is going to be rather significant.

As I said earlier, our ferrous scrap shipments were very high during the quarter.

Non-ferrous activity remains fairly strong as well.

Steel fabrication, probably the weakest link at this point in time, although coming out of the winter hopefully into a little bit better period from a activity perspective, spring and summer.

The second quarter tends to be a little better than the first quarter, but depending on economic circumstances could be still a rather weak quarter.

Although I noted in our press release that we, told everyone that we're just about finished rebuilding the three Roanoke facilities that were in need of being rebuilt and reconfigured and they have broader capability and lower cost structure, so with an improving construction market, we ought to see downstream improved earnings.

I really don't have any other comments at this point in time and would turn it over to Mark for his comments about the Flat Rolled segment and Mesabi Nugget project.

And Iron Dynamics.

Iron Dynamics ran very well this quarter.

Good morning everybody.

I guess we continue in a very intriguing market for sheet products and my perspective is not materially different than as already outlined by Keith.

The domestic steel demand remains very low, if not anemic for residential construction, for moderate production, generally weak if not recessionary economy and continued loss of manufacturing to foreign shores, restrained domestic demand.

Service centers, distributors, diminished credit capacity, recent record transaction rallies and are reluctant to speculate given the uncertainty of the market, self center that's reserved therefore remain low and they're just essentially purchasing their immediate needs.

However, despite that high industry utilization, steel supply remains tight, driving the recent market strength and the weak dollar, strong global pricing, substantially reduced import activity while driving significant export volumes.

Effectively making the domestic steel industry short, still short on the supply side.

Transaction values, (inaudible) essentially offsetting the appreciation in raw materials that Danny will discuss and as presented opportunity for appreciable metal margins expansion.

As Keith suggested, we think these market fundamentals are well-defined and our crystal ball would suggest that they're not going to change in the near future and would suggest also a strong pricing situation going forward, at least for the immediate future.

Tax fully committed through May, Techs are open through June.

Our customer base is desirous of a lot more tons than we can actually provide.

We see a very, very strong market.

Mill performance, has done a phenomenal job, had record productivity for the first quarter and even more impressive, it was absolutely incident free from a safety perspective.

Our hats are off to that team.

Our production was 710,000 tons for the quarter.

As Keith also suggested, the Techs doing phenomenally well.

Their productivity that they reached, operating record levels, shipments were just shy of their previous quarterly record.

Given the fact that they are still going through the final stage of integration I think is a testament to the quality team of people we have there.

Similarly, Iron Dynamics, and his group have done a superb job optimizing the semi thought process and we continue to improve the ratio of liquid sea lion being transferred to the steel mill.

First quarter, average rate, 70% of (inaudible - highly accented language] was transferred to the (inaudible).

Our first quarter it averaged right at 70% of the total, it was shipped roughly 43,000 metric tons of liquid iron to our electric art furnaces.

Improved further, recent weeks we've been running actually at [90%] of the DRI produced, being turned into liquid iron.

So my hat's off to the team there.

If you think about it, given recent raw material markets,(inaudible) iron probably would deliver into bubbler in excess of $725 a gross ton.

Finally, iron (inaudible) is sort of paying the dividends that we envisioned some years ago with the high raw material pricing.

Mesabi Nugget, just briefly, construction continued through the winter, preceding well.

It would appear that both construction and procurement schedules would allow us to start up late second quarter, third quarter of 2009.

Permitting for the mine has been initiated, slower than we'd like.

But we would envision mining to be initiated perhaps late 2010, 2011.

So generally, from my arena, we've got a phenomenal team doing some phenomenal things out there.

Thanks, Mark.

Dick?

Good morning, everyone.

Start with Columbia City and just say that they do continue to have a full backlog and they've had record uptime in their rolling mill operations and due to the fact that we've had gotten our permits for continued construction back house and so forth, they are now allowed to run their furnaces more efficiently by staggering them and we've had opportunity to increase our inventory of semi finished and everything is running well there.

In spite of the uptime in the rolling mill, we have had to refuse rolling requests by customers and that continues to show the strength of the market.

We will have an outage there, spanning the end of April and the beginning of May for three days, planned maintenance outage and I guess the only note that is disappointing there is that on mill number two, we continue to have delivery delays from equipment suppliers that are impacting our scheduled startup and so it's being pushed out to the very end of the second quarter and in fact may fall over into the third quarter, disappointingly, but other than that, things are going quite well at Columbia City.

The same at Roanoke.

We have a full backlog.

In fact, we did for the first quarter use rebar as a fill-in product there and we're making less rebar going forward in the second quarter and that tells us that, again, the backlog is strengthening and the order book is fine.

We have in spite of having a failed static bar which is owned by the power company, continued to produce in the melt shop at about a 5% reduced productivity issue.

That static bar had a delivery of replacement part of 12 to 16 weeks and so we're in the midst of that towards the end of it hopefully we'll get those repairs done soon and be able to get back into a higher melt shop productivity opportunity.

They too, though, will have an outage spanning April and May.

Theirs is going to be a little longer, about seven days and it again is to do scheduled routine maintenance items.

Our fiscal operations does have a strong backlog, one of the strongest it's ever had.

They also have had very strong performance.

They had their most productive rolling mill quarter, rolling 153,000 tons which actually is 15% better than any prior quarter at this borrow.

And the melt shop had their second best productivity quarter and that's in spite of occasionally choosing not to melt due to economic reasons from a power cost perspective.

So hats off to employees Pittsboro.

COLS Virginia, had to reduce their hours on the rolling mildew to the dramatic dropoff of the truck trailer business but they have been very resourceful in attempting to bring additional products back online, products that they haven't made in years or new products and to offset some of the trailer dropoff.

And as Keith did mention, New Millennium building systems did have a slow first quarter, seasonally expected, but I'm happy to report that production hours are picking up with increased hours being scheduled on each of the joist lines and we did have an improved strength in three of the five facilities from a sales order book perspective last week.

So hopefully we're turning the corner in that seasonal business.

Keith?

Yes, Dick.

Someone may actually ask you why do we need to spend money to expand capacity at Pittsboro since they're doing so well.

If you annualized 150,000 tons they're at 600 on a mill that was only supposed to produce 480.

So team is doing rather well.

Yes.

Upside opportunity.

Danny?

Thanks, Keith.

And good morning everyone.

The scrap segment turned in outstanding results in the first quarter.

Largely related to significant price increases for both ferrous and nonferrous scrap commodities.

As reported, total ferrous shipments were 1.4 million tons with scrap representing approximately 90% of that volume.

Ferrous scrap prices rose dramatically during the quarter, as a result of several key factors.

The combination of a weak dollar and strong international demand has produced record exports for U.S.

scrap.

Current estimates for 2008 are between 16 million and 18 million tons, which is roughly 20% of total domestic ferrous scrap volume.

The U.S.

remains the largest of the more sophisticated scrap generating markets in the world, followed by Russia, Europe, and Australia.

Russia has imposed export restrictions and is becoming a net importer of scrap.

Europe has always been a global source of supply and Australian scrap is primarily consumed in Asia and more recently the Middle East.

Therefore, the U.S.

becomes the place to shop for scrap in the world market.

In addition, domestic steel mill demand remains strong, as a result of reduced steel imports and the growing percentage of EAF mills operating today.

This tight supply situation has been exacerbated by a sharp reduction in industrial scrap generation, especially in prime grades.

High quality automotive scrap flows are down sharply as a result of the American Axle strike and lower auto production with no end in sight.

Obsolete scrap flows have been off during the winter, despite high prices, but are expected to increase based on seasonal factors going into spring and summer.

This may take a bit of the pressure off but may also just fill the gap created by the continuing shortage of prime scrap and export demand.

Non ferrous shipments of 240 million pounds reflect steady volumes that translate into an annual pace of almost 1 billion pounds which would be a record year for OmniSource.

Scrap flows are steady, also related to record price levels for copper and aluminum, although non ferrous markets remain highly volatile.

Current non ferrous markets are influenced by the same factors as ferrous markets, strong export demand, especially in Asia, is driving copper and aluminum prices and short supply in the U.S.

is affecting flows into domestic consumers.

We do not see any reason for conditions to change in the near term.

From an operating point of view, our efforts to integrate processing operations are ongoing with Tennessee and Virginia transitions going quite smoothly.

We expect the new shredder in Indianapolis to be running late in the second quarter or perhaps very early in the third quarter and continue to evaluate additional opportunities to expand our processing activities.

Keith?

Thanks, Danny.

Theresa, would you like to provide some financial highlights.

Yes, thank you, Keith.

Good morning, everyone.

I'll just take a few minutes to bring about some financial aspects to the quarter and give you some guidance for some aspects of 2008.

Regarding working capital comments, and you'll notice that accounts receivable did increase substantially but what I want to let everyone know is that in spite of some of the the worries in the credit markets, our days outstanding actually decreased from quarter-to-quarter and we still have a very good aging of the receivables so we're not concerned from that perspective.

Our inventories also decreased slightly which might be surprise to some given the cost structures.

That accrued due to reduction in volume of raw materials and an increase in some volumes of the finished goods of the increased costs.

Capital expenditures for the quarter were $94 million, about 67% of that was related to steel mill operations and 40% of that was related specifically to the addition of the second rolling mill in the in the (inaudible) of the structural rail division.

For the full year of 2008 inclusive of the first quarter, we're currently expecting capital expenditures to be in the range of 400 million to $450 million.

These are revenue generating projects that we have in line.

Some for completion in '08 and some for completion in 2009.

The larger projects are the completion of the structural and rail division second rolling mill in caster for approximately 135 million to $145 million.

The Mesabi Nugget project for 2008 we expect to spend approximately 120 million to $130 million and the scrap operations we expect to spend approximately $75 million for different developmental projects there.

For depreciation and amortization for the quarter, we had $53 million.

For the remainder of 2008, I would estimate somewhere between 45 million and $50 million a quarter.

Goodwill and intangibles changed slightly.

We're still refining our final purchase accounting for OmniSource.

We're almost there.

Currently we have amortizing intangibles of about 200 million related to OmniSource with average lives of between 10 and 25 years.

For an ongoing amortization number of our intangibles I would model somewhere between 7.5 million, $8 million a quarter.

Our effective tax rate for the quarter was 38% versus a full year 2007 effective tax rate of 37.4%.

The increase is related to some items in our state -- our actual state tax planning.

I would use that on an ongoing basis as well.

During the quarter, from a liquidity perspective, at March 31, we actually had $147 million at outstanding on our revolver.

But on March 31, you may have seen that we raised an additional $218 million on our senior secured facility.

That was comprised of $124 million in additional revolver capacity, so now our revolver, instead of $750 million revolver, is actually an $874 million revolver.

And we increased our term loan A by $94 million for a total of $218 million.

In addition to that, in April of 2008 we actually raised $500 million in the high yield market.

It's a term of eight years, four year non-call, due 2016 at 7.75%.

The interest on on ongoing basis for the quarter was actually gross interest of $35 million with capitalized interest of 5 million.

I would anticipate gross interest being around the $40 million range on an ongoing basis and that does not take into account capitalized interest.

Other income for the quarter was $7.8 million.

$6.7 million of that was actually related to earnings from equity investments in certain ferrous resource companies.

From a share perspective, we repurchased just less than 2 million shares on effective stock split basis for $46 million in early January.

Our current remaining authorized shares for purchase are 4 million shares.

Our treasury shares at the end of the quarter were 29 million, at an effective cost of $17 per share.

Our outstanding shares at the end of the quarter were 189 million, and we still have convertible securities outstanding of 8.5 million shares and we have options that are exercisable of approximately 3 million shares.

If you are trying to estimate maybe for the second quarter what shares may be, I would suggest somewhere in the 200 million range.

Some details regarding the Flat Rolled shipments for the quarter, our hot rolled shipments were 305,000 tons.

Our pickle and oil shipments were 38,000 tons.

Cold rolls, 56,000 tons.

Hot rolled galvanized, 111,000 tons.

Cold rolled galvanized, 86,000 tons.

Painted products, 62,000 tons.

And Galvalume products 27,000 tons.

And just one quick comment regarding exports, I know we've talked considerably about that this morning, but less than 5% of our net revenues actually came from exports this quarter and approaching 50% of that was regulated to the non ferrous materials that Danny mentioned from our OmniSource operations.

Keith?

Thank you Theresa.

I think we're ready for the Q&A.

Great.

Thank you.

Today's question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) We'll take our first question from Timna Tanners, UBS.

Yes, hi, good morning.

Wanted to ask about what your scrap assumption might be into the second quarter a little bit more, to reflect the fact that your inventory numbers went down.

It sounds like that might mean that you might have a scrap price reflection that would be a little closer to what we're seeing in the spot market.

Can you comment on that, please?

Well, clearly they're going to go up during the quarter.

I don't know that I have a handle on the scrap numbers that went into the model.

But I think that last month you saw the numbers were fairly aggressive in the market.

I think with demand remaining strong, they're going to be, again, -- not going to be as significant, the direction is probably still up.

We'll let Danny comment on that.

Most of the resource material that we've baked into the forecast is already known to us in terms of what we have on hand and can melt in the month of April and May.

So the unknown piece that you really have to take a stab at is June and I think we've modeled -- initially we thought that the obsolete material might actually go down a little this coming month I suppose there's still a possibility that that would happen, but not a likelihood that it would happen.

And the material.

as Danny said is still somewhat constrained and is likely going to be bit up again.

But Danny, can you comment, provide any further color?

Ask

Sure, Keith.

We believe that export will remain strong through May and perhaps into the summer.

We know that well over 700,000-ton has been already booked for shipment to Turkey in May at levels that would have been reflective of mid-to high $500 shipping point price on the Coast.

That would be for obsolete scrap.

I think we are expecting obsolete flows throughout the U.S.

to increase quite dramatically over the summer, which would allow the export demand to be satisfied and still allow domestic mills to consume what they need.

The wild card in the ferrous market, though, remains the prime scrap situation and we could see that go either way.

If there is an extended -- a further extension of the American Axle Strike and the Automotive prime scrap production remains at current levels, we could see that continue to remain tight, very tight, and drift upwards.

If that strike is settled any time soon and production resumes and prime scrap flows then it would come back onto the market and relieve the pressure that we see, especially in the Midwestern part of the country.

So I think I would agree with Keith that our models reflect probably pricing to remain high.

We haven't forecast a tremendous increase or a tremendous decrease and would say that that is as hard to predict scrap prices today as it is the weather.

So.

Fair enough.

I guess what I was looking for was something a little more concrete in terms of the impact on your segment for steel mills?

So if we look at the scrap price increase that you discussed, you talked about a $50 increase Q1 over Q4 whereas the number one heavy melt price probably went up closer to $90.

So as we see Q2 over Q1 at least $150 or so, I mean, I just was wondering if you could give us a little bit of guidance in terms of modeling for the impact on your steel mill segment?

Well, obviously since we're seeing -- we think we're going to see better margins in Q2 and that's baked into our earnings forecast, you would have to conclude that the pricing that will exist in the second quarter will outpace the cost of resources.

I usually am prepared with that, but I don't have it in front of me right now now..

I can't tell you what I think's going to occur there.

I mean I think it's -- the margins are going to grow.

If you give us a minute, we may come back to that later in the call.

Theresa is going to go look at what activity we have built into the model.

Maybe we can provide a little more specific color.

That would be super.

Thanks, Keith.

We'll go next to Chris Olin, Cleveland Research.

Good morning.

Good morning.

Just a little clarity on the non-residential construction part of your business, looking at the beam side.

I apologize if you covered this, but I missed an earlier portion of the call.

Can you talk a little bit about your visibility into this market, if you're hearing anything about cancellation of projects related to material costs, how comfortable are you looking third quarter and beyond?

Well, this is Dick Teets, I'll give you a little bit of color on that.

I would tell you from a beam perspective we have not seen cancellations of projects or even delays due to the escalating price of the product.

About the only place we may see a little bit of that might be from our New Millennium building system.

Their non residential construction activity at this time quite a bit of it is schools.

Many times schools, they go out, they get the architect to do their engineering work, they get the bids and then they go out and get bonds and when the bonds come in, they have a value and then price of the product like ours goes up, reflecting current costs, sometimes there's a crunch going on and the schools are delaying some of their construction activities, having to decide what to do about the actual expected costs currently versus what it was when they went to market with their bonds.

So there's some delay in that market.

But from a beam perspective, we haven't seen any slowdown.

Thanks.

We'll go next to Bob Richard, Longbow Research.

Good morning and thanks for taking our call.

Good morning, Bob.

I appreciate your comments, Mr.

Busse, on the shortage of Flat Rolled, if you will, more of a supply than a demand issue.

Would you say that the shortage is more acute on galv than the lower value products?

This is Mark Millet.

I would suggest that hot band would be our -- from the arenas that we serve is the tightest currently.

Wow.

That is contrary to what I would have guessed, based upon your galvanized shipments, if I heard Theresa right.

Well, I think the question was where do we see the greatest tightness.

I'm not suggesting that demand is not strong.

It's very strong.

But there appears to be more opportunity on tha spot market currently than anywhere else.

Fair enough.

One quick follow-up, if I could.

I don't want to beat the non ferrous to death, but traditionally did OmniSource export a fair share of that or was that traditionally consumed domestically?

Our export of non ferrous has grown steadily over the last seven or eight years as the demand for aluminum and stainless has grown in China.

So I think what we're seeing today would be fairly typical of what we've seen in recent years.

Okay.

And could you offer a mix between what domestic and export business is for your non ferrous?

Oh, I would say probably -- this would be an approximation.

Over 80% of our business would be domestic and not more than 20% export.

Okay.

Thanks for that and great quarter and best of luck.

Thank you.

We'll go next to Brian Yu with Citi.

Great.

Thank you.

My question relates to energy costs, Keith.

And can you refresh our memory on how much energy constitutes of your total non-metallics costs, how much is electricity, what's natural gas and what might be protected under long-term contracts?

Mark, you're probably in a better position to answer that than I am.

From a protection standpoint, at least, electric power, electrical energy is negotiated five year term contract at reasonable rates.

I think it appreciates up to a maximum (inaudible).

In the natural gas arena, we probably hedged about, over the next probably six months about 30, 40%, I do believe but with the gas market at (inaudible).

You don't necessarily want to be hedging too severely there.

Great.

Then one other question that has to do with pricing.

We're just kind of reading in the trade presses that some of the mills are going back to the customers and layering on surcharges on previously booked orders because of the rapid rise in scrap prices.

Are you guys doing the same thing too or just waiting for the old orders to fill before the new prices take effect?

On the sheet side of our business, we are -- lead times are incredibly short.

We only went after May business a week ago.

And that's intentionally to try to take into effect the volatility of the scrap.

So before we go out for business, we know what the scrap market is going to be essentially, at least within some degree of certainty, I would say.

And so in our pricing it's already built in.

Okay.

Great.

Thank you.

I might just -- I think our energy costs, at least from electrical energy perspective, Brian, were probably about 4%, somewhere in that arena, would be my guess.

Maybe 5.

And of course with prices moving up significantly, it becomes half of that.

Prices have darn near doubled in the last six months so energy certainly is not -- as Mark said, we have a very good contract I think at butler, which is the primary consumer.

Dick, you might want to comment on where your energy has went recently.

Really, Pittsboro and Columbia City are the two that are exposed to market pricing.

Pittsboro has a defined calculation that their energy provider whereas Columbia City is out in the open market, buying on an hour by hour basis.

We do hedge.

We have layered in a 15-megawatt package for the year, just for a base load for rolling mill and ancillary equipment and then we buy -- we do have about half the year purchased out for the melt shop and then the balance of it is in the spot market.

We use that as a strategy.

Same philosophy as in Butler, although executed independently on a natural gas basis, that we have up to 36 month hedges, most of them are in the short term.

He wanted to get through the different seasonal aspects from exposure standpoint from hurricanes and Gulf Coast items.

I guess the only point I was trying to make earlier was the percent of our cost of production for energy obviously is diminishing by a percentage from a percentage perspective due to the rapidly escalating revenue line.

Timna, I do have, if you're listening, a rough number for you for the second quarter.

We think scrap will probably be up at least $130 a ton on a quarter-over-quarter basis.

So that might help you a little bit.

Prices will be up more than that, obviously.

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

Good morning.

Danny commented that higher price benefited OmniSource's results, which I'm sure it did, but there may be a lot of subtle value added contributors, the non ferrous recovery, shredding and separation, agency services like brokering the auto auction monthly.

There might be incidental services, not the same, but in the vein of a hecatur, international mill service or logistics or other services provided to CML customers.

Could you try to venture how much of the OmniSource profits are aside from the price of Steel Scrap rising, whether a third of the profits are sort of the other and higher value added stuff?

I don't want to oversimplify the fine quality of OmniSource just in terms of the price of scrap rising.

I don't know that the margin -- we'll let Danny answer as well.

The margins on the brokered material for the Automotive lists, they're just that, they're margins.

So they're not going to expand all that significantly in high growth periods like that.

Obviously, people in the processing business buy much of their prop wares off (inaudible) or middle market, or rim docks, some indices that they are tied to.

So therefore there might be an early quarter advantage prior to major changes in indices impacting that margin, but obviously obsolete margins tend to broaden rather significantly during times like this.

I don't know what percent of our -- of Omni's earnings are non ferrous but it is to your point a significant number.

Their results are very good.

Danny?

I would say we haven't looked at it quite in the way that you've asked the question, John, but approximately 60% of our contribution comes from ferrous and 40% from non ferrous.

As Keith accurately described, our management and service business, those are fixed fee contracts that are done over a long-term basis, unrelated to the markets.

So our income from that segment of the business is steady regardless of the market prices.

Beyond that we haven't really evaluated base business or separated base volume without any market change compared to movement of market, but historically, because of the lagging nature of both industries, the margins expand slightly in rising markets and especially when the markets move as dramatically as they have, though, (inaudible) in fact, converse if the markets are falling.

Thank you.

I hope that helps.

I hope that helped.

I don't know, we're getting a lot of static on our end.

I hope it's not affecting how we come through relative to answering your questions.

But there's a lot of static on our line.

We'll go to our next question, Aldo Mazzaferro, Goldman Sachs.

I'm getting the static too, (inaudible) the conference call again.

Are you still there.

Static bar is having more of an impact than we thought.

Keith, with all this -- it's amazing how you can get $130 scrap increase and the price goes up more.

Do you still talk about what your conversion cost is for hot band and if so would you mind letting us know what your thinking is now with all the alloy costs having moved and stuff?

Well, it's certainly north of $125 I think south of $150, somewhere in that area.

It does vary.

Mark, you want to take a stab at that?

On a strictly operating basis it's running about 126 to $130, Aldo.

Yes.

That's still excellent.

Thanks.

On your -- I got another question, kind of a broader question, Keith.

You know how the -- the capacity that's been announced in the industry recently in North America seems to be focused on structural steel, which is kind of surprising, since that's in my opinion, anyway, not as in short supply as Flat Rolled.

I'm just wondering, why do you think the structural market has attracted so much capacity and the Flat Rolled, except for Contra Core, fairly little so far.

I'm wondering what you think about the future in that, that trend?

Well, I think margins certainly were greater in that segment of the business for quite a period of time, although I would tell you the margin opportunities, it does change from time to time, are better in Flat Rolled and we recently haven't been able to recover the full cost of resource escalation.

So there's probably a little bit of margin compression going on there which I would tell you we have modeled.

I really think if you're referring to the activity at Contra Core, that's years away, given how equipment deliveries are in the marketplace, it may well be 2012 before you see a project like that really integrated into the market and then it's fairly remote from a delivery and freight perspective from where much of the tonnage is consumed on the North American continent.

Obviously, there was an announced project in Mexico and how much of that could find its way into this market remains to be seen.

But other than those two projects, I'm unaware of -- there's been some rumors that certain individuals looking at another project in this country within the 48 contiguous states, but even I would tell you that might be, given today's relative demand activity, pretty perilous.

Adventure, I know years ago when we got into the structural business, there -- certain individuals didn't think that there was room for SDI's entry into the market but the market did expand and imports contracted and there was more room.

Now, there's not much room for the imports to contract the markets, ahead of their own direction right now.

So right now if I were to build new capacity, we wouldn't be focused on that arena.

Obviously, we've done so with the expansion of Columbia City but that project was in the works for a couple years.

But we don't see any further growth there.

We're focused on opportunities now in the Flat Rolled segment of our business plan and with the kind of -- with the dollar being what it is and it may not see the kind of strength that it had in the past, there may well be opportunities for domestic growth in the Flat Rolled arena in the years to come, although given equipment deliveries again that's going to be some time in the making.

Could I ask one more question on the scrap market, maybe for Danny.

If you look at some of the big players around, Nucor is obviously trying to buy, Sims middle management is looking to buy from what we hear.

Exports are very strong.

I'm just wondering, can you give us an idea of what the -- what you see as the size of the market today and whether OmniSource is looking to grow beyond its current volume or do you -- ultimately, do you see OmniSource as a long -- long scrap, relative to Steel Dynamics' consumption?

That's our vision and as we look at opportunities, we expect to continue to grow our processing business domestically.

We may not have moved as quickly lately as some others, but I would assure you that we are in the game.

So other than yourselves, metal management or Sims Metal management and then Nucor's processing side, how much scrap processing capacity do you see left in the U.S.

market?

I think there are still some -- the scrap industry is still quite fragmented and there are some very sizable players, other than those that you've mentioned.

I think our current view of the domestic scrap market is somewhere around 6.5 million to 6.75 million tons per month and so there's still quite a bit available in terms of consolidation opportunity and geographic expansion as well as perhaps longer term involvement and more international business.

That 6.5 to 6.75, that includes the export market.

Yes.

That's domestic, including export, right?

Yes.

Thanks very much.

Aldo, we do plan to grow processing both by greenfield growth as well as additional M&A activity as opportunity presents itself.

So there are plans to specifically, you might say outrun our capability to consume as a Company.

Right.

I see.

And that would not be the case if you built another flat roll mill though; right?

No.

Okay, thanks, Keith.

I think we've lost -- what did we lose, Danny?

The webcast.

They're having trouble with the static on the webcast.

are you there.

Yes.

We'll check into that.

Okay.

We do have more questions in the queue.

Go ahead.

Mark Parr, KeyBanc Capital Markets.

Hey, good morning, Keith.

Hi, Mark.

Congratulations to you and your team.

Great quarter.

Good quarter.

Thank you.

Yes.

One part of the resource question that you haven't addressed is pig iron.

I know what your long-term strategy is, but over the next -- what's your current situation on pig?

I know there's been some supply constraints coming out of Brazil.

Is that something that could hit your cost to a greater degree in the second half of the year?

Probably not so much this year, Mark.

I think looking back on it, we wish that we would have went out for a boat or two when it seemingly was very pricey at $500 some a ton, wish we had snagged another boat or two but we didn't.

But I think we have enough pig on the ground and with IDI operating at a higher level to gets through this year.

That will leave us some exposure into an unknown universe relative to the price of pig in '09.

Okay.

And obviously we're very hopeful that Nugget gets cranked up by the middle of the year and could fill some of that gap that may exist between our stocks and our operating activity.

So there could be a period where we have to go into the market, market prices and it could impact to some small degree our input costs.

But I don't think that it would be all that large.

We're not consuming all that much pig.

Given the performance of IDI, they're operating at -- we're probably consuming 2 to 3% in the way of bricks, which is pure virgin, plus the liquid at about 6%.

So we're getting up there at a comfort level with our own internally-generated iron, plus substantial stocks on the grounds.

But those will be depleted by the end of the year and we're certainly going to need to order a boat or two here later this year.

If I could ask one more question on a different topic.

On the M&A front, you've done a phenomenal job of growing the business, in addition to all the organic momentum that you built in the first decade of the Company's existence, and I was wondering how you're feeling right now about M&A or organic growth outside the 48 states?

Have you changed your view, thinking more aggressively, moving outside the U.S.?

Have not really, do not have a major focus in that regard at this point in time, Mark.

As I said earlier, if world market prices remain in demand, world market demand and pricing remains high and the dollar does not strengthen substantially, I really think there's -- it creates an opportunity to grow domestically.

Just thinking, one of the thoughts in the back of my head, and I'll just close with this is, we're -- if we're going to export as a market, 17 million tons of scrap, I mean, wouldn't the value to this country be better if we could convert that scrap into steel before we export it?

Well, we would like to not see so much of it go offshore, but obviously we're happy about exports in finished steel products and lack of imports, which have been Dennis the Menace over the course of the last so many years.

So it's a two-edged sword.

There have been a lot of people that have talked to me openly at conferences about geez, they're going to form a coalition and try and keep more scrap at home.

It's one of America's strategic resources and we shouldn't be exporting.

I mean, those kind of activities are going to go virtually nowhere as I see it at this point in time.

We still live in a globally competitive universe in a free country and I don't think we're going to see constraints there.

Okay.

Well, anyway, congratulations on the great execution and look forward to talking with you again soon.

Thank you.

We'll go next to Michelle Applebaum, Michelle Applebaum Research.

Hi, guys, it's actually Nate filling in for Michelle.

Great quarter.

Thanks, Nate.

I was wondering if you could give us the quantity of steel exports in the first quarter?

If you could provide a breakdown of the products that you shipped?

And then your plans for what products you plan to ship in the second quarter?

And then if you can give us an idea of export margins versus domestic margins?

Boy, that's not a subject we've addressed and I don't think we care to comment on it, even if we could.

Theresa may have something specific for you.

But it's such a small piece of what we do, it tends to be rather irrelevant.

Theresa?

Nate, as I mentioned earlier, we had less than 5% approaching $90 million in net sales were exports, so it's very small.

Of that, approximately 45% went to what's related to non ferrous materials that went predominantly to Asian countries and then the rest, probably another fourth of that came from the long mills from the structural mill, actually and that was more in the line of Canada and Mexico.

There's nothing of great substance.

Okay.

And so I mean, build up prices are over $860 a ton in the world market.

Is that something that you had planned to export in the future?

We, with the continued weakness of the dollar, I think Pittsboro especially will export -- I don't want to say a substantial quantity, but a decent quantity of billets abroad.

We are -- just for the color on that, we currently are shipping to Scandinavia, Germany and Italy at this current time out of Pittsboro.

All right.

Great.

Thanks, guys.

And then also, I just had a quick question about SBQ demand and the new capacity that Nucor is bringing on.

They said they're going to start casting in June.

Do you think that that new capacity will be able to be absorbed by the market and then if you can give any color on any impact the American Axle strike's having on the SBQ market right now?

Well, needless to say, any time someone brings additional capacity on, the market will have to readjust.

They're already out -- needless to say, making their preliminary sales calls and so forth and we recognize that's going to happen.

We do have, in that market a extended qualification period.

Anyone who goes through it.

And so we expect that to apply some fresh pressure to the market but we're not overly concerned but we have to recognize it's a fact of life.

But again, given the export opportunities, there will be some adjustment made by all of us as to percentage of product output that's domestically consumed versus an export.

The American Axle strike, we are not -- we haven't been affected by it.

We're supplying some material to AMN, but they took all the product that they held on the books.

We have a backlog from them.

And they've told us not to produce any and so we aren't in any way held up with products stuck in inventory, either semifinished or finished due to them.

So I think it's business as usual.

When they get back to work, we expect to go back to supplying them and hopefully grow that a little bit as we had intended to prior to the strike.

All right.

Thank you.

I think if the dollar remains weak and I don't see it strengthening in the short run, there will be considerable opportunity, not just for billet export activity but for finished tonnage.

We're talking to several trading houses about exporting greater quantities of SBQ abroad.

It's liable to open up some market opportunities for all of us that aren't there perhaps with the weak economy right now.

All right.

Thank you very much.

(OPERATOR INSTRUCTIONS) We have a follow-up from Timna Tanners.

Hi, just a quick question for Keith.

I followed your math on the guidance discussion for the full year but any particular reason why you wouldn't want to revise your outlook for 2008 at this time?

I think we've said enough about it.

I think the approaching three -- who knows what could happen by the fourth quarter, Timna.

So I think we'd rather been a little cautious right now.

We've more than once said that we thought we were in the -- on the old basis, the high fives, on the new basis that would be approaching $3.

And we're not trying to send a negative message.

We believe we have very positive message about the second quarter.

I don't know that third quarter results will be any worse and you have to draw your own conclusions.

I think we actually modeled a tighter fourth quarter, just to be conservative.

But we still continue to see us in the $3 zip code on a split basis, which I think is extraordinarily good performance.

I hope you were listening when I said earlier our scrap input costs should be up at least 130, could be a little higher than that, could be 140, 145, but somewhere between 130 and $140 a ton is where I would expect the increase on a quarter-over-quarter basis to fall out.

Okay.

That was really helpful.

Thank you.

There are no further questions.

At this time I would like to turn the call back over to management for any additional or closing remarks.

Thank you.

I'm sorry we lost a few of the people in the webcast.

I hope that's returned.

As always, very good questions from the audience.

We certainly appreciate the following we have.

I want to take this opportunity to thank the 6,000 employees of Steel Dynamics for just doing a bang-up job, a terrific job.

Thank you for your efforts and we'll be there supporting you every step of the way.

Thanks.

This does conclude today's conference.

Thank you for your participation.