Steel Dynamics Inc (STLD) 2008 Q3 法說會逐字稿

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

Today's conference is being recorded.

Joining us are Keith Busse, Chairman and Chief Executive Officer; Richard Teets, President and Chief Operating Officer, Steel Operations; Mark Millett, President and Chief Operating Officer, OmniSource Corporation; Gary Heasley, Executive Vice President, Strategic Planning and Business Development, New Millennium Building Systems; Theresa Wagler, Chief Financial Officer; and Fred Warner, Manager of Investor Relations.

For opening remarks I would now like to turn the conference other to Mr.

Fred Warner.

Welcome to today's Steel Dynamics conference call being webcast today October 16, 2008, from Fort Wayne, Indiana.

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

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 website www.sec.gov and on our website, steeldynamics.com.

After today's management discussion we will open the call to questions from participants who have informed us they may wish to ask questions.

Today's call will begin with remarks by our Chairman and Chief Executive Officer, Keith Busse.

Thanks, Fred.

Good morning, ladies and gentlemen.

It's our pleasure to be with you this morning.

And to highlight the operating results that Steel Dynamics had during the third quarter of 2008.

I think as you saw in the announcement, our earnings per share, which as one of the key focuses, was $0.98 per share, which was down about 8% sequentially from the $210 million, or $1.05 per share that we reported in the second quarter.

I think somewhere in the early morning press I read in one of the research reports that was reported it's a soft quarter.

I would hardly say that it was a soft quarter, in that this was the second best quarter that Steel Dynamics has ever reported in its history.

So it was not the quarter we had hoped for, and I think in the body of this report we went on to offer as much information about the quarter and the uncertainties that face the steel community on a go-forward basis as we possibly could, as this press release was a little more detailed than many of the releases we've had.

One of the things we wanted to emphasize was the fact that our cost structure, and I noticed our friends at Nucor emphasized the same thing, and they are probably the only other company in this space that has a variable cost structure similar to Steel Dynamics and they had excellent earnings results in the third quarter, and kudos to Nucor for that.

But our quarter could have been, in my opinion, a record quarter for the Company and the principal miss, if you will, was really related to our scrap operating unit.

And our prognostications of July of this year, we, as you can see from the operating segment data, OmniSource had a record third quarter.

And that's in spite of a very nasty September.

And no one that I know of could have ever forecast that scrap was going to take the sharp drop that it did in the late August/early September time frame.

I think people thought the market was going to come down somewhat, but I don't think anyone saw $300 crash in the pricing of prime grades.

It's just unanticipated.

So the earnings that we had forecast for September of this year were at the same pace of July and August.

And obviously when you are buying material, throughout the month of August that you are going to deliver to your clients in the month of September, and the price falls $300, there's going to be trauma during that period, and there was, and as we reported, that had about a net of profit sharing, net of taxes, about a $0.12 effect on our earnings.

Of course, if you do the math there, and add that back to $0.98, you end up with $1.10, right about in the middle of the range, although I would remind many of you who are listening who attended many of the fall conferences that we guided to the very, very low end of our announced July range.

And we generally don't correct those numbers even if we have visibility into them, if the miss is as narrow as this.

So I think we had a really good quarter.

When you look at the impact on the steel unit, operating units, we missed our shipments a little bit in September in the structural division for a wide variety of reasons.

Couldn't get railcars, et cetera.

Really wasn't that big of a deal.

But obviously in the flat-rolled universe we missed our shipment forecast in September considerably.

So there was some net effect of that, probably on the order of magnitude of $0.05, $0.10 a share I would tell you.

When you look at all these collectively, had September been as advertised, or as forecast, and had scrap not come down as materially, we might well have had a record quarter.

But that's history, that's the past, and we've tried to talk a little bit more about what's going to go on in the future because I think that's what everyone is really concerned with today.

You can read all the data about where our steel shipments were.

They were 12% lower than the second quarter, and that -- that weakness is primarily flat rolled and primarily September related, if you will.

As it regards shipments in the merchant bar structural arena, they were either up to sideways kind of activity and probably will remain fairly strong as we March forward through the fourth quarter.

Maybe off a little bit in the fourth quarter, but probably not materially from a long products perspective.

OmniSource ferrous shipments were 1.8 million tons, which is up about 17% compared to the second quarter of '08, but, of course, shipments are one thing and results are another, and as I said earlier, September was a difficult month for the recycling community in general.

Not just OmniSource.

Iron Dynamics continued to operate well during the quarter and reported a very nice profit during the quarter.

Should remain profitable, although the price it receives for its output does vary with market circumstances, so profitability may well regress a little bit in the Iron Dynamics arena, but that's really not all that material to our results in the end.

Wanted to point out that scrap yard inventories typically are three weeks, maybe four weeks, sometimes two weeks, they're all over the map, but we -- so we had an impact in September, and obviously with scrap prices falling substantially now in the month of October, there's going to be another sort of upside down effect or another tough, difficult month for recycling in the month of October, although we expect that their earnings will come back in the November/December time frame.

But, of course, volumes of shipments could be lower because it's expected that demand for their products will be lower.

But they should be back in a profitable zip code with normal margins, and we would expect anticipated further improvement in the first quarter of '09 and throughout the year '09.

And as I said in the release, the -- sort of the bright side of all this is there's been a significant drop in the cost of raw material inputs, and that's been very, very good for the -- for the steel business in general, from a cost of inputs perspective.

We think in the fourth quarter that pricing and the volume of steel production shipments in that quarter will depend on the tenor of the market at any given point in time.

I think we would tell you -- we wouldn't tell you anything different than anybody else has.

We're living hand to mouth in flat-rolled.

We live from day to day to day to day from an order back perspective.

It's altogether different in the long products business.

We have still good backlogs there in structural and a decent backlog in bars and a decent backlog in the SBQ arena, so on and so forth and we would expect those businesses to continue to perform rather well on a go forward basis.

The issue will be flat-rolled, and it's impossible to predict where we're at, although in our forecasting and modeling, we gave -- I guess the best signal we could, we expect our earnings to be about, about being the key word, half of what they were in the third quarter.

But I would point out to you, if about means about half, then if you annualize that earnings rate, that still annualizes to -- or is equivalent to the second best year that Steel Dynamics has ever had at the very bottom of a trough.

So we, as you know, withdrew our guidance.

I think that could have easily been achieved had the marketplace not literally fallen apart or imploded during the fourth quarter.

You might ask, is it the economy?

Is it demand?

I think we'd all concede that demand has considerably weakened in the commodity universe, if you want to call steel a commodity.

A lot of value-added with regard to steel products, but it clearly has weakened.

But I don't know that it's weakened to the degree that order entry reflects.

I would guess that in our personal lives, we've looked at liquidity, and we've -- a lot of people turned the personal accounts to the cash fearing uncertainties in the marketplace.

And I don't think it's any different in the business universe.

There are orders from headquarters out there, so to speak to reduce inventories.

And inventories at the end user level are probably at all-time record high prices, and there are expectations in a recessionary period that prices will fall.

And so people are cleaning house, turning inventories into cash, and they were already fairly low, and they are going to get lower as the buyers, for some period of time, continue to sit on their hands.

But all is not lost.

They will return.

I can't tell whether they're going to return in November or they're going to return in December or return in January.

They're certainly not going to return at 100% of the level they were at.

And I saw some research this morning that would suggest that we may operate, the industry may operate it was suggested at a 75 to 80% level next year just due to economic circumstances.

I don't know that I have any quarrel with that.

I would tell you that's exactly what we modeled, essentially, is that kind of activity.

And it seems like all we're doing these days is modeling, modeling, modeling, but we've modeled any kind of scenario you can imagine, from capacity to 75% of capacity to 40% of capacity.

And I don't think in our wildest dreams we could ever imagine a situation where we're going to operate at 40% of our capability, but it's kind of a fun exercise to model, and I might tell you, for those of you that fear harm to our earnings, that even at 40% in flat-rolled, operating level, even at 100,000 ton operating level, you can't drive Butlers to a loss.

I repeat, you can't drive Butler to a loss.

Now, that statement is beng made with the caveat that resource costs remain very soft.

And I can't imagine with an economy that soft that that's what we all think it's going to be, that resource costs are going to go up.

They're just not.

This may be a very bad year in the resource business.

Probably going to be followed by a very good year in '010, or if the economy turns in the spring of this year, or midyear, it's still possible that there could be very good returns in the resource arena.

But if it remains as soft as it has been, resource costs are going to remain soft, and when they do, when you couple that with our conversion costs, I don't think there's anyone out there in this industry that can stay with us from a cost of production perspective, save only Nucor, whose culture is similar and whose variable cost structure is similar in nature to ours.

I had breakfast with a gentleman this morning who made an interesting observation.

He said, Keith, he said, you guys may well actually perform better in a distressed economy than you do in a vibrant economy.

And I said, that's probably true.

I said, in a vibrant economy, our resource costs tend to rise sharply.

So do selling values.

And it's nice to be able to cherry pick the upper end of the market and have the kind of great margins and $200 a ton operating profits we had.

But our best ability to compete is probably in a different zip code.

When times are really, really tough and resource costs are tough, we can, and you've heard me say this, we can convert scrap metal or inputs into our furnaces from a flat-rolled perspective, for, on a vanilla basis, $125 a ton.

On an alloyed basis with the exotic kind of products we make, maybe $145 a ton.

That kind of number.

Loaded with the kitchen sink, including all of our corporate costs if you allocated it all to everyone, even though we do, I'd be mindful to everybody, when we talk about our pretax income and our operating units it certainly includes depreciation and amortization and also includes interest charges.

So when I said earlier you can't cause Butler to lose money that includes interest, folks.

At 100k level.

So we have an awesome cost structure.

It is variable.

And I hope this recession doesn't last very long, but certainly when you think you've got resources in the $200 arena, the cost of inputs, and a conversion cost in the 125, $140 arena, I don't think there's anybody out there that could make the claim we can and I'll let you guys do all the math on the spreads.

I haven't seen any pundit prognostications that would suggest that hot pans are going back to $400.

I haven't seen anything like that, and you haven't, either.

And I don't know where they are going to be, but you can take the worst prognostications out there today on the -- in the pricing environment, and couple that with the kind of carnal knowledge you are now armed with, relative to cost of making a hot band and you could imagine that spreads could actually expand during that time frame for Steel Dynamics and results could actually get better.

So when we said in this report that it's not unreasonable that we could have a good year in '09 I think that's exactly right.

It's not.

We could actually have -- and I wouldn't quarrel with where everybody's at in terms of looking at 2008.

I'll let you be the judge.

But what I read this morning, I wouldn't quarrel with those numbers.

So 2009, given the resource costs remain soft, and in this kind of business climate I think they will, we could have another -- we could have a better year in '09 than we actually have in '08.

It's not an unreasonable assumption.

Nobody has a crystal ball.

You can't look out that far.

But I think for all those people that were panicked about what's happening to selling guide and happening to volumes and whatnot, I think we are better girded to live through all that than almost anybody out there.

I think we have one of the best, if not the best cost structures.

We have a good balance sheet.

Certainly not a balance sheet as strong as Nucor's, but for those of you who worry about things like that we'll let Theresa address that when she has an opportunity to speak with everyone here this morning.

There's also been some early morning press about, oh, jeez, these guys' operating costs, or conversion costs were up.

I don't think there's any way to measure that.

That's got to be -- there's just some errors in thinking out there.

Our operating costs, although higher than Butler's in other arenas, by the sheer nature of the business, wouldn't come anywhere close to the kind of numbers I was reading.

And I think the mixup probably comes from somebody taking an average selling value and subtracting an operating profit of $200 a ton and arriving at cost structure and making all kinds of assumptions about what makes up that cost structure.

Well, first of all, that cost structure is dramatically affected by the likes of the taxes, where they purchased substrate, it's dramatically affected by value-added products, and we ship more value added products in the third quarter than we did the second quarter or any quarter, for that matter.

We had more success in that arena.

So it's not that simple of an exercise if you make the wrong assumption on resource costs, you end up with a bad answer.

And let me just say that from a cost of conversion perspective I think we're in great shape.

And I don't think resource costs, unfortunately, they may go down again in the month of November.

Likely will.

I think there's huge amounts of scrap sitting around out there that didn't get taken off the shelf this month because demand activities at the mills, ours included, everyone's included, was very light.

So you could see a further softening in that arena, and for those who like to think about things, dream about things like people going long in December and creating a panic in scrap, I don't think that's going to happen.

We have no intention to go long.

It's not planned.

We're no different than middle management from execution perspective.

So I would tell you that although there might be an opportunity with changing circumstances for scrap to rise next year, I would, number one, hope we're not going to see the kind of volatility that we've seen, and number two, if the economy is as bad as some people think it might be, and everybody's operating rates are going to be down, then there's very little opportunity for scrap to rise, and I would tell you our cost structure is just in great shape, as you measure it against any kind of pundit prognostications about where pricing may or may not go.

So as I said in our press release, I think our shares -- and I don't mind saying it, everybody's shares, for that matter.

I just can't believe what's happened to the steel community.

If you talk about an oversold universe of panic, and I think a lot of that has to do with the hedge funds or more kindly said, momentum stocks and when people bailed out of commodities, Buddy, they bailed out, and with a lot of horsepower, and they've drove this thing to almost a silly level where I think we, yesterday were below our actual book value.

So I think the shares are just truly way, way oversold.

I'm going to let Dick talk a little bit about steel, Mark talk a little bit about scrap.

We'll get into the Q&A.

I do want to point out again that our operating profit in our steel operation was $200 a ton.

Not bad.

And although I think the fourth quarter is going to be a dark quarter for everyone, I think we all have to look through that.

I think the first quarter will be an improved quarter.

Now, what does improved mean?

I don't know.

I would guess it's going to be better than the first quarter of '08.

That's my thinking.

And I think the year could be better than the year '08.

But we'll wait and see, and we'll give you more guidance on that as time goes along, and we have a better view of it.

But $200 operating profit is still one of the best in the industry today.

I think our selling values were higher than the average bear's.

I think our team has done a good job.

I think our people do an excellent job.

Need to remained all of you, too, that our employees suffer during times like this because their income is tied -- is variable in nature, and more of their W-2 earnings are related to bonuses, which they are not earning, than it is to base pay.

So everybody is suffering here during a time, it's kind of share the pain time.

But I think we're going to be back and back with great horsepower in the year '09 in spite of the fact that we may be facing a recessionary period, and I certainly hope it doesn't turn into a recession.

I was a little disappointed last night as I listened to the debates that there wasn't more conversation about the impact of -- on the Presidential race of a candidate who might want to raise the capital gains tax rate.

There's a lot of things that this economy and the world is dealing with, the housing crisis, the mortgage crisis, the financial crisis on Wall Street, China pulling back.

A lot on everybody's mind.

But, capital, infusion of capital into the markets, whether it's a bond market or the stock market, people's ability to earn a long-term capital gain on their investments is one -- clearly one of the key engines that drive economic success in this country.

And I was disappointed candidates kept talking about marginal tax rates and whether or not there's going to be a rebate check for the poor and this and that.

I don't care whether you make $250,000 or $100 million a year or $10 million, whatever the number is.

If you earned it, you deserve to keep it.

Redistributing the wealth is a bad idea, and raising the capital gains rate is a horrible idea.

So I'll get off my political views here, but we've got a lot of problems out there, including people selling short into markets.

It's no time for short selling, and it just destroys value and causes fear and panic in a market where there doesn't need to be fear and panic.

So having said all that I'm going to turn it over to Dick for a few brief comments.

Keith, thank you very much.

Good morning, everyone.

I'd like to add a few comments about the steel operations in addition to what Keith and the press release have already covered.

At Butler I'm proud to report that the flat rolled division, after having achieved (inaudible) status in the voluntary protection program from IOSHA for their safety program well underway to achieving a Star status.

Butler is the first of our steel mills to participate in the program, and the first steel producing facility in Indiana with melting and casting operations to achieve it.

Other than Butler the major project that we have underway is our expansion to produce 3 million tons a year, and that involves replacing all four of our furnace shelves, with the deeper bottoms and taller side wall panels to allow for single charge opportunities and we're in the process of finishing the first two furnaces, then we'll look at doing the other two when the equipment comes in.

At techs they have substantially improved their safety performance by reducing both reportables and lost time accidents.

I'm very proud to say that NexTech has achieved a zero in both of those categories on a year to date status.

Congratulations to everyone.

In the long products arena, at Columbia City during the third quarter I'm happy to say the mill produced and shipped its 5 million ton since inception.

Also, their safety performance was exemplary with two minor lost time accidents achieved in over 330,000 man-hours worked.

From a project perspective, the number two rolling mill is up and running.

We're staffing at five days a week, 24 hours a day, and producing 8, 10, and 12-inch products.

Continue to expand those products as we do our roll pass designs and cut the rolls and the guides.

Also the number two caster is under construction.

The building foundations are complete.

The building steel is being (inaudible) and we're expecting equipment deliveries just after the first of the year with installation immediately following.

At Roanoke productivity was at an all-time high, and a record rate in spite of the numerous projects that were underway which tend to be somewhat disruptive.

Project there includes a replacement to our bag house system and also a scrap yard expansion to allow for more thorough inventory control.

In Pittsboro all three-quarters have been record shipments throughout the course of this year with our third quarter being our best ever.

Also our productivity was a record in all the operating departments in the third quarter.

Modifications to both the casters and the rolling mill are underway.

We're finishing the foundations with two new rolling mill stands as we speak and looking forward to the completion of those projects which will take our opportunity to produce up to 750,000 tons a year there.

Barr Finishing continues to make inroads into the oil patch market, highly engineered steel is a very high quality application, and we've been earning that business through high quality and delivery performance.

At Steel West Virginia, in spite of decline in transportation markets, in spite of decline in transportation markets they have been able to supplement their product mix serving other mark such as the RV and manufactured housing and merchant business.

Also, they have had record productivity in the number one rolling mill and the second highest quarterly productivity in number two mill in their history.

So very great performance there.

Thank you so much.

Keith.

Thanks, Dick.

Mark, couple comments.

Yes.

Thanks, Keith.

Good mornings everyone.

A special welcome to our employees that are listening in.

I guess it certainly has been an interesting time to transition my responsibilities to the metal recycling side of our business.

I take full responsibility in my two-month-short tenure for the $600 plunge in scrap pricing but fortunately I'm in good company to manage through the unprecedented times.

OmniSource organization, both in the Midwest and the Southeast is full of talented, passionate, dedicated people with a deep understanding of the scrap business.

We have assembled an excellent management team with broad operational and marketing backgrounds that will lead the Company toward continued growth and success.

From an operational performance perspective, first scrap shipments for the quarter were approximately 1.6 million gross tons, 1.8 million net tons, 17% over the second quarter, the increased principally due to the added contribution of Omni Southeast.

Nonferrous shipments were approximately 240 million pounds, a little down over the second quarter, 5% down from that prior quarter.

As domestic steel production was curtailed through the quarter and export shipments diminished scrap demand dropped abruptly resulting in that unprecedented drop of almost $300 per gross ton in August for prime grades for September delivery.

As you can appreciate margins were squeezed in September as scrap purchased at high prices flowed through the system and with another dramatic drop of roughly $300 per gross ton in October this margin squeeze will continue into the early part of the fourth quarter.

Nonetheless, inbound pricing has also dropped as spreads should widen back to normality in November or December.

Significantly the spread between bushelling and shredded scrap has backed off from an overbaked $290 per gross ton in July to an historically normal $20 to $30 in October.

The supply and demand environment would suggest, as Keith also suggested, the scrap market will remain soft for some months ahead, although I think everyone has a clouded crystal ball right now and the -- it's a little difficult to define the exact supply/demand balance.

There are many drivers at play.

On the demand side, a significant reduction in domestic steel production, a transition of BOF charge, or scrap charge away from prime grades towards a larger percentage of secondary grades, low export rates, mills trying to sustain cash, reducing their inventories and not buying, all contributing to a reduced demand position.

In contrast, supply is going to be curtailed somewhat by reduced demand.

It is going to be reduced by inbound, obviously, scrap manifest by lower scale prices is going to reduce the flow.

There's also a reduced flow of prime scrap from manufacturers and the automotive producers, hit by the economy.

Additionally some scrap yards are holding high price scrap awaiting a rebound and all these things will constrain availability.

But I think no matter what the outcome, OmniSource is in a great position for any eventuality.

Iron Dynamics continues to perform very, very well.

It has surpassed all previous production and safety records.

Q3 shipments, totaled 70,000 net tons for a record $26 million pretax net income.

I guess our vision, albeit perhaps several years premature, along with the patience and dedication of the team, is finally paying off, so congratulations to all involved there.

Mesabi Nugget project continues to go well.

A lot of the infrastructure is in place.

A lot of the buildings are being roofed in and should give us cover before the snow flies.

Permitting is going very, very well.

We had a great public hearing up there just recently.

And we still intend to produce concentrate by the end of 2010.

Keith.

Thanks, Mark.

Theresa.

Yes.

Wait a minute.

Before we get there, Theresa, Gary, you want to tell us a little about the world of fabrication?

Sure, Keith.

Thanks.

Yes, recently I have had an expansion of my responsibilities to include now New Millennium.

I've spent much of the last several weeks traveling around meeting the team.

It's an exciting thing to be part of.

This it's a great team with great equipment and we're very well positioned out there.

It's just great to be part of the team with Burt Holman and the rest of the folks at New Millennium.

That said the markets have been softening in the joist business for probably more than a year now.

We've seen bookings slow considerably for the industry in the recent three or four months with August being off by 36% for bookings year-over-year.

In the face of that, of course, we have completed the remodernization, the modernization of all the plants that were acquired in 2006 as part of Roanoke Electric when we acquired that company, and now we have the newest most efficient plants in the country.

So we are very well positioned there with a low cost structure.

We have a very variable cost structure as does the rest of SDI, and so the seas may be a bit stormy but the ship is well positioned to sail through them.

We are aggressively pursuing business and very actively going out to look for new customers and to go through this tough time with the most aggressive position we can.

Certainly as we see these markets strengthen over the next -- when they do come back, at some point in the future we will be very well positioned to earn great returns on these facilities.

So that is all there is to talk about right now.

Things are going as well as can be and frankly we have been very impressed with the performance of this team in what has been a continually softening market.

Keith.

Thanks, Gary.

I know there have been a lot of people that have add lot of conversations about our balance sheet.

It may not be as strong as Nucor's, but it's not in bad shape.

Theresa, want to talk a little about that and CapEx and any other subjects you care to elaborate on.

Thank you, Keith.

Good morning, everyone.

I'll just take a few minutes to discuss some of the quarter's highlights.

To begin with I know everyone is interested in the mix of flat-rolled shipments.

During the quarter we shipped hot rolled of 255,000 tons.

Pickled and oiled, 41,000 tons, cold rolled, 34,000 tons.

Hot rolled galvanized 78,000 tons, cold rolled galvanized 55,000 tons, painted 85,000 tons, and galvalum of 28,000 tons for a total of 576,000 tons.

Now on to some more specific balance sheet items.

Our accounts receivable days outstanding actually decreased during the third quarter to 45 days and it's really consistent with prior periods that between 90 and 95% of our accounts are current or less than 60 days outstanding.

We're monitoring, we always do, the credit worthiness of our customer base very aggressively and we believe that our reserves are adequate.

From a finished goods perspective we remain at about 20, 25% of our total inventory values being a part of finished goods.

Scrap inventories actually increased somewhat from about 35% of our total inventories in the first quarter to between 40 and 45%.

Keith suggested a significant amount of material is currently staying at the flat roll division and we expect to work through that throughout the remainder of 2008.

We expect significant overall inventory balances to decrease through both decreases in volume and value through the fourth quarter.

Our working capital is increased about $400 million during the first nine months of this year due to price and volume reductions we anticipate generating additional strong cash flow for reductions in working capital during the fourth quarter.

From a capital investments perspective for the first nine months of the year we had investments of $116 million, $33 million which was related to the structural division and the completion of the second rolling mill and the start of construction of the second caster.

$27 million was related to our metals recycling operation, $27 million also related to our Mesabi Nugget plant, remainder were other gross projection predominantly at steel operations.

For the fourth quarter we're currently expecting to spend about $110 million on capital projects.

That would consist of about $10 million at the structural mill for the second caster, 15 million to $20 million at our metal recycling operation, 60 million to $65 million for the continued construction of the Mesabi Nugget plant, and then the remainder at our steel operations.

2009 we typically don't give guidance this early for capital projects.

We've tried to look in general at the various preliminary estimates but currently we've identified about $100 million of projects in addition to approximately $70 million that would be spent on the completion of the second caster at the structural division during 2009 and approximately 200 million to $210 million of our investment at the Mesabi Nugget plant.

For depreciation and amortization we had $55 million during the quarter and we he would anticipate this in the fourth quarter and throughout 2009.

Our effective tax rate for the first six months of the year was 38%.

We lowered the annual rate in the third quarter to 37.7% as a result of reduction in our FIN 48 exposures, and this caused our third quarter's effective rate to be about 37.1%.

From an interest expense perspective the gross interest expense for the quarter was $42 million with an overall effective rate of 6.3%, and our capitalized interest for our construction project was $5 million during the quarter.

We would expect fourth quarter gross interest to be around $40 million.

From a share perspective, at the end of the quarter we had just over 183 million shares outstanding.

We issued 3.8 million shares during the quarter related to the final conversion of our 4% subordinated note.

We purchased 18.9 million shares during the quarter for about $439 million.

And we would expect that fourth quarter diluted shares would be approximately between 183 and 184 million shares.

Finally, I would like to address our liquidity position for just a few minutes.

At the end of the quarter we had $575 million outstanding on our revolving credit facility.

The facility is an $874 million facility.

It matures July 2012 and it includes an accordion feature of about $250 million.

As a part of this credit facility we also have a $584 million term loan A layer.

This amortizes $65 million annually until maturity, and that, again, there's a bullet that's payable in the midyear of 2012.

These payments are principally the only meaningful debt service requirements that we have.

Our current debt to EBITDA ratio improved from 2.5 times at the end of 2007 to 2.2 times at the end of the third quarter.

We currently anticipate an even lower leverage ratio at the end of 2008 based on where we believe the fourth quarter is going to result.

Again, we believe this will drop back to levels that we experienced earlier in the year regarding our debt-to-equity ratio as well.

At the end of September we had liquidity of approximately 350 million to $360 million between cash and revolver availability.

Again, we plan to manage for strong cash flow in the fourth quarter and expect to increase our available funds through the coming months.

We continue to be easily in compliance with our covenant requirements and we expect to remain so.

We believe the reduction in our working capital in connection with our proven low-cost operating structure will drive significant cash flow generation.

During the fourth quarter and into 2009 we intend to use free cash flow to repay borrowings on our revolver as well as to fund capital projects which are currently underway.

Keith.

Theresa, thank you.

Good report.

Operator, I think it's time to open it up to Q&A piece of the conference call.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to assemble our roster.

We'll take our first question from Michelle Appelbaum with MAR.

First of all to your credit, for doing the very first conference call of this season, can't be easy.

And I think withdrawing guidance at this point, specific EPS guidance, is prudent.

Theresa, you went through the cash flow very clearly, but I just wanted to be clear on it, and while I have no credit concerns, I wanted to go over some of those numbers.

You are saying your maintenance level CapEx is $70 million for '09 and $100 million of projects?

No, actually, I -- no, that's not what I said.

I'm sorry, let me clarify.

I said that for 2009 currently which is very preliminary, and I wouldn't call it maintenance CapEx, I would say we've identified projects of $100 million for 2009.

In addition to the $70 million which we would need to complete the second caster at the structural mill, and in addition to the 200 million to $210 million that we'll invest for the completion of the Mesabi Nugget plant.

So the total is I think somewhere between 350 million and $375 million.

So does 100 include maintenance level?

Yes.

Okay.

And in terms of these items, what would -- I presume the $70 million you are locked into, and the 210 you are locked into.

Is there a discretion on the 100?

Absolutely.

Okay.

How much of that would be discretionary?

Well, we're just going through our capital budgeting process right now, Michelle, and the ongoing project that we mentioned, even -- there's much of the equipment, and Dick could speak to that, so I would expect that probably that $70 million we have talked about from the second caster perspective, we will spend.

Mesabi Nugget as well we have commitments that are outstanding.

She is talking about the $100 million.

Right.

The $100 million has not been committed to yet.

We are still talking about those projects.

There's some good projects in there, Michelle.

Lacking more visibility, half of it, roughly.

Theresa, you say you're in good shape with your covenants.

Correct.

Can you get a little bit more specific and tell us how much leeway you have in terms of those covenants?

Because I know it's quite -- you're pretty far away from any of your tests, but can you give us some specifics?

Yes, certainly.

Our most restrictive covenant is in our senior secured revolver, and it's 5 times EBITDA covenant, and actually playing with that little a bit, Michelle, even if we were to not -- and I'm not suggesting this at all, and Keith is probably going to jump across the table at me, but even if we weren't to make any money at all in the fourth quarter and we were still to make our capital projects we would still be easily in compliance with that covenant.

All throughout 2009, I can't think of a dire enough situation where we wouldn't easily be in compliance with that covenant.

And that's your buy back covenant, dividend covenant the $25 million?

No, the most restrictive covenant that we have is 5 times EBITDA.

We have a restricted payments covenant and all that does is limit our ability to pay dividends to a maximum of $25 million a quarter, or to have share buybacks.

So that's an irrelevant covenant?

That covenant is actually 3.5 times.

But it's irrelevant because your dividends are below that right now.

I presume you're not buying back shares, correct?

Correct?

Correct.

Okay.

Thank you for the granularity.

Sorry to make you go through a worst-case scenario, but we need to hear that.

I need to hear that.

Thank you.

You are welcome.

We'll take our next question from Kuni Chen with Banc of America Securities.

Good morning, everybody.

Hi, Kuni.

Don't have any good words of encouragement for you except to say hang in there.

Obviously not pretty on our side of the business, either.

Just on the operational side, can you give us a little bit of color on how many shifts you're running right now at Butler, Pittsboro and Columbia City and kind of where you see that going over next couple weeks?

We're running around the clock pretty much at every long product operating facility.

We're bouncing around between all shifts and you might say and two shifts.

Operating only one caster out of our two casters at the current time.

At the Butler facility.

At the Butler facility.

The only place we have a real curtailment, a little bit at the techs, the we pulled maintenance ahead.

Also at Steel Mill West Virginia, we are on our number two mill.

Number one mill is running flat out full time.

The merchant mill actually is doing quite well and having record productivities per hour, but we have some layoffs in effect currently on the number two mill.

That's the steel West Virginia.

Steel West Virginia.

We couldn't run both casters right now if we wanted to because we pulled the maintenance project up and it's ongoing right now.

The modification.

The one battery is complete, and the second battery is in the process.

So we probably could return to running both casters until--.

We have another 10 days to go until the battery -- the south furnace battery is complete.

Okay.

So it's not -- I should not extrapolate that Butler is going to run at 50% for the fourth quarter.

I wouldn't say that.

I think it could well run at that rate in October, because the maintenance and upgrade activity, but I would tell you I think that the buying community will start to come back into the market here as inventories drop below untenable levels that could sustain even recessionary OEM-type activity.

So I couldn't tell you what to model for November and December.

I can only tell you, I think we modeled about 60% or thereabouts is what we modeled.

Which is more than one caster.

Now, we don't see any pull-back in long products operating activity in the fourth quarter, and generating pretty good earnings there.

Butler's earnings will go backward, obviously, in the fourth quarter, to be expected when you are running at that rate, but true to form, they will be profitable, and which verifies what I have been telling everyone about the variable cost structure.

Okay.

Then just with the drop in scrap that we have seen and the impact there on OmniSource, obviously October is another tough month.

November, I think you indicated you expect scrap to be down again, then kind of no visibility yet on December.

So are you profitable at these levels, at least near term, given the sharp downward moves in scrap?

I think you're at best a break-even scenario on October, probably making a reduced level of profitability in November because I don't think it will be as sharp a drop as we've seen.

It couldn't be at zero at that point in time with the margins expanding in December.

Mark, do you have any different thoughts?

I think that's probably accurate.

Okay.

And then--?

We certainly don't think that the drop in November is going to be anything close to the last two conferences.

I think that's fair.

One last question.

Just on the balance sheets, there's $1.4 billion of intangible assets and goodwill.

Can you just walk us through kind of the year-end test to determine whether there's an impairment situation there or not?

We don't currently anticipate any impairment calculation for the goodwill or -- excuse me, impact for goodwill or in tangible assets.

We are currently in the process of still finalizing the valuation for recycled steel.

We currently have north of 200 million identified as goodwill and 140 million to $150 million identified as intangible assets and we do not need those to be impaired.

The question is what would trigger you to take a closer look at your assumptions there?

We have to take a close look every year, and we do that throughout the year for the scrap -- or for the OmniSource operations, that takes place in October.

And again, we don't expect anything to have an impairment issue for them because you look out into the future and you look at discounted cash flows, et cetera.

It's pretty complex calculation.

And for Recycle South we'll look at that again next fall.

For our Roanoke acquisition we look at that at the end of the year.

Again, we don't expect any impairment to take place.

Fair enough.

I'll turn it the over.

Thank you.

We'll take our next question from Brett Levy with Jefferies & Company.

Just to be clear, there's no word from your banks making you decide not to buy bonds or not to buy stock at this point.

This is just you guys being prudent?

That's correct.

With respect to the 5 times EBITDA covenant does that mean you've got to have 5 times EBITDA to interest over what period?

What's the exact -- what's the numerator or the denominator associated with EBITDA with 5 times?

With 5 times the EBITDA is a trailing LTM on a pro forma basis, and the debt that's associated with it are any outstanding letters of credit of which we tend to have anywhere between 15 million to $20 million which also decreases the availability on the revolver.

And then all of our senior debt and our -- currently we have a little bit, 16 million or $17 million of unsecured subordinated debt.

Got it.

Planned outages for the fourth quarter?

At Butler we'll continue to make our modifications to the arc furnaces.

We do not have any plans to take the rolling mill down through the fourth quarter.

At Columbia City, we do have an outage coming up in November, which is normally about a five-day outage to do repairs, normal customary repairs.

Mostly to the reheat furnace and the rolling mills.

We are going to replace -- or machine the mill housings and replace the liners on the mill.

At Roanoke we are going to be taking the -- again November, I think November 14, we'll take the arc furnace down to make a bearing change on a slew for the roof and mast assembly.

But again, we're building inventory of billets as we speak, therefore the rolling mill will not go down in the fourth quarter for anything other than normal and customary maintenance.

Pittsboro we haven't decided yet, right now we don't have any need to take it down.

We have some project work that could be accomplished should we have a unexpected breakdown or so.

But to keep on schedule with our expansion, we can either do the projects this quarter or next quarter.

That's to be decided.

And we don't have any major -- we have an outage coming in Steel West Virginia but nothing out of the ordinary, they're all planned and scheduled.

Last question, you guys continue expansion into acquisition of scrap dealers and also your kind of longer term plan to build another sheet mill.

I assume both of those are on ice until conditions improve?

I think most of the expansion we are going to be doing in the resource arena will be greenfield in nature and it's -- there's nothing near term there, but as you look further out in time throughout the course of next 12 to 18 months, we have two and a half shredders in the box, so to speak, sitting there on the shelf.

So it's not a CapEx type thing.

It's a matter of geography, and a suitable site, things of that nature.

Very modest capital expenditures.

I think most of it will be greenfield in nature.

As to the new flat-rolled mill, we expect to generate excellent earnings next year, as I said, or have another outstanding year.

But you have to understand, equipment deliveries there, we are not going to stop engineering this mill.

I think it's an important new future project for the Company, and deliveries are out 30 months.

That's two-and-a-half years from now.

I don't know what the world is going to look like then.

So you are still moving forward but not spending a lot there?

No, there's -- basically zero expenditures, other than some early engineering activity.

We have not committed any dollars yet.

Theresa, gentlemen, thanks very much.

We'll take our next question from Dave Katz with JPMorgan.

Some of my questions have already been answered but I was hoping for a little more clarification.

I understand you are saying that you are not engaged in any share buybacks at present but do you anticipate maintaining that policy throughout the recession?

Well, I don't think there's that many shares to be considered, and at the price where they are, I don't know that it's material one way or another, but it's an accurate statement that we are not currently engaged.

So we'll just let the statement go at that.

Okay.

Then you had just answered Brett's question about acquisitions.

But with leverage falling in the fourth quarter aided by the working capital release, do you guys have a leverage target that you are planning to move towards and that would, I guess overwhelm any plans to do acquisitions or anything that might come up, or is it more you will take it the as it comes?

We have no significant acquisitions right now on the drawing board, and really the only one we're looking at is a new flat-rolled mill.

As I said, that's 30 months off.

We have no current resource acquisitions, non greenfield, on the board.

And so our activity relative to M&A forecasting for next year is next to nothing.

So then throughout the recessionary period do you anticipate using cash to pay down the revolver and then to hold down balance sheet for conservative sake?

That's exactly right.

I don't know that Theresa qualified where she thought our revolver would be by the year end but it's going to be down significantly from where it's at.

Thank you very much.

We'll take our next question from David Lipschitz with Merrill Lynch.

Good morning, everybody.

Question in terms of what your customers are saying with regard to imported prices, whether it be from China or elsewhere.

What are they seeing?

Are they ordering from them yet?

Prices have fallen pretty precipitously down there and freight rates have fallen so what are you seeing from that front?

I think there's a lot of anxiety out there.

I don't see any buying going on.

People were not 30 days ago waving around $900 import steel, but I think the buyers recognize that's dangerous uncharted territory.

I think they do expect that given the level of economic activity that prices could regress, and we all know they have.

They're not $1100 any more.

Exactly where they are, I don't know if anybody knows, but I don't see the imports being a major influence.

It's pretty dangerous territory, especially when you are looking at many mills armed with cost structures, like they have.

I think we could be very cost effective at keeping them out of our hair, anyway, but where is the market going?

I don't know.

You can read about it as easily as I can.

I have no idea.

But the prices are not down to the levels that the pundits indicate they will be at in the future.

I have no crystal ball as to whether or not they will ever go there or how long it will take to get there.

Are you seeing your commercial -- we hear from the economists about commercial end market starting to weaken and things like that.

Are you worried that just in terms of you say they're not going to come back next month, they could come back in January?

Is there a possibility they might not come back until June of next year, in terms of those end markets?

I don't know if and when they're going to to come back.

We'll deal with them as we have to deal with them.

I think the end markets are probably not as bad off as the order entry rate.

I think people are trying to work down inventories.

I think when they get down there let's just say our economy is chugging along at 80% of what it was.

That would be a pretty terrible drop.

That's still going to leave a lot of steel to be purchased in this country, and I think we're in as good a shape as anybody to provide it.

I think these guys right now are just working off -- I think the shipping rates, better than their order inbound rate right now as they work off more expensive inventories in an effort to better weather whatever storm is out there themselves.

One more final question.

Could we go back to '04, '05 levels in terms of that earnings level in terms of pricing and if scrap continues to fall and level out here, in terms of historical spreads could we get back to those levels?

You're worried about where your share price is trading, I mean--?

You can't make a case that bad.

If we have any semblance of an operating rate whatsoever as I said with soft scrap prices you be the judge of where pricing can be.

I'm not going to engage in could it go back to '04 or '05.

You can read as well as I can where people think it could go down to.

That's a pretty nasty prediction in and of itself.

With that we'd have the broadest margins we've ever had.

I think we're in great shape.

I can't predict where the end price is going to go.

I can just tell you we're -- we and the likes of the Nucor's of this world who have variable cost structures are going to be in awfully good shape no matter what the climate is out there.

Thanks.

And we'll take our next question from Timna Tanners with UBS.

Hi, good morning and thanks for the great detail.

You're welcome, Timna.

I just wanted to do an exercise where maybe similar to the lines of the last question.

Keith, can you talk to us about what's different from the 2001 to 2003 scenario?

Not so much from the economy but from where Steel Dynamics is positioned, because certainly, as you point out, it's very difficult to imagine a scenario where Steel Dynamics loses money but your EBITDA per ton at that time was average $75.

So what have you done as a Company to position yourself differently into a downturn?

Can you just talk us through that, please?

Well, I think we clearly are in a different position from a resource cost perspective and are going to, with the advent of Mesabi Nugget, put ourselves into even better shape than we were.

We're in different businesses now, though, too.

We've got to quit focusing on flat roll, flat roll, flat roll.

We're in the structural business, the bar business.

Those markets are holding up a heck of a lot better.

I don't know where all those things were in 2001.

We weren't in all those markets.

But I think, given where I see resource costs going, we're going to be in pretty good shape from a spreads perspective.

And I think from a volume perspective.

Flat-rolled was impacted in '01 by the Asian financial crisis which was lingering, and heavy, heavy, heavy imports.

I think this industries cost structure in general, whether it's a mini mill or an integrated mill is, they're better positioned today, certainly, from a cost perspective, than they were -- the industry is.

And we were dealing with a flood of imports.

So I think -- I don't see 46 million tons coming into this country.

I probably see continuing 18 to 24 million tons.

I'm talking about finished product, not necessarily semis, coming in here.

And that would still suggest -- but if the operating rates are lower in this country we are not going to be producing 106 or 108 million tons.

I don't know what we are going to be producing, Timna.

You pick a number.

We could be producing 90 and exporting two and adding 30 to it, and maybe you'll be in balance.

I think there were just horrific imbalances that sent pricing to levels that people couldn't cope with or adjust to fast enough.

I think we're in pretty good shape, the caveat again, being if resource costs remain where they are, I'll leave it up to your imagination with $200 input costs at Butler, pick a number $1.25, $1.50 let's say, $1.40 fully loaded with exotic alloys and everything and interest costs, you can see where the.

cost structure could be.

I don't think you are going to see anything that even comes close to pricing scenarios.

Even if we were to say worst case scenario 2001, 2003, what you're saying is that Steel Dynamics now is a broader company in among products.

That was the early days of your Company's inception.

You weren't in some of the finer grades, that you're now even on the flat-rolled side.

Is that fair?

That's correct, we didn't have anywhere near the value-added capability we have today.

Okay.

And my other question is really, it's been more challenging.

You're a more complicated Company now with your OmniSource presence.

We haven't seen a decline in scrap, irrespective of this really huge decline in scrap.

Can you talk us through a little bit about how to think about, OmniSource still had good results but the scrap prices actually went up for your steel operations.

How do we think about what happens to your earnings in a declining scrap price environment and how do we think about the fourth quarter a little bit more?

Well, the earnings from steel are going to be impacted at flat-rolled.

Not so much at long product divisions had low inventories so they are going to see the lower scrap input costs more immediately than Butler does.

Butler has more expensive scrap on its toe and it is going to take longer throughout the quarter to work it off, therefore it's going to have an impact on earnings.

As I said earlier, you've got to look through the fourth quarter and you've got to look to, okay, armed with the kind of scrap costs we were discussing a minute ago with those conversions costs, where are they going to be?

I think they're going in to good shape.

Unfortunately I think -- and I've said before, I think Omni has a good return on assets, assets deployed, but I think it's been -- going to be -- will be a good hedge.

I think at times when steel has good earnings, Omni could have excellent earnings.

At times when steel is going to have good earnings, Omni may not, in a soft market.

So I think it becomes a slight hedge, if you will.

Mark, do you want to add to that from an Omni perspective?

Yes, I think the -- as the scrap price or transaction price goes up and down, obviously the scale price or the inbound scrap price goes up and down, too.

It tends not to go up at the same right as the transaction price and it tends not to go down at the same rate.

So typically in a market like today, with low transaction values, margins or our gross margin is going to be a little squeezed compared to what it was three, four, five months ago.

But nonetheless, there's still margin.

The difficulty or the difficult period is in the transaction -- the transition, particularly when you have $600 drop within the space of eight weeks, and the major impact is simply how many tons of inventory do you have at the higher price and how quickly does that flow through.

Fortunately, we had, in August, our inventory was a little higher than we would have liked to have seen it but we got that under control and in September the negative hit, so to speak, going into October is a lot less than we saw in the September month.

There's a lag effect in working through the inventories and, therefore, the first in/first out inventories earnings accounting will reflect that into the fourth quarter; is that right?

Right.

That makes sense.

Thanks so much.

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

Good morning, Keith.

Hey, John.

Are there any pieces of excess land or product lines other than steel melting and rolling facilities, or odds and ends, excess machinery that you might be selling to raise a little extra cash to buy in your stock, and do all the good things you could do, pay dividends, build mills, et cetera?

The answer to that is no.

Pretty new, pretty modern.

Generally the things that get ripped out and replaced by new are melted.

Again, the thing that I'd point out, John, is that just from operations, our cash flow generation, and bringing back the working capital, we wouldn't have a need to sell off extra equipment, et cetera, to be able to operate.

Literally the only piece of excess equipment is a used rolling mill, two high mill sitting down in Jeffersonville that was there originally, and we put in a new mill after we bought the place and we're actually looking at shipping it up to Metal Tech and installing it into the galvanizing liner for improved products opportunities.

So there's not a piece of equipment in our steel plant side of the business.

John, on the scrap side OmniSource side, where we do have assets that could be sold, and as Keith said earlier, we got two and a half shredders that, if you are in desperate shape, you would sell off.

But we've got all these assets that we plan on capitalizing and exploiting down the road.

There's no need to be selling anything.

We're in pretty good Sharon, John, as Theresa said, from a balance sheet.

I know there were some panic type worries out there, but I think that was just overbaked badly.

Thank you.

And we'll take our next question from Brian Yu with Citi.

Great.

Thanks.

Good morning, Keith and team.

Good morning.

Question for you is, I think I was one of those who made the comments about costs on the mill side, and if you could help me with my thinking here, barring any major change in product mix, if we look at the chang in average selling prices versus the change in scrap costs, it would indicate that at least for the commodity grades of steel that metal margins expanded in the quarter, yet kind of operating profit per ton still very high, 200, showed very little expansion, actually a slight decline.

So can you comment, is there something that happened with the alloy costs or perhaps metal margins did not expand?

Prices went in but so did scrap costs, of course.

I think we picked up on your comment.

I'm not sure how you build your model.

I'm not sure whether you make some scrap assumption and it just drops out the other end but that gets really influenced by things like the impact of the Techs and purchased material, it gets impact by value added, and if you are doing more value added or not it gets impacted by more structural and less flat-rolled which happened in the quarter.

It guess impacted by a lot of things.

It's not an easy thing to do.

And so I don't envy your job other than to talk to our folks and try and get a better handle on how to build your model.

I think the major emphasis ought to be on how you look at the hot product or the hot rolled band.

Once you get to that, I think you probably are in better shape building a model.

You can use whatever price assumptions you want, but I think you've got to know your scrap input costs and you've got to know your conversion costs product line by product line, and we don't talk openly about all that.

We have talked about flat-rolled in the past because we've talked about it.

No sense trying to tuck it away.

That hasn't changed.

We think we have a very excellent conversion cost.

If you look at a 1006 vanilla type product, without any alloys in it et cetera, et cetera it's $1.25.

If you are going to alloy something to a next 70 grade it may change your conversion costs because alloy costs are going to go up.

You may be $145.

So that part is going to roll around a little bit with the type of product going through the mill.

But I think you made an assumption that our conversion costs were $324.

There's no way that any of us can mentally get to that number.

So rather than take up a lot of time here, maybe Theresa can chat with you after the conference call and help us both get on the same page.

Absolutely.

Maybe I can kind of try to ask from another direction.

If we just look at some of the indicative prices in the market, certainly on the hot rolled side, metal margins are about the same as what they averaged in the second quarter, and this is just indicative from the trade presses.

But on the rebar, and other types of long products, structural and others, metal margins did expand in the third quarter.

Would that not have flowed through to your financials?

They did, I think, expand, but a little bit of that is -- evolves around how much scrap did you get caught with at the end of June as opposed to the vend September and how did it flow through and on and on.

But it also would be -- all this would be impacted by the Techs, which purchased material.

You've really got to back that out.

To have any meaningful compares at all you have just got to get rid of the Techs, because they're buying from suppliers other than the Company principally at full market cost which now becomes your conversion cost the way you think about it.

So you've got to get that out of there and maybe Theresa could help you do that.

Okay, last question.

Switching gears here to the recycling and resource side, I know you expressed disappointment over the margins but they were actually pretty good.

When I look at the composition of your profits for the entire quarter the recycling resource, that's accounting for 26% of the operating profits.

There's been a lot of focus on stress testing the mill's profitability, but can you help us think about stress testing the profitability on the resource and recycling side?

Because that appears to be holding up quite well.

Well, it is and it isn't.

It's what could have been.

That's the issue.

What could have been.

If Butler would have ran full -- like I said, you could have probably added $0.05 to $0.10 to the bottom line.

We tried to quantify scrap for everyone because instead of $101 million it could have been a lot higher than that, had it not been for September.

And so it was a record quarter, but when they start to cycle through these major drops, it drops their earnings to -- didn't drop them to nothing.

Because you have the impact of hedges and the nonferrous side, things like that where you had -- I think you get to read about that in the 10-Q and things like that about how much hedging activity we had to, unrealized losses and all that kind of stuff but they were still profitable but they weren't anywhere near as profitable as they had been.

As Mark just indicated in October they're better prepared.

They had lower inventories, faced another big drop, and they are going to be profitable again but not very.

But you return to some semblance of normal margins in November, December, and I think it improves throughout 2009, but now you are at the bottom, and if there's any movement upward in resource pricing throughout the year they are going to benefit from that by month to month to month.

The big answer is what kind of volume.

If there's -- if their volumes are lower, they're not going to -- when you multiply it times the margin they're not going to have the level of profitability that they had last year when they had gushers of tons flowing through there.

So it just depends on what assumption you make.

Is it fair to say that profitability from -- profit contribution from recycling and resource operations is one reason why your earnings are very unlikely to go back to where they were in early 2000?

Besides the fact that you have a lot more mills on the long product side.

That would be certainly a positive influence, yes.

We'll take our next question from Sal Tharani with Goldman Sachs.

Good morning, guys.

Good morning, Sal.

Keith, not to harp on this margin versus operating profit per ton, but your volume if I compare quarter over quarter was down 12%, I believe.

Yes.

That must have some impact.

Impact on what?

On your conversion cost.

Sure it did, clearly.

It would have at Butler certainly in September, yes.

How many people you have at Butler?

600.

And when you stressed 40% neutralization rate do you keep 600 or do you take them out when you say you are going to be even still break even at that point?

We kept them.

What we do, is end up averaging bonuses, let's say, if you have the two casting crews, who end up putting -- distributing employees throughout the department, but then the extra casting guys would end up, everyone would get a lower bonus because theoretically the second caster is earning a 0 bonus.

Got you.

So that's the variability factor without eliminating the headcount.

All the people are there.

They are just not earning as much money.

But they're not huge, huge, huge.

They're suffering.

And I said that earlier, but they're not a huge chunk of our cost structure.

But you also have to understand that today's environment with demand down, power costs, the demand isn't there, they get a little better, gas costs get a little better, people aren't selling maintenance orders for the same price.

Electrode prices, everything starts to change.

I think you know that.

Of course, everything was rising, rising, rising before.

Hey, Mark, you made a comment on BOF using lower quality scrap.

Can you expand that?

Well, I think the -- necessity is the mother of invention, and if you look at, in July, they were spread between bushelling, for instance, and shredded scrap climbed up to about $290 a ton.

Typically in the past it runs between $30 to $40, maybe $50 a ton.

So they're experiencing firstly, huge cost input -- increase and recognizing that, hey, there's a lot of money to be saved if they could switch.

What they tended to do is reevaluate their grades, and have, in many instances, increase what their internal copper spec is which has allowed them in turn to use more secondary grades.

So it takes -- obviously in the total, they're probably using the same volume but it takes pressure off the prime grades which is the grade that's in tighter supply.

Same type of calculation can be done for mini mill, Sal, and maybe better understood.

If that spread is $300 and you can take your shredded from 10% input rate into the furnace to a 17%, then you have got a 7% times the $300 spread savings and input costs.

So the minis, as you know, can't tolerate the same degree of copper that a maxi can, so to speak, but if you do a good job of picking the copper we have shown that we can increase our shredded inputs significantly into the furnace and decrease the prime inputs.

I think it's really the same kind of thing with a basic oxygen furnace or -- yes, basic oxygen furnace running at 80% virgin inputs, 20% scrap, in the past where you bought bushelling, if you don't need to buy it you can buy scrap there's a good size savings on that 20% chunk.

Got it.

How much pig iron you guys have in stock now?

Barely enough to get us through to Mesabi Nugget, which is all we really want to have.

Okay.

Hey, Mark, I notice that your scrap profit per ton actually stayed flat, actually it increased quarter over quarter despite a $300 drop in September, and I don't see the thing that prices did move between June and August that fast so even in that case.

So is it fair to say that October, November, or September, October you actually are not losing money on your scrap business?

It's right around September, we lost a little, and October we should be around break even, if all things went well.

Remember, Sal, you are comparing quarter to quarter, we also purchased Recycle South in June of 2008 which had impact if you compare quarter to quarter.

Got it, okay.

Gary, you made some comments on fabrication.

Generally in this environment when steel prices are falling, that is substrate or input for you guys, does that mean that your margins can expand, granted the volume stays the same?

It is dependent on the volumes we are going to put through.

Of course, like some of the other operations, we've got some inventory to work through, but we should be able to maintain good margin through the tough times.

Your margins were actually better quarter over quarter so you expect same neighborhood, same zip code?

Yes.

Yes, I think that's right.

We don't see that market doing anything different in the next few months.

No.

Certainly improving in the margins, just working out the efficiencies as the team has gotten more and more focused on running those shifts tightly.

Theresa, just one more question for you.

For the next three, four months, the use of free cash flow after CapEx and dividend is going to be exclusively to pay down the revolver?

That's our focus right now, Sal.

Are you going to keep the revolver drawn, or are you going to pay it back?

Are you at all worried about banks not honoring the revolver for you?

No, we actually have an incredibly strong bank group, and we've been very fortunate in that regard, and so, no.

We won't keep that outstanding just to provide additional liquidity.

We will pay down the revolver.

That's our current intent.

Thank you very much, guys.

We will take our next question from Bob Richards.

Good morning and thanks for taking our call.

Morning.

Export scrap markets, can you give any color what your outlook is there, that would, of course kind of appreciate the scrap, the shred price that we are seeing at very low right now.

Do you have any foresight into when that could possibly reinvigorate?

Well, I think, Bob that with China not running at the same growth rate and that's where part of this mess started.

It wasn't all the mortgage crisis.

A lot of people said, oh, my god, these guys aren't going to grow at 12%, they're going to grow at 5 or 6 or 7 and it is going to release some of the pressure that has been on the commodity, let's get out of commodities.

I can't tell you what is going to back up to that level or not but all signs are that China is not going to be currently a heavy player in the scrap universe.

With the dollar strengthening it, it doesn't help the export component of the equation and with the Middle East being sort of over inventory, one of the big buyers is in Turkey and a lot of, a lot of projects are being delayed over in that region of the world.

You can call it the Middle East, and Dubai and places like that.

And so things are a little soft there.

So I don't know that -- Russia has not let any scrap out for some period of time.

Everybody is suffering from, I don't think there's going to be all that much shopping activity here in the near term.

Gosh, I could be wrong about that because you could say too, oh, it is so cheap, I had better get in there and buy but at the same time, I don't, I don't see it.

Mark, what do you see?

Obviously, the Middle East construction is there.

If you look at export pricing, it is strangely, the strange correlation between that and Turkish rebar pricing.

Yes.

Through, not necessary know exactly why that is but there's a good correlation there.

But the drive for export scrap in Turkey and that area was principally driven because Russia, Europe, that primarily supplied them, principally supplied in the past they were consuming that within their own borders, obviously their economies and their steel production is tailing off which would suggest to me that it is probably scrap available in those countries that would also be, would also maybe find a home in Turkey and those kinds of places.

But, and I don't see a threat there right this second.

But again, you go back through 2004 and you look at any inflection in f product pricing or scrap pricing and march yourself four weeks before that, there has't been a pundit that has guessed right.

So.

I appreciate that.

And that color.

Your Southern Recycling, does that have any export book there?

I presume it does, right?

It does.

It has a little of an export book.

Could you remind us, Keith, what your kind of your goal is for scrap turnover in your steel production side?

Well, I think as we walk forward, we are probably not going to have much over a -- generally speaking we had four weeks at the long products division, and we carried six weeks because of the wild swings in prime grade activity and I think, I don't think we are going to see that in the future, and I think we're going to attempt in time, Butler has heavy inventories right now, in time to pare that back to probably about three weeks somewhere in that area.

So that will add some cash to the balance sheet, so lower volumes will add cash, lower pricing will add cash and so on and so forth, but I don't see the need to carry that when we have the kind of inhouse capabilities that we have.

I appreciate that.

One last follow-up.

Would you say business, the strength in the long products over the flat is pretty obvious from the tone of the call and the release?

I think you mentioned this, Keith, I just want to clarify.

Business activity is similar and it is more of a backlog issue for long products or is business activity more strong in the long products than flat?

Backlogs quite frankly, have come down a little bit in long products, but they're still fairly strong backlogs, Bob.

They're in pretty good shape.

Whereas in Butler as I said earlier on the call it is kind of hand to mouth.

I don't suppose we have a backlog even with two casters of much over a week or two at this point in time.

So order entry rates there, it is not non-existent, but as I said earlier I really think that people are trying to, there's probably more confidence out there in the market that the pricing is going to hold up in long products over the long term and therefore they're comfortable with their inventory positions.

The flat products arena, some of these people smell softening and want to get inventory off their toe.

I don't think the lack of buying activity which has probably been fairly dramatic recently, I mean falling off is going to continue at that rate because I think they will get inventories to manageable levels and we will come back into the market.

I have no comment about where pricing could go though.

I mean lord only knows.

We will leave that up to the prognosticators.

Okay.

Thanks very much for all of that color and good luck.

Thank you.

We will take our next question from Bruce Klein with Credit Suisse.

Hi, good morning.

I just wanted to get some more clarification.

I wasn't totally clear on the -- I think you said there was a (inaudible) payment test, was it $25 million a quarter and that is subject to the 3.5 times debt to EBITDA; did I hear that right?

Yes.

What did that, how did you make the payment for the -- you bought through [400] million plus the stock at 3Q?

Was that covenant in, how did that get met?

Well, our, we are not over 3.5 times levered during the third quarter.

The restriction only comes into play if you are over 3.5 times.

Okay.

So what is the 24 million -- the $25 million a quarter limit?

Is that relevant if you are under 3.5 times?

Not relevant.

That's why -- no, it is not relevant at all.

That's the point, it is not relevant.

Does it kick in if you get over the 3.5?

Or what is the--?

That's correct.

If you are over 3.5 times, then that covenant would kick in.

I got you.

That restriction would.

Okay.

So there's no, no restriction on RP, unless you are over 3.5.

That's correct.

Okay.

Can you use the accordion feature in your revolver currently or does there have to be a test that has to be met?

You have to be in compliance with your covenants and which we are.

The way that we would utilize the additional $250 million if need be, we would need to get additional commitments from our bank group.

It doesn't have to be 100% but we would have to have banks willing to increase our incremental commitment by that amount.

And we can choose to do all 250 or less than that if there are banks that would be willing to do that.

Okay.

Have you guys pursued that or no?

We haven't currently, no.

Okay.

And is there secured debt capacity other than, I mean you have the revolver ability, you have the cash, you have the accordion potentially.

Is there other, do the existing bond indentures allow additional secured debt capacity and how much would that be?

They do allow for additional secured debt capacity and I can't give you that number right now.

Is that -- I apologize I didn't check into it.

Is that the negative puts carveout in the indenture or is that because -- there are negative (inaudible) in the existing bonds that limit that or are there no limits?

Actually, we can, there's the potential to do more unsecured and from a secure perspective there is, I believe it is up to 25% of our fixed assets at book value.

But I don't, I would need to look back at that.

That's what I'm remembering.

Okay.

So the maximum would be 25% of PP&E.

Okay.

And I should know this, but the revolver, is that in the current portion?

Is it due in '012, what am I missing there?

No, it is not.

It is just an accounting formality where it has to be, incur it because we pay it and excuse me, we borrow and repay on a daily basis.

They make you show it in current.

It is not due, or it doesn't mature until July of 2012.

Okay.

Lastly, the cash taxes, do you, you guys are a full cash tax payer?

Yes.

Any other cash obligations of note other than interest CapEx, taxes, and your $65 million of term loan amortization?

Are there any other material cash obligations that you need to make?

Off the top of my head we just have the normal course profit sharing payments, and then just our normal creditors from an operational standpoint.

Okay.

And the revolver is it all secured by together PP&E and working capital?

No.

It is just working capital with a negative pledge against PP&E.

And that's the term and the revolver?

Correct.

It is one agreement.

Okay.

Great.

Thanks so much.

We will take our next question from Charles Bradford with Bradford Research.

Good morning.

Hi, Chuck.

A couple of questions about your conversion costs.

I understand that the industrial guys are asking for something close to 40% price increase, because needle coke has gone up.

Are you hearing the same kind of thing?

In electrodes?

Yes.

I think prices are coming down.

Yes, they had earlier when things were still probably six months ago requesting a major, and substantial price increase, but that wasn't uniform and across the board.

There were opportunities.

We took advantage of them, and in the current time frame -- in the current time frame, there, there has been on a downward trend.

So what are you seeing in other conversion costs?

Obviously natural gas has come off, how can you change that as a percent of your cost?

Well, I think you know that's not as significant to us as it would be to an integrated operator.

But it has its impact.

Okay.

And are there anything else 125 to 145 you talked about and would be materially changing over the next several months?

No.

Chuck, let me explain that to you.

The 125 is if you are running basically a no alloy, 1006 vanilla grade steel.

Good.

So if you are running an X70 it changes it.

So the, what is the average cost structure may be the better question, and that's probably closer to 140.

But I think, Chuck, what you are asking is are there any components of that 125 that will see a major swing or decrease in the current marketplace.

And other than, I think there's just going to be a small amount of reduction across the board and different inputs but a lot of it is very stable.

That's what I wanted to know.

Thank you.

You're welcome.

Thanks, Chuck.

We will take our next question from [Evan Kurdtz] with Morgan Stanley.

Good morning.

Hi, Evan.

Just digging in a little bit on the long products backlog, I was hoping you can provide some specifics on end markets, what sort of industries are still in and waiting for steel at this point?

Well, from a structural perspective which is also a lot of the VAR stuff, there are still construction projects going on.

The fabricator base doesn't have as big of a backlog as they have in the past, but it is still there.

A lot of energy projects are still underway, there's some major energy expenditures that are looking forward for the 2009 time frame that will transpire.

Some infrastructure work, there was quite a bit of work there, it's a little bit cooled off right now but infrastructure requirements will continue.

From a VAR perspective, oil patch, we have been growing in our presence, so forth, automotive we have been lucky enough to secure work not only in axles and so forth but in forging applications.

So, in, again I think in the Steel of West Virginia we have added some current, to our current product mix some merchant sections that we used to roll years ago and had moved away from them as our presence in the transportation industry grew but now with some of that shrinking, and on a temporary basis we move back into that but we are also recapturing some business that had moved offshore and it is coming back in the fork truck business, and rails and in the hangar bars.

And we are expanding our offerings there significantly.

So, again it is diversification and distinct by setting ourselves apart from our competitors.

That's helpful.

Thanks.

Also, you gave some detail and I appreciate it on scrap inventories at your mills.

I was wondering if you had any intelligence back from your salespeople at OmniSource on where your competitors might be as far as their scrap inventories at their mills, how are they set up for the winter, when do you expect to see them coming back into the market a little bit for scrap/

I don't know the scrap position of all of our competitors but I, we certainly have surveyed some of the mills out there and have, there are people who have a lot of scrap.

Same can be said for the processing community.

There's a lot of scrap sitting out there.

So how all of that is going to shake out, probably is as advertised, probably going to keep the market a little bit soft for a while.

Got you.

Okay.

Thank you.

As you can imagine, when the mills are going, cutting back to 70, 60, 50%, all of the sudden their inventory is just expanded by -- they had four weeks of inventory, suddenly they have eight weeks of inventory now on an equivalent basis.

Got it.

Thanks.

We will take our next question from [Sal Virani] with Goldman Sachs.

Okay.

Keith, just a quick question on hot rolled coil.

You can make hot rolled coil for probably $350 a ton based on what scrap is doing right now?

Yes.

If we could put, purchase scrap at the moment into the furnace that's right, but we can't.

We have to put more expensive scrap in.

No, understood.

But if you buy it today and convert it in a week you will probably get that kind of cost?

Not in a week.

We said very clearly we have a lot of scrap on our tow at Butler.

It is going to take a while to wash that through.

If you could have a clean inventory and buy at tomorrow's prices or today's prices for that matter, yes, you could have a cost structured sub 400.

That's what I meant.

So, and you only running one caster at Butler.

How tempting it is for you to start the second and run more volume through it because your cost is so low?

Well, Sal, I think it is tempting.

We couldn't run it right now if we had to because it is under, the furnaces are being modified.

So we couldn't do it if we wanted to.

We pulled up an outage.

Tempting, yes, it would be tempting, but as I said earlier, I don't think right now it is a matter of price for a lot of people.

I think a lot of people are trying to draw down their inventories, the price will be whatever the price is when they get those inventories down to whatever level they desire to get them down.

So I think it is a matter of, it is orders from headquarters to get inventories down with the perception that buying prices will be better a month or two from now.

So I don't know what opportunities we will have in November and December at Butler to run at a greater level of capability, but we should hope it would be improved.

Thank you very much.

Sal, wait.

Before you go away I have something for you.

You need to lobby your firm to change its policy about how many buys you could have out there.

The analysts role is totally different today and separated with a Chinese Wall from what it used to be.

When there are screaming buys, there's only 20 people left in the industry out here today.

If ten of them are great buys you ought to have the ability to say so and you don't.

And so I think you guys are contributing to whatever problems are out there.

I don't know if we are contributing, but obviously your stock didn't fall as bad.

If you look at over the last three months it is as much down as any other steel stock, and your market is down 40 points, 40% in a week or 25%.

That's just, but anyway, I think that I take your comment serious and I will absolutely pass it on.

If there's ten screaming buys out there you ought to be able to say so.

Well, we do say if you look at our note today especially, and in the last couple of days, you will see that we did mention those comments.

Super.

Thanks.

I would like to jump in and just clarify something.

Bruce, when I spoke earlier I misspoke.

The bond engenders actually allow for an additional incremental secured borrowing of up to, at the end of the quarter $1.2 billion.

It is actually based on 90% of receivables, 70% of inventory and 10% of net (inaudible) assets.

The 25% I referred to earlier is the limitation within the credit agreement.

I just wanted to clarify.

He may not be there.

That's okay.

You'll have to call him.

Everyone else heard me.

This concludes the question and answer session.

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

Thank you.

I really don't have any other than to congratulate our competitor on a very excellent quarter, Nucor, great company, variable cost structure just like SDIs.

The other thing I would like to do is again, applaud all of our employees for the excellent performance.

This was our second best quarter ever.

We have got some great people and this is one of America's great steel companies.

So, we are very proud of everyone's efforts.

Thank you.

Once again, this does conclude today's conference.

We thank you for your participation.

Have a great day.