Steel Dynamics Inc (STLD) 2008 Q4 法說會逐字稿

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

Today's conference is being recorded.

Joining us today are Keith Busse, Chairman and Chief Executive Officer, Richard Teets, President and Chief Operating Officer of Steel Operations, Mark Millett, President and Chief Operating Officer of OmniSource Corporation, Gary Heasley, Executive Vice President, Theresa Wagler, Chief Financial Officer, and Fred Warner, Manager of Investor Relations.

For opening remarks, I'll turn the call to Mr. Fred Warner.

Please go ahead, sir.

Welcome to the Steel Dynamics conference call being webcast today January 27th, 2009 from Fort Wayne, Indiana.

Note that to listen, there are links on our website to two separate services.

If you have trouble with one feed, please try the other.

A replay of this call can be heard and downloaded as a Podcast from our website, www.Steel Dynamics.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 reports we file with the Securities and Exchange Commission.

Specifically, please refer to those sections in our Form 10K and 10Q reports entitled forward-looking statements and risk factors.

These reports can be found on SEC website, www.SEC.gov and on our website, SteelDynamics.com.

After our management discussion this morning, we'll open the call for questions from participants who informed us they wish to ask questions.

Today's call will be limited to one hour.

Keith Busse, Steel Dynamics Chairman and Chief Executive Officer will now lead off the discussion.

Thank you, Fred.

Good morning ladies and gentlemen.

I think I'll probably lead off with the opening statement in the fifth paragraph of our press release which says it's strange to be reporting the best year in the Company's history and at the same time, the Company's worst quarter and we're thankful to have that quarter behind us.

That quarter, obviously was full of pain and agony most of which was felt in our scrap and scrap processing divisions where substantial losses, as you can read, in the operating segment data were incurred, which would tell you that most of the loss we're reporting was, at this point in time, in that segment.

And as expected, I think, and much of it was operating in nature when scrap goes from $875 a ton for prime goods, down to $175 a ton month by month by month until it reached its bottom.

You could imagine the losses were substantial.

I'm happy to be able to report that we think that the processing division will be back in the black in the first quarter and we'll have an operating profit during the quarter.

So we're pleased about that.

I won't go over all of the data that's in the press release, but rather just highlight the fact that it was a record year for Steel Dynamics -- up about 18% at $2.38 -- up about 18% from the $2.01 earned in the year 2007.

Also, worth noting was cash flow for operating activities was up substantially year-over-year, about better than $300 million.

Early in the year, I thought we could reach about 6.2 million tons of shipments, but obviously with the horrific declines that we and others experienced during this quarter, unprecedented drops, we did not achieve our shipping goals and shipped about 5.6 million tons where we had earlier in the year forecast about 6.2 million tons.

During the quarter, we lost $0.45.

For those of you who are wondering why not the $0.40 we had indicated we'd be at, we had some additional losses, in other pockets of the Company that we had not contemplated.

Probably one of the more significant ones was inventory write downs in the non-ferrous arena, again contributing to the $118 million operating loss that we had in the resource segment of our business.

I think also worth noting would be the fact that our debt was reduced by $226 million in the fourth quarter, leaving us over $500 million of unborrowed revolver.

From a forecasting perspective, we've tried to be as cautious as one can be and in reading the other announcements this morning, no one has good visibility, going forward, since our backlogs are not that extended.

But we should return to profitability and our best guess at this time is that we'd achieve somewhere between $0.05 and $0.15 in diluted earnings and as we said, we would provide further guidance if needed, as visibility improves and that guidance would likely come in the March timeframe.

The other statement I think most people probably are interested in is that we continue to believe that earnings for the full year 2009 could underscore, under somewhat improved circumstances, be comparable to those achieved in 2008.

What are those assumptions?

I think that's what everybody would like to know and they're not very good in the first quarter.

The assumptions is that we will run our flat rolled divisions at about 60% in the first quarter, having reached bottom in the November, December timeframe and showing some signs of improvement.

We booked about 20,000 tons a week in orders during the months of October and November, hardly enough to sustain profitable operating rates in a declining environment, from a pricing perspective.

But the bottom was reached, I believe, in the December timeframe or late November timeframe.

And, order entry in December was roughly 30,000 tons a week and has remained at that level going into the fourth quarter early on.

Now that's not real exciting, but it is probably about a 60% operating rate from our perspective.

Or somewhere in that area of 55% to 60%.

Thus, the forecast that we would continue to operate at that level in the first quarter.

We assumed about an 80% operating rate in the second quarter, with restocking having bottomed out if you will, and some of that's based on the fact that the economy is, we think, still operating somewhere between two-thirds speed and 70% speed.

One of the large indicators is, automotive units predicted to be built, that's still operating at about 70%.

Not good news, but not horrible news.

The housing starts are obviously down substantially.

Which does impact flat rolled steel as well.

Generally speaking, as a spot player, we think given our cost structure, that we can perform as well as anyone in this environment and we believe our operating activities will -- at the flat roll division anyway -- go into the 80s at the year progresses and eventually reach 90% as we only have one flat roll mill to feed.

Different set of assumptions though for heavy structural sections.

That market remained in pretty good shape through October and November and is now reaching its bottom as we speak in the December, January, perhaps even February time frame.

Substantial destocking going on in that arena and one has to consider, when we talk about operating rates, that we have a new mill that will not operate anywhere near capacity in this kind of economic climate.

Thus, our capability at this point in time -- although in time it may be two million tons, of production, from structural perspective -- is probably at best 1.5 million tons today as we continue our learning curve and operating the second mill.

Thus, since the order entry rate, shipping rate is down around 50,000 tons, one could conclude we're operating at 33% of our capability.

And, not forecasting that's going to improve all that substantially but it will improve, we think, as the year goes along.

Structural steel, especially could benefit from the stimulus package later in the year so we've modeled some improvement, in capacity, in structural as the year moves forward.

I might also point out that any stimulus package could also have a positive effect on flat rolled, as it could on SBQ bars and small shapes from a rebar perspective and/or, if the stimulus package should have any impact on the automobile community, if we see any improvement at all, that would be good for most SBQ bar producers.

Probably the steel division that's in the worst shape is Steel of West Virginia which continues to operate at about 45% of capacity and probably will reach a peak of only 50% during the year.

It's going to be a tough year there.

We think as we look at the first quarter, all of our steel divisions, with the exception of Steel of West Virginia, will be profitable.

That will include The Techs as well.

We will generate decent earnings, not decent, but given the fourth quarter climate, rebounding earnings.

Let's put it that way.

We had earnings in the fourth quarter, but offset by other issues.

From a total Company perspective, we should generate earnings in the first quarter in almost all of our steel divisions.

We should continue to be profitable in Fabrication.

In Fabrication, I might point out that that small unit of our Company had the highest operating profit of any reported in the fourth quarter.

But business conditions, they are still deplorable, but we're well positioned to surge forward in Fabrication should we get any rebound in economic activity although we're not modeling any strong rebound in light commercial construction on a go-forward basis.

And, as I said, the Scrap Division will be profitable.

Those profits, we think, will improve throughout the course of '09, quarter by quarter and thus it certainly won't be a record year or anything like that, but should be a solid year.

One must remember in the scrap universe, we are principally a processor and not a broker.

Whereas some of our competition and some of our competition in the steel community, -- much of their scraps sales activities are a brokerage in nature -- so there's a built-in margin there without the fixed costs or boots on the ground type issues that we as a -- probably 90% of what we do is processing.

Therefore we're going to get hit a little harder in times like this.

Because we're mostly all processing as opposed to brokerage.

I won't go through the segment data, I'll let Mark and Dick talk about those issues with you as we walk through their report today.

We'll try and keep our comments brief, respectful to the fact that there are other conference calls going on today.

We'll try to stay within a one-hour timeframe if we can and allow time for the appropriate questions.

But on a broad basis, we operated at about 86% of capacity or thereabouts in the year 2008.

And those are rough numbers, 85%, somewhere in that area.

We'll probably operate, we think, that's how we modeled the statement, we'll operate at about two-thirds to 70% of our capacity throughout the year '09.

Pretty bleak year, but nonetheless, if the modeling predictions relative to volume come true, even without much of an improvement in pricing and continued drilling down on our cost structures -- and we are in excellent shape now with regard to raw materials going into the furnaces and all our operating units -- we should be able to generate a reasonable operating profit and have a year that, as I said earlier, could be comparable to the year that we had in the year 2008.

So I'll conclude my remarks with those comments and I'll turn it over to Dick Teets at this point in time to let him talk about the Steel Operations.

Thank you, Keith.

Good morning everyone.

Despite the fourth quarter slow down in production and shipments, I'm proud to say that Steel Operations did not lose their focus on safety.

In 2008, Butler earned a recognition for two IOSHA for the VPP Program which is the first for an Indiana steel mill.

Both Butler and Pittsboro ended the year with their best safety performances ever.

Roanoke had only one reportable in the fourth quarter, while for 2008, Steel of West Virginia had a record low of lost time injuries with only five for the year.

Noteworthy of course, NexTech had no recordables at all for 2008.

Tremendous job by all.

But recognizing that improvement is necessary, each division has a 2009 goal of even better safety performance.

As far as capital projects and operations go, Butler has completed the expansion of the first two EAF and preliminary work is completed on the second one.

This project, along with the new baghouse installed in 2008, will allow for the goal of three million tons per year of hot roll coils to be achieved.

At Columbia City, the commissioning of the number two rolling mill continues.

Yesterday they rolled 15 inch channels for the first time and later this week or next, six inch wide flanges and 12 inch channels are scheduled to be rolled.

Work continues on closing in of the building for the number two caster and completing the foundation and inbeds for that facility.

In Pittsboro, work on the foundations for the two new rolling mill stands is complete.

Mechanical installation is ongoing as is planning for the caster and reheat furnace expansion.

The mill has expanded their product offerings with the addition of number five and six rebar sections.

At Roanoke work continues on work of the installation of the new baghouse and corresponding modifications to the melt shop.

Scrap yard improvements to improve logistical efficiencies have been completed.

Steel of West Virginia is continuing with installation of new straighteners -- one for each of the two rolling mills.

Straighteners will not only improve yields and costs but are a segue to more products requiring higher tolerance performance.

At all of our plants, we continue to reduce inventories, control our capital and operational spending and schedule our maintenance and project work to eliminate any impact on operations.

Keith?

Thank you, Dick.

Next we'll hear a report from Mark Millett.

Thank you.

As Keith articulated, it's been a dichotomy in markets in many respects this past year.

Although in late summer we could see an upcoming market softness and started to draw down inventories in August and September, we didn't anticipate the speed of descent nor the depth to which the commodity markets would fall.

I think you know in the ferrous world, American Metal, bundle pricing early in the year topped out about $900 a gross ton.

September it was $510, November dipped to $125 and recovered somewhat in December to about $230.

Similarly in non-ferrous, copper dropped and the average COMEX in September, was about $3.14, dropping to $1.38 in December, a 56% decline.

And in the other non-ferrous markets, aluminum and nickel, we saw similar declines of 41% and 46% respectively.

These dramatic market declines obviously created a little bit of a dilemma as higher priced inventories chased the market down in both our ferrous and non-ferrous businesses.

For our ferrous business, further margin compression was forced by lower volumes as the steel industry utilization rates plummeted to 35% in December.

For example, December 1 sales for us approached 160,000 tons, as compared to over 500,000 tons earlier in the year.

Specifically, we experienced negative gross margins in October and November, recovering to positive territory in December as the higher priced inventories grew down, selling values recovered, and buy-in priced dropped to more normalized levels.

In our non-ferrous segment, we achieved positive gross margins through the quarter, only to be offset by a $10 million lower cost or market adjustment at year-end.

In combination, we essentially achieved a zero gross margin for the quarter.

And, although our operations team did a tremendous job reducing expenses by $35 million quarter-over-quarter, we still incurred approximately $87 million in operating SG&A and other expenses.

Additionally, an unrealized non-cash, hedging loss of approximately $35 million was reported as the non-ferrous commodity markets dropped.

These financial contracts are utilized to minimize margin risk for long-term fixed price and volume contracts associated with long standing credit worthy customers.

Looking forward, having inventories at reasonable levels and evaluation and based on the positive gross margin experienced in December, we project a return to profitability, assuming markets do not retract significantly through the first quarter.

Turning to Mesabi Nugget and mining, the construction is proceeding well, although they are having formidable weather and, it's taken its toll and prevented the total enclosure of many of the buildings as we had hoped.

We still anticipate start-up of the 500,000 ton nugget plant during the third quarter of this year.

With engineering essentially complete and 73% of procurement committed, we have a more concise project cost.

Unfortunately this has grown from the original $225 million to $230 million to $260 million.

And, the increase is related principally to increased structural steel and equipment costs, associated with inflation of commodities, as much of this was purchased last summer at the height of the market.

Higher than anticipated labor costs for construction and an underestimation, principally on my part, of the size and scope of the off-gas system.

Permitting of the mine is currently on schedule.

The environmental impact statement scoping study has been completed and permit issuance is expected for December of this year.

Assuming a Q1, 2010 construction start, we'd anticipate mining concentrate production by year-end 2010.

Iron Dynamics saw it's best year ever in 2008.

It was the most productive, most profitable and safest year in its history.

The capital and process improvements made through the year achieved significant gains in operational performance.

DRI production was a record 286,000 net tons, yielding a liquid pig iron at a 70% rate for a total of 180,000 net tons of liquid iron shipments and a further 75,000 tons of HBI shipments.

The improved production rate capitalized on strong market conditions earlier in the year, obviously, providing $19 million in pretax earnings and $29 million in EBITDA for the year.

I would congratulate the team.

Their persistence paid off and they've done a phenomenal job.

The plant was shut down for 24 days during the fourth quarter for extensive modifications to the rotary hot furnace off-gas system, which negatively impacted production in the quarter.

However the plant restart went extremely well.

The improvements are demonstrating a potential for 30% increase in DRI production, 10% decrease in natural gas usage.

Iron Dynamics is in sound footing and very consistent today.

Thank you, Mark.

Gary?

Thank you.

For New Millennium this quarter, shipments were up about 10% versus the fourth quarter 2007, but industry shipments were down about 27%.

The team's done fairly well.

Our shipments for the year are up nearly 5% (inaudible) off 17% versus '07 shipments.

So it's clear that the New Millennium team has done a great job for the quarter and for the year, both pursuing market opportunities, building and shipping product and controlling expenses.

And congratulations to the team for leading the Company to profitability, although I think we look forward to the resurgence of the steel and scrap operations.

As we look forward, nonresidential construction remains weak compared to recent years.

And, as a result, order entry for joist and deck operations are falling across the industry.

We're no exception, but we are out there overturning every stone looking for opportunities.

We did close one facility this quarter, we closed our production facility in Florence, South Carolina and consolidated those operations in our Salem, Virginia, and Lake City, Florida facilities.

Thus giving us better utilization of those facilities and overall better earnings and no interruption in customer relationships.

The markets that were served by Florence will be served by Lake City and Salem with no interruptions.

We continue to work hard to control costs and remain very well positioned with regard to very efficient operations, very flexible cost structure.

We have a great team in place and we'll continue to get out there and pursue the market.

Thank you Gary, before we go to Theresa's report, my comment that we've work extensively with employees, we've done a good job of educating them throughout the years.

They understand income statements, balance sheets and need for profitability.

When tough times like this come along, they have really rolled up their sleeves and went to work and dramatically reduced our fixed costs which were probably world class in the industry at any rate.

They understand the economic circumstances that exist and I think they appreciate the environment in which we operate which is a no layoff type environment where everybody shares the pain, there is no cadre of families that are laid off experiencing all the pain, but it's rather shared pain with everyone.

So having said that, I think the team's spirits are in good shape, as are the fixed assets to this Company and capable of responding at a moment's notice to improving business conditions.

I want to tip my hat to all our employees.

They've done a great job throughout the year 2008.

Theresa?

Thank you, Keith.

Briefly go through some fourth quarter highlights and some directional comments for the first quarter of 2009.

To begin with from a working capital perspective, we decreased working capital over $400 million during the quarter.

Obviously, based on volume and pricing decreases.

Our accounts receivable days outstanding remained unchanged at 45 days and very positive comments, still over 95% of accounts remain current or less than 60 days past due.

We actively monitor our customer base.

We've been very fortunate in that regard.

From an inventory perspective, our finished goods with inventories volumes decreased over 30% during the quarter, yet our values decreased almost 45%.

Again, is this due to some of the lower cost or market adjustments we talked about earlier.

That approximates $36 million in losses for the quarter.

$26 million related to our Steel Operations primarily in the flat rolled arena and $10 million as Mark mentioned was due to non-ferrous write downs.

In contrast, our scrap inventory volumes actually increased during the quarter, but also the values decreased.

From the capital investments perspective, during the year, most notably we invested $412 million of which $115 million related to our Structural Division, for the completion of the second rolling mill and beginning the second caster.

We invested $80 million in metals recycling operations.

Almost 50% of that was due to new site and shredder installation in Indianapolis, Indiana.

And, $85 million was spent on the Mesabi Nugget project with an additional $20 million on the mining project up in Minnesota.

As well as $45 million was invested for the EAF expansion and new baghouse at the flat roll mill that Dick mentioned earlier.

Our preliminary thought for 2009 capital investments totalled between $250 million and $275 million, obviously based on availability of funds.

Our most significant portion of that would be $125 million associated with the Mesabi Nugget project for completion and start-up as Mark mentioned in September or the third quarter of 2009 and $45 million for the completion of the second caster at the structural division.

In addition, there's $100 million that's not committed, approximately half of that would be related to maintenance investment efficiency upgrades and another half of that would be more related to potential improvement projects that as the year goes on and more visibility, in what our liquidity platform is we will be able to make those decisions.

Our effective tax rate for 2008 was 37.7%.

We expect that to be maintained throughout the first quarter as well.

Our gross interest expense was $43 million at an effective interest rate of 6% and our capitalized interests related to our construction projects was $2.5 million.

At the end of the year, we had 181 million shares outstanding and for our estimate for the first quarter would be diluted shares of 182 million to 183 million.

Finally, I'll just comment on our capital structure and liquidity outlook.

During the quarter, again, as Keith mentioned, we reduced debt by $226 million.

And increased our availability of funds by over $500 million.

Our current debt to trailing EBITDA which is our restrictive covenant that we have is currently 2.4 times, compared to 2.5 times at the end of 2007 and 2.2 times at the end of the third quarter.

Our total debt to equity remained unchanged at 62%.

Again, I'll just reiterate that we plan to manage for maximum cash flow and focus on debt reductions.

Thank you, Theresa.

I might just briefly comment on our inventories.

As Mark said earlier, the inventories at the scrap processing units are in pretty good shape but flow is running at what would you say, half speed or thereabouts.

So, flow is down due to the industrial environment.

And we operate for the most part, in a winter climate where flows are impacted seasonally as well.

And of course, flows would be down because of the automotive shutdowns that occurred in late December, and have continued throughout the month of January.

Inventories at our steel divisions are really not in bad shape, at four of the five.

The pricing's in good shape now at five of the five, you might say, but we have a lot of inventory at Butler.

When you look at it all collectively, if push came to shove, we could probably bring $75 million to $100 million of cash out of those inventories by allowing them to decline.

It's tough to get them to decline when you're operating at only about 50%, thus they've remained high and flat rolled throughout the quarter.

As I said, really in pretty good shape elsewhere throughout the Company, so we still could flush some cash out of inventory if it were necessary, but don't believe that that will be necessary.

So, that will conclude the remarks that everyone has and we'll just open it up to the Q&A.

(Operator Instructions).

We'll take our first question from Charles Bradford with Bradford Research.

Good morning.

Good morning, Chuck.

I understand you guys have dropped out of the AISI, what's that mean as far as data?

Are you going to continue to supply information?

Chuck, I really don't know whether we're obligated.

I don't think we're obligated to supply information, but then again, we're still members of the Steel Manufacturer's Association.

I don't know whether or not we report that data at all.

I know they at least report our product's data, but I imagine they report flat roll data as well.

It will get reported and/or consolidated I do believe.

We're always interested in the quality of the data we receive and with you guys, about 5% of the industry, if AISI who has most of the data doesn't get it, I think we all have to question the validity we are getting.

Yes, I don't think we have any real problem providing that data.

They're just numbers.

We will cooperate which everybody can best assimilate that data.

Thank you.

We'll take our next question from Bob Richard with Longbow Research.

Good morning and thanks for taking our call.

Good morning Bob.

Last summer in recycling, operating profit margin's around 7%, I realize ferrous pricing was going up all through that time frame before everything crapped out in the fourth quarter -- but with inventories written down to such a low market and scrap price probably more up than down.

What kind of operating profit margins do you expect in recycling here?

I think you said you have a little more inventory volume than what you expect so you have a pretty low cost base there.

What kind of margins are you looking for in recycling in the first half of 09?

Are you able to share that?

Well, let me say that I did make a comment and I'll let Mark comment as well.

The flows at this time are very weak.

What he was saying is inventories in the yards are not high, let's put it that way certainly because flows have been down.

But with the shutdowns in December and January, the flows are really pretty bad during that timeframe so the rate at which they're operating is probably at best, 50% of where they would have been earlier this year or the previous year for that matter.

Mark?

I don't necessarily have sort of a margin percentage, but I think it's now principally influenced by volume and depending on how the volume comes back over the next six months, will obviously depend on profitability.

In the fourth quarter, we sort of had a two-point shift.

Not only did we have lower volumes, as already indicated, but we had higher priced inventories.

We should expect a lesser, year-over-year, a lesser margin at least through the first half of '09?

Yes, it all depends on what the market does.

The first half of '09, it's all quite an appreciation in most of the commodity pricing but if it's a flat six months, earnings are going to be down year-over-year.

Ok, thanks very much.

And, we'll go next to John Tumazos.

Good morning.

Hi John.

Some companies, I guess, apply different standards differently.

Worthington in their November fiscal second quarter and interim quarter, wrote off all of the goodwill related to pass metal framing acquisitions, I guess in the mid-90s.

What are the tests related to your goodwill, particularly concerning the scrap acquisitions?

And do you visit them each quarter?

And just as an aside on the non-ferrous side, the six LME inventories last week averaged 0.2% of annual demand increases or as though the market were 10% out of balance now in late January and aluminum inventories were at a record and copper inventories at the highest in six years, et cetera.

This is Theresa, the way we apply a test for goodwill intangibles, you have to set a measurement date.

For us, OmniSource's measurement date was November 1st.

At that point, we look at their net assets to make sure their forward-looking discounted cash flows -- what we expect to have -- are actually greater than the net asset value which include the goodwill and intangible assets.

That definitely met the parameters where there was no impairment.

Now, because there was a loss in December, we looked at it again because that would have been an indicator that there could have been impairment and it was clear there was no impairment based on what we expected these certain kind of cash flows to be.

We do that with all the entities that have goodwill, which would include The Techs, Roanoke, OmniSource, and Recycle South.

So is it every November 1 that you would make the test?

It's at least every November 1. If there's an indicator impairment that happens before that, which John could be, if the markets go down even further, if there's actually significant losses being established at the metals recycling operations, then we'd need to look at it during that quarter as well.

Is it basically each financial acquisition package that are baskets as opposed to a sub basket for ferrous or non-ferrous within OmniSource or Recycle South?

We did not separate goodwill down to level non-ferrous to ferrous.

We saw it as one metals recycling operation and in fact, OmniSource and Recycle South are modeled together.

They're of the same nature in business and they're operated as one unit.

So on a go-forward basis, Recycle South and OmniSource will be evaluated as one entity.

Thank you.

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

Okay, thanks very much, good morning.

Good morning, Mark.

Can you or Mark give us your best thoughts on where scrap prices might be headed for the February auction?

I think we're probably both in sync.

His marketing guys said that he thought probably the market would move sideways again, potentially at the end of January for February delivery.

Whether or not that's a reality or not remains to be seen, but as bad as flows are, equally as bad is demand and high levels of inventory that exist not just in some of our steel operations, notably Butler, but in probably the competition's as well.

The sort of good news from a scrap purveyors perspective is that flows are down.

You would think which would cause some concern, but equally bad news is demand is still in the arena of 50%.

It's probably a pretty good match and probably a pretty good assumption that it won't have any strong movement in one direction or another for some time.

Mark?

I prefer not to project--

That's easy for you to say.

Again, inbound flows on the retail wholesale side, for (inaudible) is kind of stable quarter-over-quarter.

Month over month anyway.

Industrial scrap obviously, prime scrap is down given the manufacturing community is on its tail.

Who knows where demand might be?

So the market will shake out as it normally does.

Are you seeing any -- I think you guys probably still have adequate supply of pig iron, but I was wondering if your intelligence would suggest that there's, there's any shift in momentum on pig from a negative trend toward upside.

We haven't necessarily seen it.

Obviously we've been out of the market.

We've got a good level of inventory at a very good valuation right now.

Obviously Brazilian pig is constrained.

They're down to about 40% of their output currently.

Yet demand is also down.

So again, it's just a balance and who knows where the balance is going to find light.

If I could ask just one last question -- no one is really seeing much in the way of demand pick-up at this point.

Maybe the service centers are doing a little bit of replenishment of inventories as they ship product out, as opposed to losing so much inventory, but just wondering -- Keith where do you think you'd expect to see demand pick up first, given your understanding of the markets?

Where should we be looking?

Both on the positive side and if things are going to move in the other direction, where would you expect they might take another step down first?

Well, it would be hard for us to envision it could get a lot worse in structural.

We're operating at under 50% capacity and substantial destocking being reported, but then again, there is not a lot of activity out there right now at this point in time, but as I said, the stimulus package could probably have as much impact in the structural arena as in almost anywhere in the market basket of products we offer.

Obviously the stimulus package could also affect flat roll, but a lot of the more transparent markets, automotive as you know, in terms of projections and units built, 10.5 to 11 million units versus whatever - 15 million, 15.5 million, it's operating at about 67% of its capability which is indicative, of where our general economy is.

I think the energy sector is operating at a higher rate of its capability or more money is going into the infrastructure spending for energy so I suspect that will operate at better than the average economy operates at, but on the other side of the equation is, light commercial construction, residential, things of that nature, which could operate at below 67%.

Yet, the balance could be 67% or -- we hope it doesn't worsen obviously.

If it worsens, it's going to impact every segment of our business as it will our competition's.

I think it's reasonable to assume that structural, until a stimulus package arrives, and by the way, my comment about that -- I was horribly disappointed with the amount of hard dollars going into infrastructure spending.

Out of $850 billion package the rumors of $90 to $100, $110 billion worth of spending is pathetically low.

I think the economy is going to get the biggest bang for its buck in GDP turns out of infrastructure spending.

Whether it's roads, bridges, school and hospitals or energy projects or windmills for that matter.

A lot of steel will be used.

Basic industry, it isn't just steel that's going to benefit.

All basic industry will benefit.

Whether it's concrete, plastics, aluminum, what have you.

Some rather disappointing numbers.

I was really expecting to see a stimulus package that perhaps was in the $300 billion to $500 billion range because I think that's where you'd get the most bang for the buck.

Giving everybody $500 rebate checks isn't going to have a profound impact, especially if that money is spent at Wal-Mart and helps Chinese producers with Chinese jobs.

I'd like to see more hard dollars spent in the stimulus package on hard infrastructure.

Obviously some shoring up of the banking environment, lending environment is necessary at this point in time.

It's hard to grow and expand, unless you have access to capital.

We read a lot about small banks that are lending money.

But there's a big difference between an $80,000 home loan or a small commercial loan of $100 or $200,000 and huge basic industry needs of hundreds of millions of dollars.

You know in high yield instruments and things of that nature that are not available in competitive rates today.

A lot of work ahead of us as a nation that that's my best guess right now.

Thanks, Keith.

And we'll go next to Sal Tharani with Goldman Sachs.

Good morning, guys.

Good morning, Sal.

First some housekeeping.

Would you mind providing us the details of your flat roll shipments, the way you always give us?

Sure, Sal.

Hot roll was $124,000.

Pickle and oil was $30,000.

Cold roll $36,000.

Hot-roll galvanized, $51,000.

Cold-roll galvanized $54,000.

Painted, $49,000.

And Galvalume, $17,000.

Thank you very much.

On your CapEx guidance, it's lower than what you had given us in December 12 press release.

I see the missing item is the $75 million on the Iron Ore Mining Project.

Is that something you're delaying or something that's been pushed out into 2010?

No.

There's $125 million still expected for Masabi Nugget.

And, the mining would be part of that $50 million of identify potential improvement projects if we would intend to do that.

But it wasn't $75.

I think it's somewhere between $45, maybe $30 and $40, something like that.

We've already spent $20 million of that in 2008.

Because your 2009 would be -- the press releases you put out December 12 does mention $125 of Masabi Nugget and separately $75 million for Iron Ore Project.

Out of that $75, we spent $20 million or $22 million exactly in 2008.

We should have just updated that.

Gotcha.

Okay.

On the pricing side Keith, what are you seeing in the flat role side right now?

We prefer not to comment specifically about pricing, Sal, but would tell you that we think certainly, the bottoms have been achieved.

And right now today, I said I wouldn't comment, but I will to some extent -- flat roll is all over the place.

I think the bottom is about $500 and the top's about $575 right now, current market conditions.

And in terms of--

That would be plus extras and what not.

Okay, also any more comments -- I know Theresa brought up some comments on the accounts receivable -- but anymore color on the further risk to the counterparty risk in terms of some of your large buyers?

Sal, I would say we're very comfortable with where we're at from a reserve perspective.

Especially at the mills recycling side, we worked down exposures we had.

Very, very acceptable levels.

We're very comfortable with where we're at today.

Great, thank you very much.

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

Hi guys, with respect to the hedges you guys have talked about in the previous quarter, can you talk about what hedges exist as we go into this quarter?

We still have the futures contracts are outstanding related to copper positions that Mark mentioned earlier in the fall or in September.

We entered into some long-term sales contracts with very significant customers in the metal recycling arena.

Those futures contracts are for fixed volume contracts for 2009 and fixed pricing.

We've got homes for the copper that will be delivered.

It's a matter of when we'll be unwinding those futures.

Mark?

They imagine about 25 million pounds.

And, at what price?

They've been marked from an -- can I tell you what price, the futures price or the (inaudible) price?

Really, I want to get a sense as to what the impact's going to be on the next few quarters earnings.

If you look at when the deliveries, and the copper is supposed to take place during the first half of the year, and what we're seeing the market at today, is that we're going to be realizing the targeted margins that we anticipated back in the fall.

That's why we entered into futures contracts and tried to protect that targeted margin.

So it'll be positive impact.

If you remember, throughout the course of '09, by the time you get to the end of '09, that all will have been unwound without any realized loss.

That'll all come back to you and will be a zero.

Got it.

And then I'll ask the bond guys question, are you guys able to, under your covenants or inclined to at this point think about using some of your debt reduction in open market repurchases of bonds?

We are able to and right now we're more focused on repaying our revolver and maintaining our liquidity and availability of funds until we see more clarity in 2009 and see more strengthening in the credit markets themselves.

Thanks much guys.

We'll go next to Kuni Chen with Bank of America Securities.

Hi, good day everybody.

Hi Kuni.

How are you doing Keith?

Fine.

Good.

Just to clarify on the CapEx.

The $250, to $275, that includes about $100 million of discretionary?

So certainly in a tighter liquidity environment, that $250 could be really $150 for the year?

That's correct.

Okay.

And then just as far as working capital, it didn't seem like there's going to be a lot movement over the next quarter or two, potentially you could ring some extra cash there, but can you clarify over the next let's say two quarters?

Do you expect a source or use of cash out of working cap?

Out of working capital, in the first quarter we could have -- it's probably going to be net neutral in the first half of the year.

As Keith mentioned earlier, if things don't turn around from a market perspective, we might bring some of the inventories down in scrap or we could be generating funds from working capital, but otherwise, we'd probably be building working capital, but only slightly.

I really see it as a neutral event.

Just lastly, you know as far as your bank covenants go, I think the covenant test is a trailing four quarter calculation.

If you include the certainly weaker results in the fourth quarter and first quarter, do you kind of get close to that covenant level as you look out toward the third quarter of '09 and kind of what are you doing proactively about that?

Well, actually, where our current models shows us, we're not getting close to that is a five time trailing EBITDA.

And, that EBITDA is an adjusted basis.

So, for instance, the unrealized loss associated with the hedging contracts are not included in that.

That's actually a net neutral to the EBITDA or trailing EBITDA.

We're monitoring it very closely, but currently, we don't see us approaching that at all.

There is a three time EBITDA covenant that has to do with dividend payments and share repurchases.

But, for the five times, which would cause acceleration, we're not concerned with that today.

So no discussions with your bank group at this time and any, can you talk about any other potential avenues of liquidity that you may look into later in the year?

Certainly, actually we're talking to our bank group all the time like most companies are I assume.

We've been very fortunate, we have a very strong group.

We have the availability to go out and get high yield notes if we would wish to.

I believe the market would be there if we would wish to.

The current pricing isn't very attractive.

There's availability of those funds.

We also have a negative fledge against our fixed assets.

I believe it's 20% or 25% of those fixed assets.

We have the ability within the credit agreement to go obtain financing on.

So, we also have that additional availability of funds.

Okay, thanks for the clarification.

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

Hi, good morning.

I wanted to ask about where you think your break even utilization might be.

I know it's a tough question, but if you could comment on that.

Specifically, wanted a little bit more color from Keith on how you think about the restarting of operations.

You mentioned you're able to react quite nimbly to any change in market conditions.

What's it take for you to think about restarting some of your operations specifically?

I would tell you, Timna, on a go-forward basis, the break even at flat rolled would be something south of 40% of our ability to operate.

Somewhere between 35% and 40% we could still break even.

If we broke even everywhere, we couldn't absorb some of the fixed costs at the corporate level -- amortization, charge per quarter, interest charge at the corporate level per quarter, corporate overhead and things like that.

At the division level, from pretax income, including an interest allocation, to those operating ends, they can, in today's pricing environment, probably still float a profit north of 40%.

So break even, somewhere south of that.

And structural, it's probably not all that dissimilar.

They can still generate a profit in the 33% to 40% arena.

The two biggest operating units can operate well below 50% and still break even or make money.

Engineered bars probably would be around 50% and small shapes is probably around 45% to 50%, best guess and at 45% or 50%, we lose a small amount of money at Steel of West Virginia.

Okay, and on the restart question please?

What kind of thought process do you go through or what kind of indicators would you see to restart operations?

Just steady influx of higher level of order entry.

Backlog rising.

At 30,000 tons a week order entry, we're only going to be able to operate as you can imagine, one caster.

I guess after you operated it for three or four or five weeks, you might be able to operate two casters for one week.

It's that kind of operating rate -- if order entry -- if the trend line went from 30,000 tons a week to 40 and then to 50, we'd certainly bore right in almost immediately and start producing that material.

So then you'd be in a situation where you're running one and a half casters.

We can turn them on and off within hours, kind of thing.

It's not within weeks kind of thing or within months.

So we'd be very responsive, simply said, to order entry rate activity.

The same is true at every one of the Operating Divisions.

Thanks very much.

We will go next to Dave Katz with JPMorgan.

Most of my questions have been answered, but with regard to the working capital release, you talked about both inventory and accounts receivable, but you haven't talked about accounts payable and I was hoping you could go into a little more detail there.

During the quarter, excuse me--

During the quarter, accounts payable came down substantially and probably won't change a lot in this environment going forward.

I'll have a number for you in a second.

Keith's correct actually.

During the quarter, accounts payable would have come down about $300 to $400 million and going into the first quarter, we see that increasing just slightly, but then being fairly stable throughout 2009 actually, based on current estimates.

And not a lot of fluctuation.

Okay and then with regard to the operating rate, you're saying that, if I understand correctly, you're looking for a 60% kind of capital utilization rate in first quarter, but the industry's running at kind of the mid- to low 40s.

I was just trying to kind of close the circle there between you and the rest of the industry.

Why is the industry overall showing a lower rate than you are?

That was just in flat rolled at 60%.

We're probably going to operate at about 33% to 40%, best case, in structural, and probably somewhere around 60% best case in engineered bars, 50% to 60%.

Same way with small shape.

The aggregate is something less than 60% for the quarter.

Okay, thank you very much.

That does conclude today's question-and-answer session.

I'd like to turn the call back over to Mr. Keith Busse for any closing remarks.

Thank you, Elizabeth.

I don't really have any specially prepared remarks other than I think all of us are glad the fourth quarter is behind us where you had severe drops in the price of raw materials and had to adjust to that climate as well as adjust our inventories to new standards.

I think the worst of that is behind us and, we're well positioned to move forward, at this point in time in a difficult market and certainly hopeful that the markets tend positive and improve slightly throughout the course of '09.

But more to report later on.

I want to thank everybody for continuing to support the Company and follow the Company and I hope we've been responsive to all of your questions in the past and know that we will be in the future.

Thank you and we'll chat with everyone throughout the course of the quarter.

Thank you.

Bye now.

That does conclude today's Steel Dynamics fourth quarter 2008 earnings conference call.

We thank you for your participation.

Have a wonderful day.