Steel Dynamics Inc (STLD) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Steel Dynamics second quarter 2009 earnings 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 - Steel Operations, Mark Millett, President and Chief Operating Officer -- OmniSource Corporation, Gary Heasley, Executive Vice President, Theresa Wagler, Chief Financial Officer, Fred Warner, Manager of Investor Relations.

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

Fred Warner.

Please go ahead, sir.

Good morning, and welcome to today's Steel Dynamics conference call being webcast today, July 23rd, 2009 from fOrt Wayne Indiana.

A replay of this call can be heard and downloaded as a podcast from our web cast later at www.steeldynamics.com.

Today's management discussion may include various forward-looking statements.

All statements regarding anticipated future results or expectations are intended to be forward-looking statements, within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements, which by their nature, are predictive and are not fact are preceded by such words as believe, anticipate, estimate, expect, or other conditional words and are not intended as guarantees of future performance.

We caution that actual future results and events may differ materially from such forward looking statements or projections we may make today.

Some factors that could cause actual results to differ include general economic conditions, governmental, monetary, or fiscal policy, industrial production levels, changes in market supply and demand for our products, foreign imports, conditions in the credit markets, price, and availability of scrap and other raw materials, litigation outcomes, and equipment failures.

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 the forward-looking statements and risk factors sections of our most recent report on Form 10-K, or in our quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission, as well as in other reports we file from time to time with the commission.

These reports are publicly available on the SEC Web site and our Web site, Steeldynamics.com.

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

We will begin today's call now with introductory remarks by our Chairman and Chief Executive Officer, Keith Busse.

Good morning, ladies and gentlemen.

Thank you for joining us this morning, and giving us an opportunity to give you a business results update.

I am sure all of you have read the press release, our loss per share was $0.08 during the quarter, which is about $0.02 better than the bottom side of what we had indicated, due largely to the fact that we had income tax credits that changed the income tax rate and benefited the Company.

Net losses for the second quarter monetarily were $16 million compared to net loss of $88 million in the first quarter.

Positive significant difference.

But when you compare it to the first quarter, and the when you compare it to the second quarter of 2008, a significant decline.

As all of you know, during the quarter, we redid our credit arrangements with banks and issued some equity.

I won't go through that in detail, but only say the average increase in shares outstanding was offset by certain related transaction expenses of approximately $3.5 million.

Net sales in the quarter were $792 million, 3% lower than net sales of 815 million, in the first quarter of 2009.

I think this obviously speaks to pricing and not to volume, volume was actually up, but pricing continued to deteriorate late first quarter and early first quarter, thus yielding these results.

The steel shipments in the quarter were 886,000-tons, better than the first quarter of 700,000 approximate tons shipped.

The SDI average selling price for the second quarter declined $126 a ton and the average scrap costs declined $79 per ton.

So you would wonder why you would have better results when you seemingly were losing margin, and I think this again speaks both to volume and speaks to the enormous cost control initiatives implemented by the Company and its employees.

I think it is also important to note that the Company's steel operations, it is significant that the steel operations produced an operating profit of $36 million, but also had a pretax operating income as well during the quarter.

So the shining star was flat roll, and structural and rail results lagged behind.

In the structural rail arena, we only shipped 25% of our compass did underline the word or underscore current.

I think these results came very close to a pretax profit that fell this short, and a lot of that had to do with the experimentation during the quarter, and the perfecting the art of producing rail blooms and successful rail blooms.

We had some quality issues and had write offs we had to deal with in that quarter, and had we not had them, we may well even at at that 25*% of our capacity.

And we are very pleased as we said in the report, to report that OmniSource generated operating income for the quarter with May and June results offsetting April losses.

They not only had an operating profit, the segment had an operating profit, Omni specifically had an operating profit and kudos to Mark and his team because they actually had a small pretax income in the quarter as well, something we didn't believe early in the quarter that we could achieve, but I think he and his team had very positive results during the quarter.

Scrap went up last month anywhere from 40 to $70 depending on whether you are dealing with obsolete grades or prime grades, and had increased in the month before as well.

Mark and I may or may not differ on the -- we haven't even talked about it.

My take on where we are going from here, and we all have short windows of visibility, is that scrap is likely to go sideways for delivery in the month of August.

It could actually be down slightly in the month of August.

Where it's going to go after that really depends to a large extent on business conditions.

Flows are improving, we said in the report.

We believe OmniSource will be profitable for the full year.

Our fabricating operations, the Millennium Building Systems, as I said continues to face very stiff head winds as the nonresidential building construction market remains very weak.

And in fabrication, we basically broke even during the quarter.

Talk a little bit about business conditions and backlogs, we still see order entry being very strong in flat rolled.

We are now moving into the month of September and ready, we have orders for September, we haven't officially open the books and are about to do that, but strong flow, strong order entry remains in the flat roll segment of our business and has not abated at this point in time.

We have seen marginal improvement in structural, not meaningful, a better trend line, but not meaningful volume.

Things in small shapes in Roanoke have improved, and we believe the operating rate at Roanoke may well approach 70% during the quarter.

At least, we are hopeful that it will.

Business conditions in Steel West Virginia have recently improved, and they should operate a little stronger in the third quarter than they perhaps did in the first and second quarter of this year.

I think Tim and his team have done a very good job in the face of very adverse conditions that exist in their marketplace.

As it would regard special bar quality steels, we've had marginal improvement there, but would suggest that the SBQ division will probably remain in the 50s for an operating rate or in that area, they will not achieve a higher operating rate in the third quarter.

As we noted, with flat roll, the strong book we are running at near capacity, and plan to do so in the foreseeable future.

So we see being able to maintain fairly full operating rate in July and August and we believe order entry will remain fairly strong for the remainer of this quarter, at least, and should produce fairly significant results there.

Our mills are in terrific shape.

Our recycling yards are in great shape and our fabricating operations are also in good shape.

All of them are ready for any surge in business activity as they come.

While we believe that flat rolled business conditions will remain healthy in the near term, we have only seen marginal improvement in products and we have yet to see any real signs of improvement in the construction marketplace.

Based on our viewfinder at this point in time, or our view of the world at this point in time, we suggest that in the third quarter our earnings, and I repeat earnings, not losses.

It is really good to say that again.

We've had a couple of bad quarters really related a lot to mark to market reevaluation of inventories, business conditions, low volumes, low selling values, and we have hit the bottom, and we are going to start to rebound in almost every segment, even though the long product segment that may remain weaker for some time tied the construction environment.

I do think that we've reached the bottom of destocking, and we are in a period where, especially in the automotive arena where I think would suggest that finished goods inventories at general motors and Chrysler weakened substantially and they're in the process of rebuilding that pipeline, service centers are in the process of coming off the bottom, in fact they may have, their inventories may have dipped too far in light of slightly improved business conditions, so I think from a service center perspective, they will now order steel at the same rate they're going to consume and/or ship it.

Which would be a better operating rate for the industry in general, just based on that result alone.

As I said, I think our range in the third quarter, we expect earnings in the range of $0.10 to $0.20 in the quarter.

I do not look for this number to deteriorate as we update guidance in September.

And it could slightly improve.

With that brief report, and concise report, I would now like to turn this over to Theresa Wagler and give her an opportunity to speak to other elements of our financial results as she does, each and every quarter.

Thank you, Keith.

Good morning, everyone.

I would like to talk just a little bit about the enhancement that we made to the capital structure in June through the joint issue of common stock and convertible notes.

We issued 31.050 million shares of common stock at a public offering price of $13.50, and we issued convertible securities at 5.125% through 2014 of $287.5 million.

The conversion premium was 30%, and the underlying shares that are attributed to that offering are just a little bit under 16.4 million shares.

The net proceeds raised were just over $675 million of which we used $550 million to prepay our term loan, and we also reduced our revolver during the quarter by $117 million through the excess net proceeds.

In connection with that, as Keith mentioned earlier, we had additional expense in the quarter of about $3.5 million, related to the write off of financing costs, and the unwind of an interest rate swap.

In addition during June, we amended our senior secured credit agreement to allow for greater financial covenant flexibility for not only the remainder of 2009 but actually through the 2010.

Our total debt leverage covenant was actually suspended through December 31st of 2010.

In its place, we instituted a first lien leverage.

The maximum amount on that is 2.5 times, and then it steps up actually to three times at December 2010.

At the end of the second quarter, that calculation was 0.28 times, and the way you should consider that is the revolver is our first lien outstanding balances plus about 25 to 30 million of LCs and other secured debt.

We also modified our interest coverage financial covenant.

It was two times.

Now it is 1.25 times and it steps up to 2.5 times.

In addition, we engaged a borrowing base, attached the revolver.

It is 85% of our accounts receivable and 65% of inventory.

At the end of June, that would have allowed for $773 million worth of borrowing on our $874 million revolver.

During the quarter, we reduced our debt by $370 million, and we improved our debt to equity capitalization from 62% at the end of the first quarter to now 53%, and we expect that to improve throughout the remainder of 2009.

We also improved our liquidity to just over $650 million, and now our debt maturities are actually just a few million dollars a year until 2012, at which point our revolver will be refinanced and we will have $700 million of senior notes come due.

We have 215 million outstanding shares at the end of the quarter, and from a working capital perspective, we reduced working capital $32 million during the quarter, trade receivables remained relatively flat, approximately 92% are current or less than 60 days past due, and the inventories decreased $95 million.

That $95 million was predominantly between finished goods at our steel operations and scrap at our steel operations and the scrap was mostly related to volume, volume reductions and most significantly at the flat roll increase production.

Capital that we invested during the quarter was about $73 million, and over 70% of that was related to our project in Minnesota for the nugget manufacturing facility.

For the remainder of 2009, we expect to spend between $150 million and $175 million in additional capital expenditures.

Over 70% of that, or about $100 million of that would be anticipated to be at the Minnesota project for both the completion of the nugget plant, and the continuation of the mining facilities.

The effective tax rate as Keith mentioned earlier did change during the quarter.

It was 48.4%.

On a go-forward basis, we expect it to be 41.3%, and that was related to lower earnings, and the fact we actually have to provide for FIN 48 or what we call uncertain tax exposures for the year.

We also have a $126 million federal and state income tax receivable.

During the second half of 2009, we should receive about $25 million of that back in cash and then the remainder would be reductions in expense or cash paid back to us during 2010.

Interest rate on a gross basis was $42 million during the quarter, but you need to take into consideration that about $2 million of that was the write off of the financing costs during the quarter, and the effective interest rate was 6%.

Capitalized interest on construction projects was $4.6 million, and I would model anywhere between 35 and $40 million, probably closer to $35 million on a quarterly basis for net interest expense for the remainer of 2009, and if you are looking at depreciation and amortization, I would model approximately $65 million per quarter.

Finally I will comment, I know many of you track the flat roll shipments by product type.

During the quarter, we had hot roll shipments of 150,000-tons, and taken and oiled of 42,000-tons, cold rolled of 45,000-tons, hot roll galvanized of 78,000 tons, cold rolled galvanized at 57,000-tons.

Painted products of 56,000-tons, and galv-alum of 27,000-tons for a total of 455,000-tons of flat roll shipments.

Keith?

Theresa, thank you.

Excellent report.

Dick?

We will go to you next and allow you to talk about steel operations.

Thank you, Keith.

Good morning.

Steel operations continued to improve our safety record at all of our locations, noteworthy performances in flat roll.

In the Butler mill, The Transportation Department has now gone fiver years without a lost-time accident, congratulations.

Jeffersonville has gone over 1 year with no reportables, and the techs also had a reportables performance in the second quarter.

Also, Pittsboro had no reportables for the quarter.

The approximate operating rates, as Keith mentioned for the mills in the second quarter were flat rolled at 66%, and as he mentioned now fully booked for August with a little opening at the end, but not much.

And also the techs are fully booked for August.

The structural mill is operating at 25% with little sign of improvement.

SBQ and the merchant in Pittsboro are about 40%, a little more than that with certain product improvements, all media and so forth.

Merchant borrows at Roanoke were 65% and holding steady, actually our June bookings were the best we've had since July of 2008, and I know one month doesn't make it, but it is a positive sign, and also Steel West Virginia continues to operate at lower levels due to depressed OEM markets, but it is optimistic in the second half of the year.

Pittsboro, from a new products perspective, is now offering 20 new sizes, less than 2 inches in rounds and Steel West Virginia has added large flats to their product list.

As far as capital projects go, to explain a little bit more about what Theresa mentioned on the steel operations, we continue to focus our projects that will improve safety, quality, and cost reduction efforts at Columbia City, or I'm sorry, at Butler we have finished the last of the 40 AF shells that have been standed in pipe to further improve our productivity and efficiency.

Columbia City, work continues, albeit slowly, on the second cast here, with the steel deck going in on a cast and deck, along with the severe ball stand, and structural mill also is seeing the structural steel and joist being fabricated for our discharge building at the rail welding facility.

Pittsboro has upgraded their descaling system for the rolling mill, and that's been completed.

Roanoke outage work continues for the final hook up of the new mill shop bag house.

Lastly, Steel West Virginia, the installation of the new number one rolling mill straightener is going well, with completion scheduled for August.

Finally, I would like to report that we negotiated or successfully negotiated a new five year labor agreement in Steel West Virginia.

Congratulations to everybody.

And I'd like to thank all of our employees for the safe performance of their jobs and a positive attitude in challenging times.

Keith?

Thanks, Dick.

Before we turn to Mark and the recycling segment of our business, raw material segment of business.

I might mention, as I said earlier, we talked about about the excellent efforts that our employees have made in cost reduction.

I might report to you that from a head count perspective, and based on shuttered operations in fabrication and the loss of people throughout the system for a wide variety of reasons, voluntary resignations and headcount reductions, which were significant, in a rightsizing effort for the business, our employee count has dropped from in the fall of last year perhaps as high as 6800, 6850 people down to 5800 people.

So we have reduced the employee head count throughout the system by about 1,000 employees, which is pretty significant, and most of those reductions are probably going to be permanent in nature.

With that said, I will turn it over to Mark.

I want to remind everyone that when we talk about that segment of our business, OmniSource is the main operating unit within that segment, iron dynamics is producing on a regular basis, as we have noted in every quarter, and Mesabi Nugget makes up the third leg of that business unit that Mark is responsible for, and he will speak to where we are in the process, and we'll start up there.

Mark, please.

I too would like to applaud each and every one of the OmniSource team for a, absolutely phenomenal quarter.

So I believe we will be probably one of a very few, the only one organization costing positive operating earnings in the recycling sector.

This quarter's $9 million operating profit was a stark contrast to the $6 million operating loss in the first quarter of this year.

Ferrous shipments increased 15% from 730,000 net tons to 840,000 net tons quarter to quarter, driven principally by improved steel mill operating rates.

Our business remains steady, ferrous gross margins improved as transaction process appreciated, and lower cost inventory flowed through the system.

Non-ferrous shipments dropped slightly from 190 million pounds to 170 million pounds.

The drop of 20 million pounds in total shipments related principally to our lower shipments from our Superior Aluminum business, our secondary aluminum business.

It actually hides an 11% increase in flows throughout our other non-ferrous businesses.

With a struggling market driven principally by demand from China, the non-ferrous team executed extremely well, and margins were substantially higher through the quarter.

Our positive financial performance was driven by cost containment efforts expended throughout the organization.

Right sizing the organization was completed through the quarter, with a reduction in the OmniSource organization of 660 employees, that took us from about 3100 employees at the height of summer last year, down to roughly 2460 employees today.

Forming operating expenses are down $25 million a quarter at the beginning of the current downturn.

Keith suggested both the ferrous and nonferrous markets remain unpredictable.

In ferrous, the supply and demand dynamics continue to change, obsolete flows are attributing their typical seasonal increase, while industrial flow of prime scrap remains very weak as the domestic manufacturing base continues to flounder.

Given the restart of some Chrysler facilities, our prime flow should increase over the months ahead.

Additionally, although difficult to quantify, the recent approval of cash for clunkers, that initiative should prove beneficial for shredder feed stock.

Potentially improving supply demand dynamics could be offset to some degree, or in whole, by greater potential demand.

Steel mill utilization has been picking up with the expectation of additional integrated coming onstream, and although recent pricing levels have tempered export demand, exports remain the wild card.

In aggregate, there appears to be no specific trend any firm speculation of market direction is difficult.

I would agree with Keith, it is kind of status quo to up a little, don't see any strong, strong direction at least in the near term.

Non-ferrous markets are equally fickle.

The strong presence of China in our markets has softened so some degree, allowing greater available of scrap, higher flows for us, particularly in copper, and increased metal spreads.

Pricing in recent days also has been increasing, particularly in aluminum and nickel.

On a positive note, I think for us in these tough times, financial health and an ability to provide excellent service is allowing us to capture more industrial cash that will increase our market share as the economy returns.

Aerodynamics, the team there is also executing extremely well through tough times, despite significantly lower shipments, we have shipped 46,000-tons in Q2 versus 62,000-tons in Q1.

That's principally due to the other sheet mills' reduced operating rate.

They're even despite that, their financial performance improved from a loss of $3.9 million down to a loss of 3.4 million.

I believe Dave and his team did an incredible job.

There has been some dramatic improvement in operating costs, particularly in feedstock, optimization of feed materials and a dramatic 30% reduction in natural gas consumption which is quite incredible.

Mesabi Nugget construction progress continues to do well, as one walks through the facility, it is a well engineered plant.

The quality of installation is extremely good, and we're still on target for the heat up of the refractory of the furnace in November, with nuggets following shortly thereafter in December.

In conclusion I think the platform, both on the first resources and recycling is well positioned for the markets going forward, Keith.

Thank you.

Good report, Mark.

Gary?

Thanks, Keith.

The team and New Millennium has done a great job on pushing down costs and reducing exposure to high cost steel and whatnot as we have seen shipments fall 35,000-tons or I'm sorry, shipments of 35,000-tons now 53% in quarter two in 2008 and sales were $37 million, down 6%, the impact of cost reductions and the plant closures have offset the decline in sales allowing the group to generate a break even position for the quarter.

In spite of dramatic declines in joist sales nationwide, New Millennium has maintained market share, in a tough competitive environment, we are seeing shipments nationwide about 70% in the peaks of 2006 and 7.

I would say that as one of the most efficient joist and deck producers, with the finest joist plant in the country, New Millennium is well-positioned to compete and grow share in the difficult market we see today as we look forward we see predictions for nonresidential construction remaining weak throughout 2009, and potentially into 2010.

So the focus the team has had on cost reductions, on being efficient and running these plants lean will continue, and I think we will continue to grow share using our cost position to achieve greater market position for the Company.

So in closing, the team has done a great job forcing down costs and maintaining customer service and I look forward to more of that as we move forward.

Keith?

Thanks, Gary.

Karen, I think we are ready for the Q&A.

Thank you.

(Operator Instructions).

We will take our first question from Michelle Applebaum with Applebaum Research.

Hi.

It is nice to hear good news for a change.

Nice to have some.

Oh yes.

Can you give me -- two questions, the first one is an accounting question, you had a $0.06 gain on the hedging contract in the first quarter and I think you expected another one later this year.

Is there a is similar $0.06 gain for the second quarter.

Michelle, the unrealized hedging gains specifically related to copper during the second quarter were about $12 million pretax.

Okay.

Was there anything else unusual in the quarter that may not have made the press release?

No.

I guess I wouldn't call that unusual in nature.

You wouldn't?

Will you have that again in the third and fourth quarters as well.

Again, last year we had a 35 to $36 million I believe loss related to hedging, and so that will be recovered throughout the year.

Right.

So we had $15 million in the first quarter and now we have $12 million.

So you would expect to get that 4 or $5 million back sometime throughout the second quarter.

Right.

When you have the charge in the fourth quarter, it was in the first paragraph of the press release and it wasn't in the press release in the first quarter and it is not in the press release in the second quarter.

So I am just trying to determine if this is an on going thing or if it is unusual.

It is unwinding and.

Right, right.

It is very, it is whether it ends in the third or fourth quarter, it will end this year.

It is a few pennies left.

And you have to understand we bake all of that into our projections.

Right.

I know.

I won't take it out but it is very clear, I was just trying to find out the magnitude, because if it wasn't in there and it would be next quarter, then it would have a difference.

I know that your guidance assumed that $0.06 gain.

I'm very aware of that.

Would we expect to see again the fourth quarter another big charge the way we did last year first quarter.

Michelle, hedging is actually a part of how we try to mitigate the risk exposure we have at our scrap operations because they're commodity based.

So it is part of on going operations.

The reason there was a loss in the fourth quarter is because we had extended positions as the copper markets were falling very, very quickly as everyone is aware.

We don't expect that, no, but we are subject to the volatility of the market and trying to protect our cash and our margin versus just the sales dollars.

The way market has came actually, they revamped the way they look at hedging and I think have a better game plan going forward.

Omni is not a comp, given that it was private before you bought, not a company that I have a lot of familiarity with, and so I'm asking these questions because it's kind of new in your mix as the quarters fall out.

So it's interesting.

So you would expect less hedging, less of this kind of impact.

I wanted to ask you also in terms of the market, your comments and guidance, you seemed more hedged than I would have expected in terms of the outlook for flat roll.

Is that just a matter of having been shell-shocked by the whole market the last nine months or do you have reasons why you think the market may not hold up in the summer?

Are you just being conservative?

I think I said that we expect to operate at near capacity which will offset the lower operating rates we are experiencing, and the long products field.

So I think the earnings there will deliver the significant difference from a $0.10 loss to as wide as a $0.20 gain.

I said I don't expect to see any deterioration of your forecast numbers when we update guidance in September.

Maybe it can be a little higher.

It is too early to predict that, but I think it's a pretty reasonable move quarter to quarter.

I am excited to see the profit.

Great job in a very rough environment, and thanks for the accounting lesson, Theresa, I appreciate that.

I don't have a lot of experience with hedging.

Michelle?

Yes.

Just one comment on the hedging, you also have to bear in mind a little, the as you unwind the contracts, you have to look at the realized gain or loss at the same time.

And so in the second quarter, although unrealized gain was $12 million, as we unwound the contracts, and you balance out everything, it was a, a realized loss.

So the actual impact to the bottom line through that hedging was a couple of million bucks.

So you can't say, you can't just conclude that the hedging alone improved our posture so greatly.

We are going to have to finish this off line.

Where I get confused is if you had the $0.12 in the fourth quarter, that you told us to add back to your results, it would theoretically come out somewhere later on.

So I expect to see balance here.

But we can finish it off line.

That's fine.

Okay.

Thanks.

Thank you.

Our next question comes from Luke Folta with Longbow Research.

Morning guys.

Morning.

Just a quick question on the flat roll side, it seems obvious you guys are gaining share in this business, is this a function of your customer mix or some strategy you are employing in this business, and do you think that's sustainable once the, some of the integrated capacity starts coming back online over the next couple of months.

Some of that, Luke would be related to our ability to respond at a moment's notice.

I would hope that the quality of our products continues to improve, the product offerings, that we offer to the marketplace continued to expand.

So, hopefully with good service, along with good quality, we are gaining market share.

It would be our intention to gain market share.

As to are we really or aren't we really, I don't really know.

It is an assumption I think we all have to make at this point in time.

Just on the recycling side can you give us a little more color on are you suggesting that the metal recycling business as a whole will be profitable in the second half?

The metals, the OmniSource component of that segment will be profitable in the second half, and as we suggested, will be profitable for the year.

The segment is different, the segment contains Iron Dynamics, which will lose money throughout the year because of the low transfer values of that product in relation to its cost structure, in that it supplies its products to SDI at market, and market isn't that brisk at this point in time.

Mesabi Nugget is just a start up operation and we will continue to generate losses throughout the remainder of the year but Omni will not only be profitable for the second half, it will be profitable for the year.

All right.

This is our forecast.

Turn it over, thanks.

Next we will go to the Sal Tharani with Goldman Sachs.

Morning, guys.

Hey, Sal.

Just wanted to first confirm the utilization rates at Butler, are you using the new utilization, new capacity of 3 million or is it at 2.8, 2.7.

Also at Columbia, are you adding the new capacity you brought in last year in your utilization rate numbers?

I don't know what -- we are all at the same point using something very close to 3 million.

At Columbia City, I think we are measuring it this year against 1.5 million, we are not going to get, we are not going to see a lot of progress on the medium section without an order book.

So it is -- we said our capabilities there would probably be, given the lack of practice and the ability to dial in all products, because of a lack of demand for those products in general.

We felt the fair number would be 1.5 million-tons, increasing in time to, and perhaps next year we'll just modify it and call it 1.8 million because I think we are becoming accomplished and therefore 1.8 million might be a good number.

We are using 1.5 million this year.

I believe you said in the press release you were actually profitable at beam business even at 25% utilization rate.

At the operating level, yes.

Okay.

We just missed having pretax income by a little bit.

But we expect in the third quarter, it to be profitable, not only from an operating perspective but even from a pretax perspective at very low operating rates.

So give us just a little color, if your operating rates double, that could be a huge profitability in this business, because being profitable at 25% is very incredible.

It would have a significant positive impact.

Okay.

I will stay away from the word "huge."

A couple of more things.

On share count, Theresa can you give us an idea of what share count to use.

Will all of them be included at this time?

All $31 million?

It will be, Sal.

The way to look at it is it will be, the outstanding right now is 215 and that includes the 31 million.

You would use that for the third quarter and in addition if because we anticipate making money you need to lurk at the dilution factor of the stock options and convertible notes as well.

And your $0.10 to $0.20 includes all kind of these motions in there.

That's correct.

That means operating level it is much better than the EPS reversal from minus $0.10 to plus $0.10, $0.20 since you have a dilution to 12 to 15% in the EPS line?

Yes but dilution from the converts that will have to be recognized as Theresa said in the third quarter given a profitable third quarter but we are on out the same wavelength.

Thank you very much.

Next we will go to UBS' Timna Tanner.

Hi, good morning.

Morning.

You have been really thorough so just a couple of questions really.

If you could remind us what you think your exposure is to the auto industry rough roughly and specifically on SBQ, wondering why such a muted outlook given the exposure generally to the auto industry.

I don't think in SBQ we are all that exposed to the awe e toe industry.

We are more exposed to heavy construction markets like Caterpillar and John Deere and forging markets and things of that nature.

Being able to run smaller sizes with any kind of great success would quiver us more exposure to the automobile and truck community.

But I don't think it is that significant of an exposure for us at this point in time.

The other part of your question, Timna was?

Just overall auto exposure with the entire company.

I don't think it is changed a lot in flat roll.

There's obviously little to no exposure would be the correct term for most long products, other than SBQ.

And flat roll we always said it is hard to tell because we saw a lot of our product to the service center community and not a lot through OEMs, but we have always said we believe, considering the truck marketplace.

Right.

As well as the car marketplace, that collectively we are probably somewhere between who knows, 20 and 30%.

It is just a guess.

Maybe the high 20s.

Overall.

And that should be improving.

I think all of the suppliers are starting to see better order entry because the pipelines emptied out to a great degree.

A lot of at that business activities has probably been covered by the new domestics or transplants but I think Chrysler and General Motors do make very fine products that are in fairly heavy demand.

And therefore, we should be rewarded in that we have good positions through Heitman in that arena.

So I know John's order book and Heitman steel is picking up and he's largely tied to automotive.

That should at the same time help SDI.

Okay.

So just to clarify, high 20%, over all company or just within flat rolls.

Just within flat roll.

Got you.

The other question was actually running full out to me seems to indicate a lot of confidence in the flat roll market.

Seems like there were comments that indicated it was more than just end of destocking or restocking, can you talk about the underlying demand evidence you are seeing that gives you the confidence in the flat roll spaces?

It is really just order entry.

We are running against a book of business that we haven't seen for a long time, and as I said we think a lot of it is destocking related.

Refilling high planes and other arenas, in addition to the automobile community: but right now we are out into September.

We haven't even opened the books for September.

We have a backlog of business especially in value added that will go into September and with the expected order entry positive pick up in order entry at Heitman, we think our flat roll will probably fill rather rapidly as well.

So we are just forecasting our run rate against our backlog.

It is all for demand in July, August, September and we have good bill capability we will run it and deliver it.

I can't see out as far as October.

Got you.

We are not trying to forecast it is going to fall into the abyss in the fourth quarter but I don't know that it is, that the rest of the sectors beyond automobile community will continue to pick up all that strongly.

In part of that book, you to asked how much is dependent on the flat roll business, how much of it is automotive.

We said high 20.

Remember about 30% is construction related as well.

That marketplace is really in the tank, and until we see some movement there, that would give us more confidence, it is hard to predict that we can maintain this kind of strength in flat roll.

Fair enough.

Any evidence of infrastructure stimulus demand in any of your products.

No evidence of that but tag on to Mark's comment about Cash for Clunkers, I do think, whether we believe it is a one time, two year event, I think Cash for Clunkers will probably move a few more automobiles and that's a good thing.

As Chrysler and General Motors go back to work, the natural tendency, when the pipe is empty is to build more cars that are actually being consumed.

The Cash For Clunkers could modify that equation and hopefully the two could be in a better balance, because you hate to see a situation where the pipe fills up by October, November and the third shift gets laid off again so to speak.

I think the Cash for Clunkers might be short term helpful for everyone.

Thanks very much.

Our next question comes from Charles Bradford with Affiliated Research Group.

What's the status of the mining permits that you need up in Minnesota?

The on going, we were anticipating getting a permit the end of this year, first quarter next year.

I would imagine it is going get delayed but again it is just on going.

If you get those permits by early next year would you have the mines going by the end of next year?

We can have the mine going approximately ten months probably after we get the permit, 10 to 12 months.

Thank you.

Another question, on metallics, you talked about how your scrap costs came down $79 a ton, which a lot more than one of your competitors just reported, but you didn't give a figure on your cost of usage was.

Is it fair to say it is closer to $200?

It's well below that.

Chuck, we don't give out a specific number, but it was below that.

Below that.

Thanks very much.

Next we will go to Mark Parr with KeyBanc Capital Markets.

Hey.

Thanks I'm at the same place.

It is KeyBanc but morning everybody.

Morning, Mark.

I am not sure where that one came from.

Yes, Keith I wanted to follow on to the conversation that Chuck had.

Could you give us an update on your concentrate contract for Mesabi, and what sort of cost differential you might be looking at in the next because of the changing metallic marketplace?

Well, the first couple of years, Mark, we have anticipated or hedged our bets so to speak that perhaps the mine wouldn't come up right on time, so we have got contracts and those contracts are a mix.

We have some old QCM, it is not a contract anymore but we had some QCM concentrate delivered at last year's pricing.

And we've got other material coming in on a market basis.

But by a market basis you are looking at buying concentrate on a spot relationship?

The relationships that we have are contracted supply, but it is indexed against Canadian concentrate pricing.

And that represents 100% of your concentrate needs until you get the mine up and running?

Yes.

But again, it's a mix.

We have concentrate from several different streams, we have some other concentrate coming in from a company called Magnetation that is actually reclaiming concentrate from the old tanning spots.

And that is competitively priced.

Okay.

That's great.

In terms of IDI, you had talked about improvements in raw material costs and also and I think Keith mentioned there will been a significant improvement in natural gas consumption.

That being said, IDI is continuing to operate at a loss this year, could you talk about the difference in the cost of production at IDI versus the pricing because it looks like you made some significant progress on the cost side even though pricing is down.

How much is the cost mitigated to lower transfer pricing that you are getting?

Transfer price right now is $350.

That's for liquid now.

That's for liquid iron.

That's not a solid.

Right.

So there is a hot metal credit that can be valued around $25 a ton.

The pig iron market is appreciating a little and if were to have pig iron delivered today it would be higher than 350.

But sort of a break even number is around about $400.

Okay.

How is that changed from where you were say last year at this time?

Last year at this time it was probably closer to 450.

All right.

Just trying to get a sense of, is most of that reduction just a function of raw material input costs or have there been structural improvements in the profitability at IDI that you've achieved?

It is all in, as David has done, if you go back two or three years ago when we were concentrate base, obviously the present production cost would be a hell of a lot higher.

But that is solely recycling mill scale and other materials today.

So I would say, given two or three years that is a structural change.

Yes.

The reduction in natural gas again some times necessity is the mother of invention, and some of the things that we have done in the last couple of months and discovered some things we should have done a year are two ago.

They are quite a good that have significant advance that will with us going forward.

Hindsight is always 20/20.

Just one last question on the raw material side, can you give us an update on your best estimate as far as delivered to nugget to Butler.

The cost of nuggets at Mesabi given a market price for transfer of concentrate, not the cost but the actual cost of the concentrate, assuming the mine gets a market transfer price.

Okay.

Around about $300.

Then to liquefy that is what about another $20.

That would be hard to say, Mike.

The nuggets, it is not like Iron Dynamics, they get adjusted into the heart of the bath, and you have to look at your tap to tap and drive off.

It wouldn't be, it wouldn't be 60 or 70 or $80 either.

I don't know what the number would be.

Okay.

But what you are looking at right now is about $300 plus transportation.

Yes.

Okay.

Terrific.

One last question, if I can, for Omni could you talk a little bit about your export mix from a revenue standpoint and what you think the reduction in head count and some of the cost reductions you have done, how has that changed the normalized spread for the scrap business going forward in terms of dollars per ton.

On the export side I don't have that in front of me, Mark.

I can get that for you.

We will have that in the future because that's the question I was asked last time.

On the cost going forward, as I said, we are stripped out about $25 million a quarter as compared to say the Q3 of last year, obviously our volumes are down and not all of that will be saved going forward today.

We hazard a guess that a good $15 million of that.

Okay.

If Mark's price moves up $50 a ton because market, , good fortune moves to move the price of pig iron up $50, then he starts to push back into Iron

Thanks, Keith.

Congratulations on the solid second quarter, and the second half outlook.

Thank you.

Next we are go to Kuni Chen with Banc of America.

Hi.

Good morning everybody.

Morning.

I guess just to start off, can you just walk us through a major maintenance outages across your system that we should be thinking about in the third quarter and perhaps give us a break down of Mesabi expenses that you expect to flow through in the third and fourth quarters.

We'll let Theresa tackle the Mesabi expenses in a minute.

As for major outages, Dick can chime in, but I think we're in good repair, and expect no major outages in the third quarter, we will have some normal maintenance downturns in the fourth quarter, usually in the October time frame, three to four days.

Roanoke the final ties in, we will mitigate that exposure by pre-producing the billets required for the rolling mill, so you won't see a reduction in the rolling or shipping aspects.

Okay.

The question was anticipated losses in the third to fourth quarter related to nugget.

Depending upon the start up, Kuni we expect somewhere between 4 and $5 million of expense in the third quarter and probably 5 to 6 in the fourth quarter.

That would be assuming the heating up of the November time frame that Mark mentioned earlier.

Okay.

Great.

And then just, just one follow up, on OmniSource, looks like you are having some good cost improvements there and there's certainly head count reduction, what are your plans as far as costs or efficiencies out of this business going forward from here?

How much more can you wring out of the operations over the next year or so?

I don't think there's much more to go.

I don't want to speak for Mark but when you wring $90 million, $95 million out of something, that's pretty significant in relation to where the earnings posture of the Company was prior to that.

Yes.

Again, I don't think there's a huge amount to do that.

Obviously, as volume comes back on a unit basis we are going to see some dramatic changes.

Actually one last question, more of an industry question.

If I look at the spread between beam pricing and obsolete scrap and kind of look at that spread over a long period of time, 10 to 15 years, it is typically been sort of in the 2 to 300 per ton type of range but certainly recently even despite the weak environment we're in, you are at a pretty significant spread.

What do you attributable that to, is that just the fact that kind of hide base prices have been locked in or are there other factors contributing to that spread staying high even if there's utilization rate.

The lower utilization rate, the spread needs to grow to remain profitable.

I think because the cost structures climb dramatically on a per ton basis ex scrap.

So those spreads are necessary to achieve profitability.

That doesn't mean they're going to stay there.

Can't predict future market, but certainly widening spread has not been disappointing to any f of us because it has allowed us to hang in there break even make a small profit level in that business.

All right.

Good enough.

Thanks a lot.

Next we will go to JPMorgan's Dave Katz.

Hi.

I was hoping you could talk a little about the inventory expectations, the strong drop off between first and third quarter of almost 100 million.

With the expectations I know you guys can't look out that for but where are you expecting to see that go throughout the third quarter and as third quarter pours if you see demand, where do you anticipate inventories going.

If demand should pick up, in long product, we probably would still be just fine from an inventory perspective but we are not very long there -- we don't have huge positions relative to products arena.

And the position we have in flat roll is becoming cash being maintained without jeopardizing --

Dave I wouldn't look at inventory being either a significant source or use of funds from that perspective given the rest of this year at least not what we are looking at currently.

Okay.

Sorry if I missed it earlier.

You had something you had reduced quite substantially and didn't anticipate it building back up again.

It can build a little bit but it is not going back up.

Right.

I was just curious how would that be possible if over the longer term we did get back up to somewhere where we were before in terms of production.

The operating capability of the three facilities we have which are well positioned geographically, East of the Mississippi river, their ultimate capability is well beyond anything we have already realized.

So you can have a light or two here or there, which would add back some headcount, so we certainly could be in good position to respond to any kind of market activity.

I think it is in flat roll we, well in all steel-related businesses where the head counts aren't down that much we are pretty darn efficient at this point in time, and we may have found that we could do without a soul here or a body there, but there isn't any ramp up really necessary to maintain the volumes.

So certainly in the recycling arena, we just think that the more efficient business systems that Mark and his team have developed had greater focus in certain areas has increased their capability to get the same amount out the door with fewer folks.

Mark, maybe you could add to that.

Looking at the practices and the way we do things, I think has allowed us to streamline the organization.

We are combined two of our divisions in Ohio and northern Ohio, which allows some synergy and just looking at the organization as a whole, just making sure that we're not doing double duty anywhere.

Obviously employee count will grow to some degree beyond as flows come back, but we don't have have them coming back to prior levels or anything close to it.

Thank you very much.

Next we have John Tumazos with John Tumazos Very Independent Research.

Congratulations on all of the improvements.

With the tough conditions in heavy construction markets, and the likely hood that health care and other things crowd out the infrastructure moneys that may never be spent, do you see a case for just not writing down, not impairing, not permanently shutting down but taking a rolling mill or a fabricating plant offline for two or three years given the extent of vacancies in commercial buildings?

We have already taken fabricating two plants off line but our -- as it relates to the heavy construction market and its impact on Pittsboro.

I think they're just constantly looking at new market opportunities and looking to further penetrate the market as a new player.

Roanoke has a pretty stable client base, and I think is going to do fine in spite of a lack of stimulus- heavy infrastructure spending.

Butler the same way, structural and we are constantly looking at new, we can get involved with beyond rail to do a lot more channels, we're looking at big angles, we're looking at other opportunities, John.

So I don't see shuttering any of these facilities in the near term even though the outlook in the heavy construction universe looks a little dismal without some more hard dollars committed to construction community or to heavy infrastructure rather than just remodeling jobs so to speak.

In terms of the 1047 realization for joists and related products that probably reflects bids made six or 12 months ago, as joist divisions bid new business, what the pricing like, is it closer to 750.

It is down a lot but the inventory, the cost of the raw materials is also down a lot so I don't know that their bottom line is going to move around gigantically, it could move into a loss in the third quarter, but but it is not going to be a big loss, I don't think.

Congratulations on holding those margins as much as you have.

Thank you.

Next we will go to Dahlman Rose's Tony Rizzuto

Thanks very much.

Hi, everyone.

Keith, you mentioned in flat roll that you indicated 25 to 30% of the mix there was automotive and truck related, another 30% construction related.

What about the remaining 40 to 45%?

It is hard to know where all of the products go, agriculture, appliances, energy would be a fairly significant market of size, it can be 15% or greater by itself or greater.

It would be markets like that.

We do get involved in all sorts of consumer goods products, exercise equipment, things of that nature where we make a lot of the boxes for computer hardware, and we are involved heavily in metal buildings, although that segment of the market is got doing that well either.

It is pretty broad.

Broad.

Similarly for the techs, now I realize a higher proportion of the sales there are to non-auto OEMs, but how is that auto book shaping up there, and rough approximation of the end markets there.

Would be it similar to what you just gave us?

They have pretty good book there.

They have also improved significantly I don't know how far out are they, do you know.

Again they're sold out for August and they will be today holding the book for September.

So they're very positive about the outlook.

So you are operating pretty full out there?

Yes, sir at this point in time, yes.

Just one more question then, I want to make sure I heard correctly.

OmniSource, did I hear you say that you've wrung out $95 million annualized in cost savings since the acquisition?

Somewhere around 90, $95 million.

When you guys move your corporate headquarters, should we expect any meaningful cost savings?

Are there any other initiatives?

You guys have already done a lot and run a pretty lean ship.

Anything else we should be thinking about for the balance of the year?

Most of that has been accomplished.

We have the building for sale, whether we lease it or sell in this market is an open question but should we sell it, we might take in some income that was unexpected but other than that nothing to report there.

All right.

Good performance.

Thank you.

Next we will go to Brian Yu with Citigroup.

Thanks.

The question on the long products side of your business, is the general feedback from your sales force that customers are still destocking or do you get the sense that they're basically kind of ordering at the same pace that they're selling the product at?

I think until recently they are been destocking in unusual ways, selling to each other to destock.

That hits its bottom as well, and then you have a truer measure of where the economy is at from a real demand perspective.

That we don know yet.

Okay.

Moving over to the flat roll product side you mentioned you're going to open up your September order books soon, this is just for customers to occupy a slot in the mill, right?

Prices I don't think have been determined yet.

Well I'm not going to speak to pricing but they have been determined in our mind, and we'll be out in the market here shortly.

Are they up in September?

We would like for it to be.

Okay.

Thank you.

Next we will go to Brett Levy with Jefferies and Company.

Hey, most of the questions have been answered, can you fill in 2010 CapEx?

If there's not an absolute number for 2010 can you at least talk about the major items continuing Mesabi Nugget et cetera?

We haven't went through the budget exercise to firmly define 2010 yet.

That's yet to be done, but there are no significant CapEx expenditures on the horizon.

There's a couple million here and a couple million there.

But no big ones.

The one thing that would be determined upon when we would receive the environmental permitting for the mining operations, so that could be upwards of 50 to $75 million potentially in 2010, but that will be a significant project I would be aware of.

We have a couple of million dollars and $5 million of environmental work we are doing in the mill shop down in Steel West Virginia and we also have the opportunity.

We have put on hold many expansion projects and so forth, and we're going to review those, and reinitiate ons again that have incremental opportunities, not necessarily just go open the flood gates, Pittsboro expansion as well as Columbia City, cash for projects in the near future.

Maintenance around 100.

No, no.

It is not that high.

Remember when you talk about maintenance CapEx we are talking about the small projects that Dick just mentioned, so I would say $50 million or $60 million in a normalized year.

Got it.

And then last question is as it relates to the scrap business, obviously there is a scrap inventory that needs to be worked off before the scrap business can run at the same utilization as the mini mill customers.

By your best guesstimate, around what month at current run rates, does it look as if the scrap overhang starts to go away?

Mark is pondering that right now.

For us, for our own energies, or for the industry?

Both.

We have scrap.

Let's put it that way.

The flows have improved.

Demand is not all that significant yet domestically, foreign demand has abated a little bit.

I wouldn't say the inventory overhangs are significant for anyone at this point in time.

I wouldn't describe them as significant anyway.

Brett, I think you are in great position inventory wise.

I would suggest there are other steel mills out there that have been cash conscious and prudent and pruned their inventories so I would suggest that the steel mill community as a whole is pretty tight on inventory.

The scrap sector itself, you've got a mix, but most of the scrapyards have a reasonable inventory and that's being liquidated here as prices come down.

You think you run at 50% utilization in the scrap business by the end of the year?

Say again.

I missed that.

Would we run at 50% utilization.

We are already at 50%.

Absolutely.

We are going to be higher than that probably.

All right.

Thanks very much, guys.

You're welcome.

Our next question comes from Wayne Atwell with Casimir Capital.

Thank you.

And congratulations on essentially break even in a tough environment.

Thank you, Wayne.

I realize you just fixed your balance sheet, but is there any equipment out there that might make sense for you, and you can't tell us the specifics but have you had any conversations with any organizations where there's some equipment that might fit in well with your set of assets?

Not something we would comment on, Wayne.

Just in general is there anything out there that might be interesting, or are you likely to have any initiatives?

It is just not something we are going to comment on.

Okay.

Thank you.

And our last question comes from Sal Tharani with Goldman Sachs.

Quickly, can you give us some color on the booking capital for Q3, what do you expect.

Yes, again the same instance we talked about from inventory for working capital, Sal, I wouldn't look for it to be a significant use or source of funding right now.

If anything you may use a little bit as receivables increase, potentially at the flat roll and tax but otherwise I just would look at net neutral.

Thank you very much.

It does appear there are no further questions at this time.

I will now turn the conference back to your speakers for any additional or closing remarks.

Thank you, Karen.

Again, thank you, everyone.

The questions were great as always.

I hope we answered them appropriately.

To all of our employees, I want to say thank you for hanging in there and doing yeomans work.

I think the esprit d'corps that flows through the veins of this company is the best of any steel maker anywhere in the world.

We still have tough times ahead of us and long products arena but we will get the job done in the end, the country will return, the economy will return, and we will move forward because we thank you so much of your cost control efforts and hanging in there with all of us.

You're the best.

Thanks.

Once again, that does conclude our con for conference for today.

Thank you, again, for your participation.