Steel Dynamics Inc (STLD) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Steel Dynamics second quarter earnings conference call.

Today's conference is being recorded.

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

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

Fred Warner.

Please go ahead, sir.

Thank you, and welcome to Steel Dynamics second quarter 2010 conference call.

The call is being webcast live July 20th, 2010, from Fort Wayne, Indiana.

Later today, you will be able to replay the call from our website or download the call as a podcast.

During today's call, our management will make some statements that are forward-looking.

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 statements of historical fact are often preceded by such words as believe, anticipate, estimate, expect, or other conditional words.

These statements are not intended as guarantees of future performance.

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

Some factors that could cause results to differ include general economic conditions, governmental monetary and fiscal policy, investor 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, equipment performance or failures, or litigation outcomes.

You may find additional information concerning a variety of factors and risks that could cause results to differ materially from today's forward-looking statements.

Refer to sections entitled "Forward-looking Statements and Risk Factors" in our most recent annual report on Form 10-K and other quarterly reports on Form 10-Q, as well as in other reports we file from time to time with the SEC.

The reports are publicly available on the SEC website at www.sec.gov, and on our website at www.steel dynamics.com.

Now let's begin today's call with comments from our Chairman and Chief Executive Officer, Keith Busse.

Thank you, Fred.

Good morning, ladies and gentlemen.

Thank you for joining us today.

As you can see in our report, our second quarter was what I thought was a fairly decent second quarter, when you consider kind of lackluster environment for flat rolled order entry that occurred late in the quarter, and certain mechanical issues, specifically transformer issues that we encountered.

We earned $49 million of net income, versus a loss of $16 million in the prior year second quarter, $0.22 a share versus an $0.08 loss.

Versus the first quarter net income was down from $65 million to $49 million, and earnings were down from $0.29 to $0.22.

As reported, our second quarter sales of $1.6 billion were more than double our sales for the second quarter of 2009, and were 5% higher than the first quarter; as you can see later in the body of the report, much of that due to average steel selling prices increasing by $93 per ton during the quarter.

Second quarter shipments of 1.3 million tons were 43% higher than 2009, but were 10% lower than the first quarter, and I think that's really a point where I would pause and say when you look at our operating income per ton of $108 in steel, had we -- and our volume from quarter to quarter being off 142,000 tons, had our volume not been off and been at least the same as the first quarter, I would imagine operating profit would be higher than $108 a ton, and when you multiply that kind of a number times the decrease in shipping volume that occurred because of some market weakness and/or mechanical issues, we lost about somewhere between $15 million and $17 million worth of operating income.

When you combine that with our second quarter, and recycling not being as good as our first, and the operating income decline there, you put those two together and multiply it times 60% for a tax effect and profit sharing, et cetera, we could have done $0.09 better than the previous quarter, above $0.30.

So for me one of the take aways is the pretty steady Eddie operating profit per ton being generated, which was about $9 higher than the first quarter.

I'll also mention that while selling prices increased $93 a ton during the quarter, scrap costs also increased by $49 during the quarter.

Our steel operating income though was not down very much, as you can see, down from $138 million in the first quarter to $134 million, and most of the decline in income really occurred in the recycling arena, if you will, which Mark Millett will speak to that in greater detail.

I couldn't help but look at the consolidated statement of operations, and note that for six months ending period in 2009 we had lost $104 million, and this year we made $114 million, obviously a $220 million turnaround when you measure the six-month period, and we went from a loss of $0.56 a share to a profit of $0.51 a share, which what --in what is really pretty shaky economy yet for the most part, having its fits and starts and ups and downs, if you will.

As we noted here, we did see some weakness in flat rolled order entry, it bounced up and down in late May and came back a little in June, and then declined at the end of June, and rather lackluster at the beginning of July, which I think is reflective of the fact that most of industrial America goes on vacation early July usually, and you have [follow year] changeover events, and whatnot.

So it would be expected that shipping -- that order entry late in the quarter and shipping early in the third quarter would be impacted by that, it usually is almost every year unless you are in a very, very strong economy.

We also talked about the fact that we had a malfunctioning melt shop transformer at Butler, and that is repaired and running well, although we had some -- we had a capacitor bank fail in July on our static bar system, and won't allow us to run at the highest run of melt shop tap rate, which is going to affect volume in July, as will rather weak order entry as well.

So we don't expect July to be a real strong month going forward, but I think August and September have pretty decent prospects.

I think we've kind of reached the bottom of pricing in the steel community.

I think we -- at least I believe we've reached the bottom.

And I believe as we progress in to autumn and early fall, I think you will see a better pricing environment, and perhaps even more margin available to the steel side of our business.

As it relates to scrap, I read some morning commentary that certain folks believe that scrap was probably going to be up sharply in August.

I don't believe -- that's a personal opinion -- that that's going to be the case.

Weak order entry across sectors, entire sectors, and segments, coupled with decent inventory levels in certain scrap arenas, and weak export, and a declining price environment recently in steel, would lead me to conclude you are not going to see any strength in August in the cost of ferrous resources.

I'm not sure how much it could decline or advance, but I don't think it's going to advance by $20 or $30 a ton, as some are advertising could be the case.

But I do believe you are going to see a better price environment, as you walk forward late August and September, for resources.

Mesabi Nugget, as you can see, we lost about $12 million there; not a whole lot difference than what we had lost in the first quarter.

A lot of mechanical issues occurred, Mark will talk about that, and we replaced equipment, upgraded equipment, and are in a much better position than we were.

Metallization is very, very good.

The tests we've run on the nuggets were very high on them.

So it's a matter of delivering volume at this point in time.

So as we roll forward, we see the steel markets for our products remaining relatively steady, with some short-term uncertainty surrounding the demand for flat rolled steels, I think primarily tied to order entry at the end of June, early July, model year changeovers, and outages and vacations, and whatnot.

But I do believe it will strengthen, and pricing could strengthen as we go forward.

I don't really look for the economy to sharply strengthen; I don't think it's going to go backwards, and I don't see a double dip here, and therefore progress will be probably just slow and steady.

As it relates to our structural business, we ran a little higher operating rate in the quarter than we had, shipped a little bit more than we did in the first quarter, but it's still a fairly weak environment for heavy structural products.

Our other long products output remains in good shape.

We have excellent backlogs at our SBQ shop in Pittsboro, and excellent backlogs at Roanoke and Steel of West Virginia.

So there is some strength there in small bars, at least in our camp.

It's kind of steady as you go, with a mildly improving environment for structurals, and sort of an up and down roller coaster ride with regard to flat roll.

As we said, we would have more to say about it later on, which has become our practice, to really comment on how we see the quarter developing a little later in the quarter.

So that's kind of a synopsis as I see it of really where we are.

You will probably note that most of the loss in shipments was between either the flat roll division or the techs, pretty steady shipping volumes, up a little in structural, and up a little in engineered bars, and Roanoke about the same.

Roanoke could have performed at a much better level had they not encountered transformer issue, which we believe are currently resolved.

So with that, I will turn the commentary over to Mr.

Teets to talk about our steel-making efforts, and then to Mark Millett to talk about resources.

Thank you, Keith.

Good morning.

I would first like to acknowledge some of the excellent safety efforts of our steel facilities.

I would like to note that Roanoke bar division worked the second quarter without having a recordable incident.

A great job by the Roanoke team, thank you.

During the second quarter Columbia City eclipsed the one million man hours worked milestone without a loss time injury.

Congratulations to the Beam and Rail team on that accomplishment.

A couple of comments about each of our major facilities, as far as operations go.

At Butler, as Keith mentioned, we saw orders tail off slightly at the end of the quarter.

We therefore made the decision to swap out the EAF transformer, as we were operating one with a repaired bushing, and a history that has shown a failure was probable.

Therefore, we took about a five-day outage to make the switch.

It was a very smooth job, safely and on time.

Congratulations to the team for that effort.

Also at Butler, our galvanizing and painted products backlog probably is the bright spot.

It has extended itself further than it has in at least a year, and continues to be where we are focusing.

We believe that customer shipments and flat rolled continue to increase month over month, while inventories remain manageably low.

At Columbia City, we are currently commissioning the number two casting machine, the four strand bloom and billet machine has been casting a couple of [heats] a day to work out any of the bugs.

It's great to see progress being made at Columbia City.

Also there, the medium section mill has successfully returned to production.

It's nice to see product coming off of both of our mills now.

There's nothing positive to say about the construction market, but I will say that we are focusing on rail production for the Q3; we are forecasting around 30,000 tons and growing, and that's annualized to be 100,000 tons for the year.

So we are excited about the progress being made in quality and in quantity at Columbia City with rail.

At Pittsboro, as Keith mentioned, we have a very strong backlog.

In fact, yesterday we announced a $40 a ton price increase effective later in this quarter, and all of that covered by pricing agreements previously negotiated.

We have seen an increase in inquiries for products in automotive, class A trucks, and heavy equipment areas as well.

We've had a year's worth of challenges in Roanoke during the second quarter.

The melt shop experienced a 20-day outage due to a string of EAF transformer failures.

I'm happy to say that after a subsequent bushing failure here in the beginning of July, they are back running strong and making up ground.

During June, the melt shortfall caused us to lose three days of rolling, and impacted shipments probably about 7,000 tons of billets and 2,000 of [finished] bars.

At Steel of West Virginia, we remain with guarded optimism, as our markets of truck trailer and industrial lift trucks show slight signs of improvement.

All of the team there has been recalled, and we are actually in the process of interviewing for additional permanent employees.

We took an extended shutdown of the melt shop at Steel of West Virginia to upgrade the fume collection system to be compliant with our Title V permits.

All went extremely well, with only detail work and compliance testing to be completed.

Also congratulations to the Steel of West Virginia number one rolling mill team for successfully commissioning some new miscellaneous channel sections.

Additional sections are scheduled to be trialed this quarter.

Great job by everyone there.

Again not much to report from the techs; they are experiencing the same market pressure as Butler.

We continue to use this time for equipment upgrades and maintenance needs.

Across the board, we remain focused on safety, quality, and efficiency to be prepared for when the market opportunities return.

Thanks to the team for your efforts.

Mark?

Good morning, everybody.

On the recycling side of the business, ferrous scrap demand was robust during the quarter, with shipments totaling about 1.3 million tons, up 10% quarter-over-quarter.

This was our highest quarterly shipping volume recorded since the 2008 downturn, and almost double the volume recorded the same period last year.

April and May shipments were particularly strong, while June dropped off in concert with the reduced domestic steel mill utilization rate.

[In band] scrap during the quarter relatively stable.

42% of the ferrous shipments were internal to SDI steel mills.

It is significant to note, I believe, that although per ton margins eased slightly as the market pricing softened through the quarter, increased volume resulted in total gross margin dollars from our ferrous business remaining essentially unchanged quarter-over-quarter.

In non-ferrous, our shipping volumes remained level quarter-over-quarter at approximately 235 million [pounds].

However, our financial results declined, paralleling the base metal markets, as they were negatively impacted by the sovereign debt crisis in Europe, the strong dollar, and signs that the Chinese market is decelerating.

Global uncertainty seems to dampen the interest of hedge fund managers and speculators in these industrial [matters].

After hitting a 20-month high in April of $3.69 per pound, copper prices continued to stumble through the months of May and June, falling into the $2.70s before a slight recovery to $2.93, a loss of 17% over the quarter.

Aluminum dropped 16%, falling from $1.05 to $0.88.

Nickel, the principal value of our stainless metal, dropped 21% from $11.31 to $8.96 a pound.

This downward trend significantly eroded our non-ferrous margin.

OmniSource's stand-alone second quarter operating income, as you saw, was $25 million, as compared to $43 million in the first quarter.

Whereas our ferrous operations were essentially flat, as I said, quarter-over-quarter, their operating income falling just $3 million in the down market, our non-ferrous operations declined approximately $15 million.

So you can see the impact in that arena.

Two-thirds of this decline was direct margin compression, while approximately a third of the decrease was associated with unrealized mark to market adjustments for our hedging positions.

If you compare quarter-to-quarter, these adjustments resulted in a gain during the first quarter of about $4.2 million, and loss during this most recent quarter of roughly $400,000, $429,000.

Moving to Minnesota, commissioning, as Keith suggested, of the Mesabi Nugget project has been progressing well; a little over 19,000 metric tons being shipped in the second quarter.

Two principal factors limited production in the quarter.

Firstly, a seven-day outage was taken in May to investigate, and subsequently eliminate, a potential safety concern.

Secondly, as I believe I discussed in the last call, the drive system for the cooling drum was under designed as limited throughput, to a maximum of 55% of its ultimate capacity when we were running at full rate.

These issues are being corrected during the current July outage, and we are just coming out of that in the next couple of days.

These issues aside, many other equipment and process improvements have been achieved.

Changes to material conveying systems, off maintenance practices and other equipment improvements increased operating availability to about 60% during the month of June, with over 70% being achieved in the last week of June before we went down, the recent outage.

The recycled [fine] system was commissioned, allowing improved raw material conversion yield, for significant cost improvement.

Further process streaming has led to continued product quality enhancement; the nugget composition, again as Keith mentioned, is excellent.

It is yielding a consistent 97% iron content, substantially above that found in conventional imported pig iron.

Furthermore, the fines content in the product, which is a combination of smaller particles of iron and small particles of DRI, has been substantially decreased.

In fact, the Electric Arc Furnace shop in Butler at the Butler sheet mill has consumed all the material shipped to date with excellent results.

Although second quarter pretax loss increased slightly quarter-over-quarter, if you look at operating loss it actually improved marginally from $9.6 million down to $9.3 million, and profitability is still expected to be achieved before the end of the year.

Thank you for all our teams, great effort gentlemen and ladies.

Keith, back to you.

Gary, fabrication please?

Thanks, Keith.

As everyone is aware, nonresidential construction continues to be weak, and is likely to be weak for some time.

However, with the joist business, we have seen industrywide bookings have stabilized; actually bookings are up slightly for the year-to-date numbers, and while shipments are down slightly reflecting weak backlogs that everyone had coming into this year, with the combination of bookings being up slightly and looking at what is going on in pricing, pricing is improving as well, it appears that our belief that the industry really bottomed in the first quarter of 2010 is probably correct.

The recovery that we expect to come in the joist business is going to be slow, it is going to take a lot of time, but it is not getting any worse, and is getting in fact a little bit better.

Price improvements that we've seen so far year-to-date have been partially offset with increased field costs, and that continues to keep margins tight.

But we have grown share beginning in late 2009, and we further increased share when one of our major competitors exited the business earlier this year, and that is reflected in the significant increase in shipments that we seen in the second quarter over the first quarter.

So good news in pricing, good news in volumes, and it's clear that things will continue to improve.

We see light at the end of the tunnel.

The environment remains challenging, and will continue to be difficult, but we do see steady improvement from here.

We believe that this business is going to recover; we will get back to positive earnings well before the overall recovery of the nonresidential construction market, by keeping a tight focus on costs and growing our share, putting more tons through the shops.

So that's where we are from here.

Keith, back to you.

Thanks, Gary.

Theresa, I will let you provide some balance sheet commentary and other statistical data, as you usually do.

Thank you, Keith.

Good morning, everyone.

During the first quarter we maintained our liquidity of $1.1 billion, which represents our cash on hand plus our $924 million revolver.

Our leverage ratios continued to improve, as total debt to EBITDA was 3.5 times at June 30th, versus 4.1 times at March 31st; additionally, our interest coverage ratio improved quarter-over-quarter from 3.8 times to 4.4 times.

Our net debt increased $36 million during the quarter.

Cash flows from operations were $19 million, versus $73 million achieved during the first quarter, as funding was required for working capital.

Specifically, inventories increased $117 million or 13%; this was driven by increased volumes and pricing in finished goods and raw materials at our steel operations, most notable at the flat roll and Roanoke divisions, which absolutely is -- makes sense, given the outages that they had during June.

Additionally, our raw material inventories, associated with our continued ramp up of nugget operations, increased working capital by about $18 million.

We currently anticipate a rather neutral impact to cash flows related to working capital movement in the third quarter, and a normal seasonal trend of decreased needs in the fourth.

During the second quarter, we received just over $90 million in state and Federal income tax refunds, and we expect to receive an additional $10 million to $12 million during the fourth quarter.

Our effective tax rate before minority interest during the second quarter was 39%, versus 35.2% in the first quarter.

Our second quarter rate was much higher than we had anticipated.

We currently estimate our full year 2010 effective tax rate before minority interest to be approximately 38%, which would represent a second quarter rate around 38.5%.

During the quarter our capital expenditures totaled $41 million, depreciation was $42 million, and capitalized interest associated with these projects was $1.9 million.

Capitalized interest is expected to further decrease during the remainder of 2010, as our capital projects are coming to completion.

Our outlook related to 2010 depreciation and amortization remains at between $55 million and $60 million per quarter.

Our net interest expense during the quarter increased $5.2 million compared to the first quarter.

The change was both a reflection of decreased capitalized interest of $1.5 million, and our change in capital structure with the addition of our $350 million of senior notes issued in March of 2010.

Gross interest expense for the quarter was $45.4 million, with an effective interest rate of 7.3%.

We had 216.8 million shares of common stock outstanding at June 30th.

We also had, in a dilution factor, convertible notes with underlying shares of 16.4 million, and dilutive options of 1.6 million.

Our expectations for the third quarter would be to have dilutive outstanding shares of approximately 235 million to 235.5 million shares.

I know many of you like to have the flat rolled shipments breakdown, so for the second quarter our hot rolled shipments were 276,000; our pickled and oiled was 66,000; cold rolled, 41,000; hot rolled galvanized, 95,000; cold rolled galvanized, 57,000; painted, 68,000; and galvalume, 20,000.

Keith?

Thank you Theresa.

Vicky, we will proceed right away to the Q&A piece of the report.

(Operator Instructions) We'll go first to Kuni Chen with Bank of America Merrill Lynch.

Good day everybody.

How are you doing?

Just first off, clearly from your discussion here, the near term outlook and the tone going forward is a little bit more cautious.

Can you give us a little bit more color on that?

Is that more from just a pricing perspective, or from a volume and demand perspective?

And uncertainly with the flat roll volume down sequentially in the second quarter, can you give us some flavor on how much of that comes back in the third quarter?

Well, I think from a long products perspective, we will see increases probably in the third quarter, simply said.

From a flat rolled perspective, the weakness is really going to be exhibited I think in July; from an order entry perspective, I think you are going to see strengthening order entry, we are already starting to see it here in late July and I think that could continue.

I think underlying demand remains steady, I think you have people that were working off a little stronger inventory platforms going into the summer outages, scrap prices were declining, steel prices were declining, probably a lot of folks sitting on their hands.

As I said, I think we probably are very close to a bottom and I think you are going to see steel prices rebound at some point in time during this quarter, and I don't have any specific time frame for that to occur, but during the quarter I think you will see it start to strengthen, and as I said, I think you'll start to see ferrous scrap prices later in the quarter perhaps start to strengthen as well.

My comment about ferrous scrap was really limited to what you are going to see at the end of July for delivery in August.

I think there is still going to be some weakness out there, but I think once you get through that weaker period, it will strengthen going into -- later into August and maybe -- or at least for deliveries in September and October, so maybe a little brighter outlook there.

The weak order entry that we are experiencing -- experienced late June and early July, probably came at a good time.

As I said earlier, we lost a bank in our static bar system, which isn't allowing us to run the melt shop at full capacity.

So the two are matching up fairly well, but that's still going to leave July a little short, followed by increased expectations for August and September.

Okay.

One quick follow on, and I will turn it over.

Lately we've seen some recent new capacity announcements in the electric arc furnace sector; does that impact your own plans or thought process as far as what you may do down the road?

Do you feel like you may need to put a stake in the ground at some point before somebody else beats you to the punch?

Are you talking about long products or flat rolled?

Either.

I'm not aware of any new flat rolled projects that are concrete.

We've talked about ours for some period of time, and we are still working on it, discovering new technologies and modifications to existing technologies that we are excited about, and we haven't quite got out the lasso and lassoed one of them yet, but Dick and I are pretty positive about the project, and the likelihood of it going forward.

But I'm not aware of any other significant electric arc projects that are -- have been announced for the United States, anyway.

And in long products, we are a smaller player.

Obviously [Mr.

Craney's] rebar project is under development right now, and they may move forward with one or two additions to the rebar universe in the due course of time, but I haven't seen any other growth announcements, Kuni, in long products.

Okay, great.

Thank you.

Moving on, we will go to Michelle Applebaum with Michelle Applebaum Research.

Good morning.

Good morning.

First, I want to say, I know it was a weak quarter, but I want to point out that you were up front, you were ahead of us on that, and I think on the conference call in April, you said that the $0.37 forecast for second quarter at that point was too high.

So congratulations on reigning us in, and for anybody who knows you as well as I do, Keith, that is impressive.

Congratulations on that.

The second thing I wanted to ask you about was can you give me a little bit better tools to do a forecast for the recycling business for next quarter?

It's a bit more challenging.

It seems to be more volatile, and it's a newer line of business, and I understand it's been going through some restructuring.

What are the moving pieces to look at?

One of the encouraging things, I will let Mark speak to this, but one of the encouraging things that he told everyone this morning is the margins were fairly stable in the ferrous end of it, and a little loss of margin but not a lot, and volume was up.

I don't expect volume is going to sag, and there could be a margin challenge in July here, maybe even in a little bit in August, but we will rebound nicely from that.

I think you saw the impact was really in non-ferrous, and we would expect that that could return as well.

But we have indeed taken a lot of our costs out of recycling, and as volumes continue to grow, I think that will bode well for us, and I think the environment going forward in recycling, as you look deeper in to the year and certainly in 2011, is probably for a lot better strength.

Mark, you want to comment on that?

Michelle, I think we are having an equally difficult time trying to forecast this -- .

I know it's not doable.

As I said in both of the last calls, predicting what is going to happen both in the ferrous and non-ferrous market is tough more than a couple of weeks ahead at times.

Generally, I think on the ferrous side of our business we did well in a down market.

Prime scrap last quarter was down $20 or so.

Obsolete scrap down $30 to $40.

In that environment, to maintain a flat margin was a very, very good effort by the team.

As Keith suggested, with July's pricing down in one month $40, $45, I think we will have a little bit of hole to climb out of from June to July, but I do believe August and certainly September is going to be a strengthening market for us on a pricing perspective, and volumes will be should be sideways, I think.

April, May was strong --

Mark?

Yes.

Can I ask, is it possible we could have a quarter that looks more like the first quarter than the second, in terms of results?

I don't believe so.

You don't think so.

So the quarter would look like more like the second than the first?

I would hope slightly better than the second.

But again, it depends where the markets go, to be honest.

The non-ferrous -- as you can see from the past quarter, the non-ferrous side of our business is quite influential on our bottom line.

If you look back in history, and history being the last, two or three or four years, non-ferrous and ferrous have tended to balance each other out.

Quite often the ferrous side of the business will not do so well, and it's buoyed up by non-ferrous, and vice versa.

In the most recent climate, both of them are -- have been falling.

In the non-ferrous world, obviously there is a lot of uncertainty out there.

People generally are suggesting that we are stuck in the current trading ranges for both copper and aluminum, but if they were to go strongly one way or the other, it's going to have a major impact on our efforts for the third quarter.

Can I ask another question?

You certainly may.

Not for you, more for Keith.

Is there any truth to the noise in the marketplace that you are looking at the CMC deck and joist operations?

We have no comment about what we are looking at or not looking at, Michelle.

Are they for sale?

I think we all know that they are.

Okay.

All right.

Would you be interested potentially or -- ?

We are in the business.

I'm sorry.

I'm done.

Thanks.

We'll go next to Timna Tanners with UBS.

Good morning.

Wanted to touch base with you a little bit and make sure I understood, have you quantified or are you able to talk a little about how much in the second quarter might have been attributed to some of the different outages that you talked about?

We haven't really tried to boil it down to that.

You could say, with the weakness you could afford to lose five days, but at the same time I don't know what the sales team might been able to actually reign in or reel in at that moment in time.

So there is no real way to quantify it.

I think the best way to look at it is, if we could have been at the same volume in the first quarter or improve, certainly have the ability to improve upon it, you multiply that times some a number, 108 or better, from a cost compression standpoint you could have had remarkably better earnings in steel in Q2.

So the potential is certainly there.

That's interesting.

Also trying to follow up on -- between the two different outages, as I recall, that you might argue that there would have been more potential to sell out a little bit on the SBQ side than on the flat roll side; is that conceptually the right way to think about it?

No, it wasn't SBQ anyway, it was Roanoke, and it's strictly bar products, and as Dick said they might have rolled 7,000 to 10,000 more tons and they might have shipped 3,000, 5,000 tons more billets, but any way you look at it, they probably wouldn't have got beyond 120,000 or 125,000 tons.

But that was impactful, that would impact earnings by perhaps a couple of million dollars in and of itself.

So there was definitely an impact from the transformer debacle at Roanoke that did impact earnings -- that was all about the transformer, wasn't about market weakness.

Okay, got you.

And then one question on Mesabi -- I understand that you are saying you are still expecting to be profitable by the end of the year, but how do we think about that?

Is that meaning no outage costs, or do we expect that $12 million or so to be reversed or are we expecting something beyond that?

And if you could talk about Mesabi nugget expectations?

I was pretty impressed with Mark reaching right out there and saying he was going to be profitable by year end.

At the rate it's been going, I would like to just break even by year end.

A very positive outlook from his perspective.

Mark?

The comment that Mark made wasn't that all of our gains in the second half would offset the losses in the first half, it was really more speaking to profitability on a monthly basis.

Monthly not quarterly necessarily, right?

Yes.

Yes.

It's possible you could have a profitable December and not a profitable fourth quarter.

In short, things should be improving dramatically between now and the end of the year.

Great.

That's what I was looking for, thanks a lot.

Luke Folta with Longbow Research.

Good morning, everybody.

Quick question, a follow up on Mesabi nugget.

If things go as planned, and you are able to reach profitability by the end of the year, can you give us just a ballpark figure on what contribution we can expect for next year, understanding there is a lot of variables in the calculation.

Tell us what pig iron pricing would be, and we could perhaps give you an estimate, to be honest.

Or more importantly concentrate pricing.

We really, I don't think, at this time would want to talk about 2011 contributions from Mesabi nugget.

Obviously, we expect it to be profitable operations at that point, and we are expecting that the utilization rate will be approaching capacity of 500,000 metric tons during 2011.

So all those things bode well, if you compress costs.

And to Mark and Keith's point, it really depends a lot on the raw material costs as well, but we don't think we should be commenting on the actual dollar amounts for 2011.

Okay.

Any update on the mining permit?

Still a battle.

I don't think much difference than the last call.

The EIS study is in, and we are negotiating and discussing, and that will the [stated] range.

Lastly, if you could add some more color on your comments, you said that the supply of scrap, Keith mentioned it's okay but maybe certain segments of the market may be better than others.

I am just trying to understand, what is the real basis for your expectation that scrap and steel prices start to move up towards the end of summer?

I think we probably did see a lot more capacity returns serving a depleted store shelf.

I do expect demand to continue to move slightly forward not backward.

I think a lot of the restocking that occurred in the first quarter, some of those tons came off the shelf late in the second quarter, and I think you had a lot of buyers expecting prices to come down with declining resource costs, and so I think a lot of people probably are a little reserved from a order entry perspective, but there is not a lot of inventory out there.

I expect you will see a little bit of strength actually return, and I couldn't possibly predict where it takes pricing, but I think you have probably seen the bottom, and you can see a strengthening environment, both in resource -- the value of resources sold into the marketplace and the value of steel products.

But I don't think that's a July event or necessarily an August event, but I think as you walk through autumn and the fall, it's my belief you will see a strengthening environment.

I think you've got fairly weak levels out there that still exist, and I believe that as the buyer realizes the bottoms are being reached, they may not aggressively come back in the market but they will come back to the market.

There is some capacity that will be shuttered, I'm sure, in the meantime, and so there will be a better match.

Okay, and is it fair to say that flows are better on the prime side than obsolete?

That's my last question.

Flows on the prime side versus obsolete.

I would suggest that the prime flows will remain tight going forward, and if there is an uptick in order entry across the steel mills and utilization goes up, I think you are going to see that strengthen and be the cause of an uptick.

On the obsolete side, I believe the closer -- obviously from a seasonal standpoint, weather standpoint are good.

And as again that mill utilization picks up in perhaps August or September, the demand will drive pricing up, along with I think export activities probably going to market in the next month or two.

Thanks a lot for all the color.

Sal Tharani with Goldman Sachs.

Good morning.

Keith, can you give us some color on what utilization rate was at Butler?

I know you had some disruption over there, but what was it in the second quarter and where are you now?

I think utilization went from 100% down to whatever it did, probably a little north of 80% in the second quarter, 83%, 85%, somewhere in that area.

I would expect with the weaker start in July that you are going to experience the same thing in the third quarter.

Okay.

But probably July is lower than 83%, is that correct to say?

Yes.

Probably be in the 70-s%, would be my guess in July.

Okay.

Also, Dick, how much scrap are you carrying at the steel mill?

How do you see that compared to the last two quarters?

Dick, go ahead.

Go ahead Mark, we are all jumping in.

Essentially, inventories for steel mills are being maintained at around about four weeks.

Is that for your guys or for across the board, you think?

Well, we can't tell you what other companies are doing, but I think that they vary between three and four weeks is a pretty accurate statement in our own house, and we wouldn't get excited if they went down to two, but we are not planning on carrying six or eight either.

The reason I am asking is because 55% of your scrap at OmniSource does go to other mills, and you might have some idea how the other mills are positioned?

I don't think demand was all that strong, given the exhibited weakness in order entry in other arenas as well.

We weren't alone in experiencing some weakness; if there hadn't have been weakness out there, the price wouldn't have declined.

So there is weakness, and some of these people probably didn't play off as much inventory or produce as much as they had hoped for, and that could leave them with a little stronger inventory position, as it did us.

We probably wouldn't even have four weeks if we had shipped in our 100,000 tons, might have had three weeks.

But it's going to float around in that area for us, Sal.

Okay, great.

Thank you very much.

Mark Parr with KeyBanc Capital Markets.

Thanks very much.

Can you hear me okay, Keith?

Sure can.

Terrific.

One of the things I noticed, Gary had talked about seeing a bottom in the deck and joist business, but some of the flat roll commentary around coated products seemed to suggest continued weakness.

Is there -- can you give a little more color just about the construction marketplace and where you are seeing some perhaps bottoming, and a little bit of upside, and what segments of the market you look for continued weakness in here over the next quarter or two?

We are not rehearsed, we may all have a different opinion, but I do believe that you probably see more hot rolled weakness than you are in coated products and painted goods, in my opinion, that's held up better.

I think the first thing to go, and obviously then the first thing to come back sometimes is hot roll.

Dick?

I concur with you Keith, that's what we have been experiencing.

And there were a couple of sectors that fell much faster than overall, nonresident construction, joist and deck being one of those, so the dynamics of different segments will be different.

Okay.

Then if you would look at the other part of your construction business, clearly Roanoke and the long -- and the structural side as well -- if you look at your total, the totality of your construction end markets, would you -- how much of a change would you expect in shipping volumes in the third quarter relative to the second, based on what you are seeing right now?

Slightly improved, but not dramatically.

Okay.

Thanks very much.

Mark [De Manna] with Morgan Stanley.

Good morning.

Most of my questions have been answered, but Keith maybe if I could get some clarification.

You talked about seeing signs of optimism for flat roll pricing beyond July; you also said that you didn't expect scrap to move immediately.

Can you comment -- do you expect that the price moves in sheet to be led by scrap, or do you think they will expand over and above what happens in scrap?

Thanks.

I've always said that scrap pricing movement and sheet steel pricing movement have some bearing, but not as much as they do in bar products and structural products.

They operate a little more independently.

It would not be impossible to see steel prices move up before scrap prices were able to move up.

Generally speaking, it works the other way, but it wouldn't be an anomaly to see steel prices which bottom pretty hard find a little air before scrap prices do.

But you never know.

Thanks for that.

Maybe just a little bit of clarification, the press release in tone sounded a lot more cautious than a lot of your comments have.

Was there anything specifically when you said you're particularly cautious about the second half that you were trying to highlight?

And that will be it for me, thanks.

No, I don't think so.

I think we were just being cautious, so I don't have any startling revelations one way or another.

I think the economy, as I said, will continue to just make anemic progress forward, inventories will go up and down and have some impact.

I just don't think you are going to see the economy take off and deliver GDP of 5% or 6%, I just don't see it happening.

I think we are probably going to stay in the 2% to 2.5% to 3% range going forward on real demand, and it's better than going backwards but it's nothing to write home to mom about, either.

But you feel pretty good that you could replicate earnings in line with the first half and the second, it sounds like?

I would tell you that's not impossible, yes.

Thanks.

Good luck with everything.

Thank you.

Charles Bradford, Affiliated Research Group.

Good morning.

A question on rail.

Obviously, you designed the plant so that you can make the higher end rail products.

How long will it take you to get your rail qualified, so that you can get into, for example, rail for high speed, or for some of the more difficult products?

Well, Charles, this is Dick.

I would tell you that when you start talking about high speed rail, that's a -- we could have a conversation for a week on that subject.

That the product requirements in that -- under that definition, in the United States high speed is 79 miles per hour, 99 miles per hour, and a maximum of 129 miles per hour in different corridors.

And most of the high speed developments that are being looked at, other than the specific projects in California and Florida, most of them are actually combination ones where they are in concert, like Amtrak, with a host owner of one of the Class 1s, and needless to say the Class 1s are going to continue to put rail into their lines that are compatible with their basic needs, whether it be coal hauling or long freight hauls, or whatever; each one has a specific difference in their lines.

So the product you normally think of is head-hardened rail; head-hardened is a premium rail product, but it's used only in probably about 50% of the applications, but in very specific applications, not necessarily high speed.

So we are working across-the-board on all product developments.

We are probably looking at products that are non-head-hardened in a much more vigorous way because it's available to us today, it's available to fill up our line time, and head-hardened will just come.

Each owner of the rail has different qualification requirements and parameters, independent testing, third-party testing and in-house inspections.

Okay.

On the scrap side of the business, seems to me that the spread between prime and obsolete is unusually large.

That leads to possibilities; could prime come down more or could obsolete go up more, any ideas?

Mark, you want to tackle that?

Chuck, that spread does expand and contract dramatically.

Again, I think prime scrap tends to be a lot tighter.

There is a very definitive amount or volume available, and given the method of manufacturing, it is dramatically off as compared to history, and I do believe that that spread is going to be maintained.

Chuck, I believe that the prime scrap, I'm a little different than Mark, got ahead of itself; it raced forward based on a lack of supply, a little further and faster than it should have, and probably reality has been reached a little further and faster than it likely could have been.

Thank you.

Tony Rizzuto with Dahlman Rose.

Thank you very much.

Hi, gentlemen.

I have a question here, just a follow up on Mesabi nugget, and from your comments, Mark, it seems that you are comfortable that you are going to be able to achieve an operating rate that would close you or get you to a point of profitability by the end of the year.

Could you give us that operating rate for the second quarter?

And also, I want to understand the mining permit process better in Minnesota.

I know you have got your [EISN], and I know this has been a little bit more delayed than you thought earlier, but else is there in the process -- in the chronology -- that we should be thinking about?

I know there is a public comment period and all those other types of things; can you just refresh my memory of what all that entails?

The principal step or the next step is for the state to finalize the EIS, such that they will support it going forward into the public arena.

So the first step is discussions, negotiations, whatever, between the state and ourselves, and fine tune that study, that permit application.

At that moment in time, it goes before the public for the commentary.

From the standpoint of mining, I think we said as soon as we have a permit, 8 months, 10 months, 11 months, 12 months thereafter, we would be in the ground.

And relative to price, fully loaded price for concentrate, mining ourselves up there, at the old [LTV] site, is in the $40 to $50 range.

Fully loaded, includes depreciation, and interest burden.

How does that compare right now to the concentrate that you are currently purchasing?

Currently, concentrate pricing is -- well, what we are actually purchasing is a mix of Canadian -- a form of Canadian pricing, some of which is market price, and also we have some material coming in at a discounted price for the next year or so.

But the current market price for concentrate up there is about $128, $130.

Okay.

Very considerable.

And then as far as the operating rate in the second quarter, could you give us that, or -- where were you?

Were you below 50%?

Yes, it's very weak.

Obviously, if you are only producing 17,000 tons, and you have a capacity of 500, it's like 3% or something.

3%, 4%, 5%, yes.

All right.

Yes, I didn't see that 17,000 ton figure.

Thanks Keith, appreciate it.

Thanks gentlemen.

You're welcome.

Brett Levy with Jefferies & Company.

Hi.

It's actually David [Olkavetsky] for Brett.

Just a quick question on revolver.

Is this fully available, the $924 million?

It's fully available, except for letters of credit that are outstanding, and that's around $15 million.

Okay, so negligible.

Then can you remind me what your CapEx -- I think you gave CapEx guidance, right, of about $150 million for the year; is that accurate?

Yes, we did.

It's going to be somewhere less than that, between $125 million and $150 million, based on projects that we have in place so far.

Okay, sounds good.

Then one more thing, I missed the hot rolled galvanized number that you gave earlier, what was that?

Sure, it was 95,000.

95K.

That's it for me, thanks a lot, guys.

Thank you.

We will take a follow up from Sal Tharani.

Hi, a quick question.

You made some comments on working capital expectations for the third quarter; for the first two quarters, it looks like it's been a draw of about $155 million.

Should we expect that to be neutralized in the third quarter?

Not neutralized, in the fact it would be providing funding of that much in the third quarter, what I was suggesting was that the third quarter will be basically neutral from a funding versus draw perspective is our current expectation, and probably we should have some give back in the fourth quarter.

Thank you very much.

At this time, we will take a follow-up from Michelle Applebaum.

Two questions.

Keith, we go back and forth between products so quickly that I don't know if I'm keeping up.

I thought you were talking about flat rolled when you said that inventories were being built in the first quarter and so the business was better, and then the second quarter customers started to take material off the shelves, so inventories were being liquidated; is that what you said?

I think late in the quarter -- the second quarter -- there was probably a little destocking occuring as order entry was pretty weak for everyone in almost every segment.

But I think those reports are yet to be generated.

I was going to say that during your call the MSCI inventory just came out, and flat rolled inventories were actually up about 9% in June, and they are the highest level in over a year, 18 months.

So would you say that that destocking has yet to come, based on that new information?

I would tell you probably not, because the inventory level as an absolute number is still pretty low.

It is.

Okay.

All right.

So you think that the destocking is over?

I don't think they are going to go any lower.

They might actually build.

But it's hard to measure, because you see increasing shipments that would accelerate it.

Got it, okay.

And then, I wanted some clarification on the second half.

In your release you said that you had a cautious outlook for the second half, and did you say it was possible for second half to be consistent with the first half on earnings?

I did.

Okay.

When you say possible, is it like a one out of ten or one out of hundred or --?

We are not doing to get into that, that's just an opinion.

We said we would give you guidance for the third quarter later, and we will.

Okay.

All right.

Well, thank you.

You're welcome.

We will take a follow up from Luke Folta.

Just a quick follow-up for Gary.

You noted you are seeing some improvement in the fabrication segment.

Is there -- how do you rate the prospects that we get to a break even level by the end of the year?

Is that within the realm of possibility, you think?

Oh yes, the segment should be well above break even by the end of the year.

We should be showing monthly earnings by the end of the year.

Excellent.

Thanks a lot, guys.

At this time there are no further questions.

I will turn things back over to our presenters for additional or closing remarks.

Thank you, Vicky.

Again, thank you ladies and gentlemen for excellent questions.

Thank you to the 5,900 people who make what I think are extraordinary achievements in this industry possible every day.

I don't know that there is a better team out there delivering more EBITDA to their shareholders than this steel team and this recycling team.

Bye, now.

That does conclude today's teleconference.

Thank you all for joining.