Steel Dynamics Inc (STLD) 2012 Q1 法說會逐字稿

(Operator Instructions).

Good day, everyone and welcome to today's Steel Dynamics first quarter 2012 earnings conference call.

Today's conference is being recorded.

For opening remarks, I would like to turn the call over to Ms.

Theresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics.

Please go ahead.

Thank you, Ryan.

Good morning, everyone.

Welcome to Steel Dynamics' first quarter 2012 conference call.

As a reminder, today's conference is being recorded and will be available on the Company's website for replay later today.

Certain comments made today may involve forward-looking statements that, by their nature, are predictive.

These are intended to be covered by the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995.

Such statements, however, speak only as of this date, and involve risk and uncertainties related to our metals business, or to general business and economic conditions which may cause actual results and turn out differently.

More detailed information about such risks and uncertainties may be found at the Investor Center Advisory Information tab on our Steel Dynamics website, and our Form 10-K annual report under the captions, Forward-looking Statements and Risk Factors, or as applicable in subsequently filed Form 10-Q filed with the SEC.

I know many of you are accustomed to Fred Warner, our long-time Investor Relations Manager, handling this portion of the call.

However, as many of you are aware,Fred retired in March, after many years of service to the Company.

We all wish him well in this next stage.

Until we announce Fred's replacement, please feel free to contact me directly with any investor matters.

Now, joining me for today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics and the Company's Platform Executive Vice Presidents including, Dick Teets, President and Chief Operating Officer for our Steel Operations, Russ Rinn, President and Chief Operating Officer for our Metals Recycling Operations and Gary Heasley, Business Development and President of our Fabrication Operations.

Now, for opening remarks, I am pleased to turn the call over to Mark.

Super.

Thanks, Theresa.

Good morning, everyone.

Thank you for your interest in Steel Dynamics and for taking the time to join us on our call to discuss our first quarter 2012 results.

I will provide some commentary, which hopefully anticipates some of your thoughts and your questions.

After which, Theresa will present more financial color and then we will open up the call for your questions to each and every one of us.

Turning to the first quarter 2012 sequential net income grew 51% to $46 million, or $0.20 per diluted share.

That result was at the high end of our recent guidance of $0.15 to $0.20 per share.

If you add back the net expense associated with our January financing activities, the earnings would have been $0.23 perdiluted share.

I think this solid performance, by a phenomenal team in a challenging business environment, is continuing testament to our business model that focuses on our customer commitment, our innovation, our innovative low cost operating culture, and our diversified portfolio of value added products.

The increase in sequential quarterly earnings was principally attributable to expanded metal margins in both the steel and metals recycling platforms.

The steel margins expanded as the average selling price increased $22 per ton shipped, while the average first scrap cost increased $10 per ton melted.

Operating income increased 19% to $139.7 million.

Our metals recycling margins also increased, as did both ferrous and nonferrous shipments.

These drove an increase in operating income of 59%, reaching an amount of $25 million for the quarter.

Those steel shipments were essentially flat quarter over quarter, at approximately 1.45 million tons, a shift in product mix was evident.

As we suggested in our last investor call, increased domestic capacity along with attractively priced import opportunities, created a headwind in the flat roll market.

The market was further disrupted mid quarter by a temporary slowdown in order input rate, as our consumers anticipated the moderating scrap market and held back their orders.

By quarter end, this trend had reversed, order input rates had been reestablished and pricing firmed.

Nonetheless, Flat Roll shipments were impacted and were off approximately 38,000 tons as compared to Q4 2011.

While the SBQ markets remained strong, our Engineered Bar Products division shipped 8% less volume in the quarter, as a result of an unexpected maintenance outage.

Despite the outage, the mill continues to improve productivity and market share as they benefit from their exceptional quality, the downstream processing and a superior on-time delivery history.

Despite reduced SBQ shipments, our combined Long Products divisions recorded a slight increase in sequential quarterly shipments.

When looking at the first quarter 2012, compared to 2011, notably, and despite a continued anemic nonresidential construction market, the construction on Rail division increased shipments by 37%.

Rail shipments were approximately 34,000 tons for the quarter, 13% of the product mix.

On the metals recycling front, ferrous scrap shipments increased from fourth quarter levels, as inventory collected in November and December was sold into a higher priced January market.

In fact, the first shipments increased 20% to 1.6 million tons in the quarter, a record level since we purchased OmniSource in 2011.

During the quarter, 48% of OmniSource shipments were delivered to our own steel mills.

Our nonferrous team increased shipments 15%, to 292 million pounds of nonferrous materials, stainless, aluminum and copper.

Generally, positive scrap flow throughout the country created supply-side pressure in the quarter.

Mild weather sustained obsolete scrap flow, and growing manufacturing and auto production increased prompt industrial scrap flow.

Furthermore, the export market remained bearish, while attractive import pricing grew in foreign prime scrap and pig iron.

After an up tick in early January, the market moderated through the quarter continuing into April.

Our fabrication platform shipped just over 60,000 tons of joists and deck in the quarter, a slight reduction from fourth quarter.

We believe this decline is more of a seasonal effect than a true demand effect.

Operating losses were $2.7 million in the quarter, slightly higher than the fourth quarter results.

Increased steel costs could not be absorbed in the marketplace, and additional ramp up expenses, related to manning, were incurred at our Hope and Fallon locations to address our strengthening backlog.

We continue to see slow improvement in our market share participation, particularly in national accounts, now that we have a broader geographic presence.

The impact of losses from our Minnesota operations on first quarter 2012 consolidated net income was consistent with Q4 2011, at $10 million net of tax or approximately $0.04 per diluted share.

Productivity dropped to 46,200 metric tons, as we intentionally decreased feed rate to offset a constriction that developed in the off-gas system of the rotary hearth furnace.

Despite this, certain process and equipment change did produce an increase operating time during that period.

A planned four-week outage has started to address the off-gas issue, along with a series of mechanical equipment modifications, that are expected to produce significant operating performance going forward.

The impact to second quarter earnings from the Minnesota operations, is currently expected to be similar to those recorded in the first quarter.

As we have discussed in the past, even when I see unproductivity levels reach over 30,000 metric tons per month, no significant financial improvement will be achieved until low cost iron concentrate is available to replace the higher cost market material that we are consuming today.

The good news, is that a solution is well in sight.

Construction of our iron concentrate joint venture in Minnesota, is proceeding as planned with continued expectations of a third quarter 2012 start date.

Then, after we use the remaining high priced concentrate that we would have in inventory, the financial performance in 2013 should be considerably improved.

Shift into current market dynamics, we have seen steady underlying demand for our Flat Roll products, auto continues to be strong along with energy, heavy equipment, transportation, and the agricultural markets.

The new and restarted domestic capacity is certainly providing a headwind, particularly in coated products.

The market disruptions and associated volatility as we experienced this past quarter, I believe, are principally procurement driven through erratic buying behavior as consumers try to time the market, as opposed to any discreet changes in specific demand.

Nonresidential construction markets remain soft.

It will certainly improve from the first quarter of last year.

The recent MSCI data would suggest structural shipments are up year over year, by approximately 15%.

Our wide plant shipments, actually, are up 38% year over year and up a few more percent from last quarter.

This progress, along with forward looking March ADI index that recently came out remaining over 50, suggests a recovery has perhaps begun.

Utilization of the structural mill is being helped as we gain market share in the rail business.

Rail customers are excited about the quality, dimensional tolerance and physical properties of our standard rail.

We view this market as further diversification of our value added product mix, and our long-term opportunity to mitigate a portion of the structural mill's exposure to nonresidential construction.

Through the cycle, the rail market tends to be more stable.

We are further committed to the development of premium rail, to give our customers a more complete range of products.

As I said, the transportation, automotive and heavy equipment sectors are particularly strong.

Creating a strong demand in solid backlogs for our Engineered Bar Products and Steel of West Virginia steel divisions.

Based on our customer outlooks, we believe demand in this arena will remain strong and anticipate participating in the growth to an even greater degree, as we complete the $76 million expansion of our Engineered Bar division.

As announced in February, we plan to increase the mill's annual rolling capacity to 950,000 tons, a 52% increase from today's capability.

The expansion provides for state-of-the-art precision rolling of smaller diameter bars, thereby expanding our product mix into a large segment of the SBQ market that resides below 3.625 inch diameter.

It will also include additional finishing capabilities, for non-destructive testing, and will double it's inspection capacity of finished bars.

Expansion is incredibly efficient in terms of additional personnel, and at a budget of $76 million, is a very effective use of capital.

Furthermore, it will consume approximately 250,000 tons of billets from the Columbia City structural mill, thereby diversifying their product mix and providing a good base load to mitigate the vagaries of the structural markets.

For this expansion, our Engineered Bar division would be among the largest single site SBQ production facilities in North America.

We are excited to provide additional first rate one-stop shopping for our customers and to provide, what we believe, will be a superior return to our shareholders.

Relative to raw materials, moving through the second quarter and into the summer months, it is difficult to predict relative scrap movements.

However, the environment of higher demand, driven by increased domestic steel capacity utilization and reinitiated export activity, could support moderate upward pricing movement in the months ahead.

Although it's important to consider such short-term market trends, I would like to again emphasize, that our focus is very much long term.

Through the recent downturn, we have continued to position ourselves for the eventual economic return, and capacity that was added during the crisis has still not been fully utilized for a full benefit realized in our bottom line results.

I think it should be noted, that steel shipments for the quarter on an annualized basis which is 5% short of our record shipping level ever, yet we have an additional 1 million tons of capacity yet to fully exploit as the residential and nonresidential markets return.

In keeping with our entrepreneurial spirit, that emanates throughout our Company, we will continue to assess the opportunities for growth, whether in new products, new technologies or new investments.

With a focus on enhanced, more consistent margins and additional top line growth, with effective margins and returns.

I think leveraging existing facilities through capital effective organic growth, such as that of the SBQ mill expansion, will further this goal.

So with that, Theresa, can you review some of the pertinent financial facts for us?

Thank you, Mark.

During the first quarter of 2012, our gross margin percentage improved over 150 basis points, in comparison to the fourth quarter of 2011, as Steel and Metals Recycling operations each achieved margin expansions in the quarter.

Within steel, on relatively flat volumes, our average sales price out paced increased raw material costs, and operating income per ton shipped increased almost 20% from an average of $82 in the fourth quarter of 2011, to $98 in the first quarter of 2012.

Metals Recycling saw increases in both ferrous and nonferrous shipping volumes and modest increases in overall metal spreads resulting in a $9 million, or 59% increase in sequential quarterly operating income.

So we out paced our fourth quarter results, when we compare the first quarter of 2012 to the first quarter of 2011.

Gross margin percentage actually decreased just over 160 basis points, as the historically high Flat Roll and Recycled Ferrous margins achieved during the first quarter of 2011 were not repeated in 2012.

Our operating income per ton shipped for Steel Operations declined $40 when compared to the first quarter of 2011, and our operating income for Metals Recycling declined $36 million.

Gross interest expense for the first quarter was $41.4 million, based on an effective interest rate of 7.1%.

In comparison to the fourth quarter of 2011, interest expense was reduced by $3.2 million in the quarter, as we replaced a portion of our senior notes with lower cost term debt in January.

Based on the current refinanced capital structure, the second and third quarters of 2012 would also benefit approximately $3.6 million in each quarter, through these interest cost savings when compared to our pre-finance structure.

We are very pleased with the execution of partial tender that occurred in January.

Nearly 40% of holders tendered their notes, representing $280 million of notes tendered, and $420 million remain in place.

We refinanced the tendered notes through net proceeds received from the expansion of our senior secured credit facility in the form of a $275 million term loan.

The term loan has minimal amortization requirements, with a final maturity in the third quarter of 2016.

The balance outstanding at March 31, was $272 million.

Expenses related to the refinancing net of interest cost, decreased our first quarter 2012 earnings by approximately $10 million or $0.03 per diluted share.

The expenses related to the tender of $14 million are classified in other income and expense, on our income statement.

Our first quarter effective tax rate was 39%.

It was at the high end of expectations.

If you will remember on last quarter's call, we actually thought it would be in the range of 38.5% to 39%.

The rate was impacted by certain discreet items during the quarter, as well as, the inability to recognize any benefit from research and development tax credits that have still not been approved by Congress for 2012.

If the R&D credits are approved, we would expect the tax rate to fall significantly.

Cash flows from operations provided $21 million during the quarter.

It was reduced by our Company-wide profit sharing distribution, which was made in March, and that was in the amount of $38 million.

Operational working capital required about $70 million of funding, as receivables increased due to higher selling values and raw material inventory volumes increased during the quarter.

Our first quarter capital investments totaled $46 million, about 45% of these investments were related to our copper rod, and iron concentrate joint ventures.

First quarter depreciation was $45 million, and we currently believe a first quarter -- excuse me, a full year 2012 estimate of $195 million for depreciation and $36 million for amortization of intangible assets is reasonable.

Currently, our estimate for total 2012 capital spending is between $225 million and $250 million, which includes approximately $35 million to be spent in 2012, for the SBQ expansion project.

Currently, the second quarter could contain peak spending for the year, due to the timing of certain projects.

Of the 2012 capital investments, nearly 40% would be related to our Copper Rod mill, Iron Concentrate plant and the SBQ expansion.

Over 70% of the capital investments planned for 2012 are what we would consider growth.

Projects that either increase capacity, efficiency or margin.

Liquidity remains very strong.

At March 31, we had no outstanding borrowings on our $1.1 billion revolving credit facility and our liquidity was over $1.5 billion.

The funds that were available to us, after our minimum liquidity covenant, were $937 million.

Our current net debt to trailing EBITDA is 2.6 times, and remember, our long-term preference is to maintain net leverage at below three times and our interest coverage ratio was 4.5 times.

We believe the framework for strong cash flow generation, coupled with our strong capital structure, has the flexibility to sustain our current operations and support future growth.

Now, finally to conclude, I know there are quite a few of you who like to have the breakdown of the Flat Roll division shipments for the quarter.

So with that, during the first quarter from the Flat Roll division, we shipped 297,000 tons of hot rolled, 74,000 tons of pickle and oiled, 44,000 tons of cold rolled, 97,000 tons of hot rolled galvanized, 53,000 tons of cold rolled galvanized, 74,000 tons of painted product and 19,000 tons of Galvalume for a total of 658,000 tons.

With that, I will pass the call back to Mark.

Thank you, Theresa.

I think we will pass it, actually, back to Ryan for your questions.

Thank you.

(Operator Instructions).

We will take our first question from Luke Folta, with Jefferies & Company.

Hi.

Good morning, everybody.

Good morning, Luke.

My first question, one of your close competitors reported results this morning and gave an outlook that they expected to see a modest improvement in the second quarter.

Is that, kind of, in line with what you guys are thinking?

We would anticipate, sort of, incremental growth in volume.

So, I would hope that would be the case.

If you contrast it with last year, obviously the February, March, April, May period, had some pretty terrific spreads that allowed profitability or pretty extensive profitability of the Flat Roll division.

It would be difficult to see that those spreads would return and that same performance occur this year.

Okay,but your expectation at this point would be, you know, some improvement mainly driven by higher volume more than anything else.

Yes.

Okay.

Secondly, I wanted to ask about, just looking through the numbers on what you reported on the recycling segment, did Iron Dynamics lose money in the quarter?

No.

No, Luke.

Iron Dynamics contributed --

No, they did not lose money in the quarter.

I mean just looking at the results, if you did and maybe there's too many numbers to do on the conference call, but I'm just looking through it, if you made $25 million in OmniSource and you lost, say $13 million or so pretax on Mesabi, I'm trying to understand where the rest of the offset might have been.

Luke, the difference is that when you are looking at the segment results, we have to report 100% of the losses associated with Mesabi Nugget and what gets to consolidation is only our portion of that.

Got it.

Okay.

So we only own 81% of Mesabi Nugget, and what you see in that segment information is 100% of the loss versus just our portion.

Okay.

All right and then just the last one on SBQ, I just want to get your sense of what have you been seeing in the market.

It seems like we have seen a little bit of a pull back in lead times and maybe some availability, you know, availability increasing.

I just wanted to get your sense of what you are seeing out there.

Well, I think what we are seeing -- I'm not so sure a pull back relative to that specifically looking at demand or the -- there seems to be a stability, away from the sort of frenetic ordering that we saw in the early part of 2011, where people were ordering beyond three months out.

Today it's more controlled, more stable, and more consistent, I think.

Would you agree with that?

That's very true, Mark.

Exactly right.

I would tell you that the vast majority of our customer base is positive and optimistic for a slow but continued growth, and that's just reflective of the different buying pattern, not a demand issue.

Okay.

All right.

Well, thanks, guys.

We'll take our next question from Shneur Gershuni, with UBS.

Hi.

Good morning, everyone.

Good morning.

My first question, if I may, is related to the iron ore concentrate comments that you had made in the press release and on the call.

You talk about that there's some significant cost savings that potentially could result by not making the third party purchases and so forth.

I was wondering if you would be able to provide us with a little bit of color of how material this is, relative to what your buying versus what can be produced and so forth?

If you compare just simply, current market pricing, it's edging up in the $150, $155, $160 range for iron concentrate.

Last year it peaked at about $185 a tonand we, unfortunately, are reliant in the most part or have been reliant on the most part for that market type material.

Going forward, the magnetation, as we suggested, is going forward well.

The construction is well underway, and we're expecting a third quarter start-up.

That material should be produced in the $45 to $50 per ton range, so obviously you've got that immediate effect.

You go from $150 to $160 down to $50, that's a considerable change, and the additional impact is that it takes roughly 1.5 tons of concentrate to produce a ton of nugget.

So you have that compounding also.

And you would be able to capture the complete difference, if you use round numbers $150 to $50.

So you would be able to capture the full $100 essentially?

Sorry, say again.

Let's assume the concentrate market, just to make numbers round, was $150 and the cost was $50, you are saying you will able to capture that full $100 benefit and then be able to magnify it based on the 1.5 ton ratio for concentrate in nugget.

Yeah, if you look at our -- as we have addressed in the past, we sort of separated -- not separated out Mesabi Nugget magnetation, but if you look at our Minnesota operations in general, that would be the case.

Great, andone follow-up question, if I may, in relation to Luke's question.

There has been some commentary about softening in the sheet market and so forth.

Is this related more to how you're seeing the customer changing it's buying patterns, or is there a little bit more weakness in the market right now that we should be aware of?

Well, they suggested the market disruption sort of mid first quarter, I think was definitely sort of bio-pattern related, you know, the underlying demand, I think we found to be relatively steady and it continues to be so.

You know, auto -- as I said, auto is very, very strong.

I think they sold just 14.4 million units or whatever in March.

But auto is strong, energy is strong,agriculture is strong.

So we're not seeing any dramatic drop off in demand.

Are you expecting the imports to kind of lay off with the spread that's come in from Europe as of late?

Certainly the domestic to global spread has dissipated dramatically, and we would suggest that imports won't be as attractive to the buyers going forward here.

Great.

Thank you very much.

We'll take our next question from Arun Viswanathan, with Longbow Research.

Thanks.

Thanks for taking the question.

Good morning.

I guess I had a question on the cost side.

Have you guys seen any benefits from lower natural gas costs and do you anticipate to see those benefits in future quarters?

I would tell you that we have seen the benefits, but it's been such a long tapered decline in those costs that they have been rolled in and we have been realizing them over the last couple of years.

I mean, starting in about 2008, there started to be a decline in the forward pricing and the spot pricing of natural gas.

And so, I guess I'm saying that you are not going to see an additional change.

They have already been tapered in through our performances over the last couple of years.

So going forward, you don't expect a large incremental decrease because of spot prices dropped in that gas?

No, because the drop in spot price gases has occurred, has again, been slow and steady and I don't see it dropping a whole lot from the $2 range that we all hear about.

Okay.

Next question --

Just note, natural gas is really, maybe 3%, of our overall steel manufacturing costs.

So it's not a tremendous cost.

Okay, and I guess the other question was on the markets.

You noted that construction has gotten a little bit better from 1Q 2011, I mean, where would you characterize us relative to the peak?

I mean, are we still, 60% to 70% below the peak or is that much better these days?

Well, I can't give you specific percentages against the peak, but it is anemic and incredibly soft.

There's a huge up side there as the economy recovers.

Again, on the structural side of things, our shipments have improved on the wide-flange arena and we are seeing that principally through our fabricators, medical centers, hospitals, warehouses and some energy-related infrastructure.

Right so if that continues to improve, do you think that the fabrication segment could reach profitability this year on an EBIT basis?

It looks like that could happen.

The challenge we are having in that part of the business is more spread than anything else.

As we have ramped up, we have seen the industry increase bookings year over year by about 29%, if you are looking at January and February, we have market data for January and February of 2012.

They are about 29%.

Our bookings quarter over quarter are up, more than 60% for joists and about 35% for deck.

The growth is there.

The challenge with this business is we are continuing to invest in the resources necessary to drive that growth.

A little additional spread over steel costs would be helpful.

We are doing some things to reduce costs, but really what's driving this performance or the lack of dramatic improvement in results, is the investment in both sales, engineering and production costs to drive the growth that we think positions the Company best for the long term.

Everything that we are seeing continues to support that model.

The spreads, though, if you look at pricing year over year, they are roughly flat and by this time, pricing should be up a bit and so it's just got a bit more shakeout to happen in that market as the market evolves.

Okay.

Thanks, Gary.

Do you think the investment is kind of reaching an end or is there a lot more to go on that on the investment side?

Well, from a from a SG&A standpoint, it's probably 80%, but as we see backlog growth, our backlog is up about, I think, 27% from December 31 to March 31.

We've had to add some production crews in order to address that backlog.

So we are very carefully adding production capacity as we must, to address customer demand.

So that will continue through 2012, that we'll have to add capacity to address that demand.

We have measured very carefully to try to make sure that we get the results that we can, without giving up customer relationships that we think are really important long term.

All right, thanks.

We'll take our next question from Evan Kurtz, with Morgan Stanley.

Hi, good morning, everyone.

A question on Mesabi to start off with here.

Just wondering what sort of monthly profitability and operating rates are you kind of assuming post the down time here, to kind of get you to that roughly loss of $10 guidance that you gave?

Sorry, $10 million.

Well, I think the -- we have suggested in the past, obviously we've got to get the operating rate up.

The financial performance there is driven by three main issues.

One, volume, and we are expecting and hoping to get up to sort of at least on an annualized basis, a 300,000 ton year rate by year end, which would hopefully flow into next year.

It's driven by the cost rate cost, which obviously, we will be turning that around.

Again, that won't happen until probably Q1, because we won't have -- even though we will be producing concentrate from magnetation in the fourth quarter, we are obviously going to have to consume any remaining higher priced concentrate that we've brought into the market.

And thirdly, you know, the price of pig iron, and we can't predict that.

Obviously the recent down trend, there seems to be a flaw at around 460 NOLA, 480 NOLA, but that the financial performance is also going to be driven by where that market applies.

Evan, as far as the estimate that we gave in the press release, the question is what were the assumptions that went into statement?

Right.

Right.

Yeah, the assumptions were that production is very similar to the first quarter, as they ramp up, and that, you know, pig iron pricing is similar and that we are using market priced iron concentrate.

Great.

That's real helpful.

Then the second question is on OmniSource.

I think Keith said on the call a couple of years ago, that he thought the mid-cycle margins for OmniSource would be somewhere around $200 million a year.

Given than your volumes are near record levels at this point, profitability is half of that right now.

Is that still something that you think could play out as the economy starts to improve or have you tweaked that a little bit?

Well, I would tell you, I think certainly that's a stretch on the margin side in today's market environment, trying to get to that level.

I believe we are back up to volume levels that we experienced preacquisition.

But, again, the margin and the supply lines, as Mark referred to earlier, supply driven marketplace that we sit in right now, is going to make that very tough until we get mill utilization rates up to a very high level.

Okay.

Great.

Just finally, what were Columbia City's operating rates this last quarter?

Just one second.

Columbia City operated at about 54% of its capacity.

Basically the same as in the fourth quarter, slightly lower.

Gotcha.

Okay, great.

Thank you so much, guys.

We'll take our next question from Tim Hayes, with Davenport & Company.

Hi, good morning.

Good morning.

Actually my question was probably mostly asked on the recycling, it was more just to flesh it out, the operating profit per ton has been low the past couple of quarters.

Some of that is probably cyclical, but is there anything that structurally has changed in the last year that has made those spreads narrow, perhaps, just tougher to buy the unprocessed scrap or is there even more shredder capacity that's been added in the last year to go along with what was added prior to that?

Well, I think certainly shredders, there's still an exorbitant number of shredders in the market place which have tightened those buy prices out in the market place and have maybe squeezed the margins to some degree.

I don't know that there's a tremendous, again, scrap market to scrap supply market is generally what it is.

We had, with automotive improving, certainly some of the prime grades have increased somewhat in the last year or so.

So that's put some pressure on the supply side there, but I don't know if there's any fundamental shift over time from a year ago to two years ago in the supply side from the scrap perspective.

Okay.

Thank you.

We'll take our next question from Timna Tanners with Bank of America, Merrill Lynch.

Good morning, guys.

Good morning.

I want to take a step back and ask a philosophical question, if I could?

If you look at your EBITDA over the entire Company, it's down a third from year ago levels.

Normally a strong Q1.

I guess you are talking about getting up to near your full volumes, but it just seems like there's something structurally that's changed and the industry is getting back up to 80% utilization but the pricing power isn't back.

So I mean, is this something where the structural over supply is going to get fixed any time soon?

I mean, how do you look at the market dynamics that way?

Do you think anybody needs to or would take out capacity at this point?

Well, obviously the quality of our earnings, so to speak, dropped considerably quarter over quarter from last year, and in large part related to the spread.

You think of the spread between hot band and prime scrap.

As I said earlier, February, March, April, May, we were at historically high levels with the exception of the single period in 2008.

And here in the first quarter, we're kind of at the bottom end of the range.

Generally, that spread vacillates between roughly $250 to $300 a ton, and we would hope and would suggest that normality is going to return and our spreads expand going forward into the rest of the year.

What about the market is going to help the margins at this point?

I mean, is demand better second quarter versus first quarter in your view?

Is there -- I mean, what's going to help pricing power and your ability to pass through that additional margin relative to what you had in the first quarter?

Because that's what the challenge I'm seeing is that we hear that demand is better, utilization is rising, but we are not necessarily seeing margins improving.

Again, I think to me you have the headwind of the increased capacity coming online.

Right.

That is a headwind that until that goes away, that margin won't expand dramatically, I don't believe.

Okay.

That's helpful.

Then, just a nitty-gritty question, if I could, on the paint line.

I thought the capacity was considerably higher at 430,000 tons, so the run rate is much lower than that.

Is there anything about the paint line that's not as strong in terms of demand that we would have expected?Maybe I'm dating myself, but it seemed like that was a pretty strong project running at higher levels in the past.

There's nothing constraining production.

It would be based on order rates that we have to ship, and so everything is fine and we expect to continue to remain strong and grow.

Okay.

Thank you.

I think Timna, also, that it might be product mix.

Obviously the paint line -- it doesn't run every product at the same speed and as we've ventured into different markets, because the residential construction, you know, the raised garage door panels were pretty strong running or fast running products.

As those folks have had a tough time, and we've gained market share in other arenas, we've probably got some slower running material, but I wouldn't guarantee that.

Okay.

Thanks.

We'll take our next question from Michelle Applebaum, with Steel Market Intelligence

Hi.

Good morning.

My first question for you was just to confirm your guidance on the second quarter.

So Nucor said that they would only expect modest improvement in the second quarter, and you're saying you hope for modest improvement in earnings,or are you just saying you hope for improvement in volume?

I would suggest that volumes should increase, at least if our customers are correct in their prognostications, Michelle.

That with margins remaining as they are, should give us a modest improvement.

Okay.

Based on certain assumptions, you might have a modest improvement.

Given the vagaries of the market, both on the scrap side and the product side, I don't think anyone in the latter part of January, felt that we were going to have the market disruption that we had two weeks later.

Exactly.

So when I say hope, I guess I'm just hedging my bets.

Yeah, no.

There's -- it's very, very difficult to tell what's going to happen six weeks ahead any more in our markets.

Right.

Right.

I mean, we see steel cycles of a year, and then we had steel cycles of six months, and then we had steel cycles three months and now it's six weeks.

So, you know, I agree.

Okay.

But I just wanted to make sure what you were saying.

My next question is; On the SBQ expansion, can you address -- there's a lot of that going on, and SBQ has been neat because it whittled down more than any other product line.

So it's been tight for a while, barriers to entry for new players are very high, but existing players are expanding.

Are we going to end up with another glut of that, the way we did in the early '90s?

Well, there's a lot of planned capacity and not so sure that all of it will come online as advertised, would be one comment.

Secondly, I do believe we are well positioned, and Barry and Dick and the team have done a phenomenal job in structuring the expansion.

Again, we have gone into a product arena of small diameter bars, 3.625 inch diameter and down, which is an arena that we are not really in today.

That arena is probably four, 4.5 million tons of the SBQ market.

If you look at the SBQ market in total, it's about 8 million to 10 million tons in a normal year.

So a good portion, 40%, 45% of that market is in a place that we're not .

The expansion has come on the heels of our customers suggesting and wanting us to get into that market arena, and we feel that a lot of our product will be going to existing customers.

So to your earlier point, there's a huge hurdle both in costs and in time and effort to get into this, the higher quality market niches that we are in today.

Qualifications with the Caterpillars, and the John Deere's and everyone in the world, it's not an overnight occurrence.

I think we have a good number of years, sort of leg up,

If I could add, just quickly, that again, I think Barry and his team have attempted to position ourselves as a leader in the future in a market that we aren't even in.

Yet, because we have a good reputation, a great reputation in the larger bars and in entering this market, the equipment that's being chosen is, what I would say, the highest order of delivering the highest quality product.

There are suppliers out there today, no matter what capacity they have, cannot deliver that quality of a product that we will bring into market.

So we are geared for good growth and if a fight comes on, hey, we will be positioned for it.

Sizing blocks, block and beam furnaces, just things like that that are not necessarily customary tools in the industry in that market.

One last point, Michelle, it's integrating into our existing facility.

It's incredibly efficient from a labor perspective, and also from a capital perspective.

$76 million for 300,000 tons of capacity is an incredibly effective use of capital, and should put us into a low cost position compared to any of our competitors.

Okay, and the 45% is that -- can you tell me who you would -- who logically -- who is in that market right now?

Is that a big import market or are you fighting domestic integrated competitors there, or comparable companies, or --

I would say all the above.

Okay.

So there is an import piece of that market?

Yes.

All right.

Changing gears here.

At this point, you would say you have a million tons a year of unutilized capacity, so you could ship a million tons more, you said that earlier?

Yes.

Okay,and then one more question.

As Nucor ramps up their DRI facility in Louisiana, what kind of impact will that have on the local ferrous feedstock market, prime scrap, pig, all that kind of stuff?

Is that going to impact with new capacity, new local capacity of DRI?

It certainly will help the supply/demand balance, the supply side on scrap and the raw materials.

If you look in the southern hemisphere, the Houston, Texas, Corpus Christi arena, today they have a reasonably good supply of obsolete scrap.

A lot of which is actually exported more than anything.

But in the prime arena, it's very, very tight.

So it will certainly help the dynamics there.

Do you think if it makes prime prices go down, that could have an impact on the sheet market, or last year prime prices didn't move the whole year and sheet prices went up a lot and then they went down a lot.

So this was --

Obviously, one imagines that Nucor is not going to sell the material into the open market and it's destined for their own facilities.

Right.

Right, right.

And thus -- but in turn, that's going to take demand away from the regular market.

So one would have to assume that it's going to ease that situation.

Okay.

Great.

I will go back in the queue.

Thank you.

We will take our next question from Dave Martin, with Deutsche Bank.

Thank you.

I just had a couple of questions.

First, coming back to the Flat Roll business.

I know, Mark, in your comments you noted the decline in shipments versus the fourth quarter was attributable to market share losses and new entrants.

Also, today you had a peer that reported a 10% quarter over quarter increase in sheet shipments.

I guess what I'm asking is, can you help me interpret those different data points and are the regional differences and demand trends, et cetera?

The -- I can only comment from our own experience in the marketplace and I would suggest that, particularly from the Texas perspective, we are seeing greater competition in the southern markets where TYK and Nucor sort of dominate.

So it most likely is regional.

We are not seeing any displacement of our order book from our peers in any material way up in the mid-west arena.

Okay, and then that is fair.

Secondly, on engineered products, I know you noted you had a maintenance outage in the quarter.

Can you quantify the financial impact of that outage on 1Q?

Not the financial impact, but we did make a suggestion that affected the execution by 16,000 tons.

At which point, you would have had SBQ actually shipping more in the first quarter than in the fourth quarter.

We just don't go to that granular level with our operations.

Okay.

If I could just clarify a little bit about that maintenance outage.

We mad a maintenance outage planned for the early part of April and included in that outage, was the plan to replace some components inside of our walking beam furnace there and for whatever reason, the leak developed a little bit quicker than we had anticipated and we determined for the integrity of the refractory and the furnace, it was prudent to shut down a month early.

We kept the melt shop running and it didn't miss a beat, but the rolling and finishing was impacted, hence the shipments.

But again, the work was anticipated, the material was all on hand and it was going to occur in April.

So really, I would tell you, the shipments shifted from the first quarter and will be reflected, with really no loss, into the second quarter.

Okay, and then lastly, Theresa, you noted some special items which were on the other expense line in the income statement.

I had missed those details.

Could you quantify what the items were and the impacts?

Certainly.

The comment that I made was, that the premium associated with the tender offer in January, it amounted to about $14 million.

And that $14 million expense is showing in other expense and income.

Otherwise you would have had other income in the range of $2 million to $3 million, which is very typical for us quarter over quarter.

Okay.

That's good.

Thank you.

We will take our next question from David Lipschitz, with CLSA.

Good morning.

Quick question.

Can you talk about your lead time, sort of end of year, beginning of the year, sort of mid quarter and sort of now and sort of compare and contrast whether if they have moved or stayed the same?

I would tell you that I would believe the vast majority have stayed the same.

Again, even when we took orders sometimes they were more of a reservation and not an order on a specific product.

So therefore we have time consumed, but not necessarily a backlog tonnage that was noted.

So we talked emotionally about how far it is out, but in reality we all recognize that putting things out nine months or 12 months, when some people claim that it is a little bit harder to realize that those are the true products that are going to get shipped.

I would tell you that we continue, as Mark indicated, under pressure in the east from our techs divisions and we are working on that situation, looking at other products and other opportunities there.

I would tell you that backlogs is have not appreciably changed across the book, other than maybe the appearance of -- from the end of the year to mid quarter to now.

Okay, and just a follow-up, and I'm sure beating a dead horse here, follow-up on Tim's and some of the other questions.

What stops the pressure if everybody is going to continue to bring on product?

What is in it?

I know demand is slowly improving, but not enough to offset the supply.

Any time prices rise, the imports come rushing in.

It doesn't look like Asia or Europe is getting better than where it is now, that much better at least.

What changes this whole situation that we don't just keep muddling along?

I think, obviously, the new capacity has to be absorbed and that capacity has been coming online for probably a year and a half or so, ramping up.

At some point, obviously demand consumption is going to be matched.

I think going forward, if you look at a normalized economy where America needs 120 million tons or 125 million tons the new capacity is going to be easily absorbed.

As I have stated in the past, I believe that the import scenario is going to be a little more challenging for consumers than it has been in the past, and the hurdle or the spread to make imports attractive has increased.

In years past, if you could save yourself a $50 bill for imports it would be attractive.

Given the volatility in the market and the exposure, or the financial risks that you have speculating on that import material, I think it has increased dramatically.

And imports market to market, when the market spread is dramatic they all find their way to our shores, but at a much higher spread.

Recently, we didn't really hear a huge amount of that import activity until that spread was over $100, $150 a ton.

That's a different scenario than experienced in past years.

Okay.

Thanks.

(Operator Instructions).

We do have a follow-up question from Michelle Applebaum, with Steel Market Intelligence.

Hi.

My follow-up question was answered.

Hello?

Yeah,.

Thank you.

Okay, great.

Thanks.

You don't have another one, Michelle?

I have about ten more, but I will finish offline.

We have no further questions in the queue at this time.

I would like to turn the conference back over to Mr.

Mark Millett, for any additional or closing remarks.

Super, Ryan.

Once again, thank you sincerely for your support and for taking the time to join our call.

Thank you to our loyal employees, that each and every one of you have an impact on our performance, and we wish you the very best and just remind yourselves to be safe in each and everything that you do.

And also, thank you to our loyal customers, without you we wouldn't be here.

Again, thank you all.

Bye bye.

That does conclude today's conference.

Thank you for your participation.