Steel Dynamics Inc (STLD) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Steel Dynamics' Second Quarter 2012 Earnings Conference Call.

As a reminder, today's call is being recorded.

At this time, it is my pleasure to turn today's call over to Ms. Theresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics Inc.

Please go ahead, ma'am.

Thank you, Andrea.

Good morning, everyone.

Welcome to Steel Dynamics' Second Quarter Earnings 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 predicted.

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 any general business or economic conditions which may cause actual results to 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, in our Form 10-K report under the captions Forward-Looking Statements and Risk Factors, or if applicable, in subsequently filed Form 10-Q filed with the SEC.

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 of 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.

Thank you, Theresa, and good morning, everyone.

I would like to add my thanks for spending time with us this morning,not only to discuss the quarter's results, but to also talk about some of the nearer term earnings catalysts that I believe we have for Steel Dynamics.

And I consider them quite compelling.

In challenging times, though, the true character of both individual and company becomes apparent.

This is certainly a challenge in the political and economic global arena in which we operate today.

Our industry is in a new era of greater volatility and less predictability than in years past.

I believe there is good news.

We continue, at SDI, to perform at the top of our peer group, maintaining our low cost position, a key to our success.

It is a tribute to our employee culture and to our great team of some 6,500 employees.

Each of whom contributes -- each is a real impact focusing on safety, bringing an enhanced value to our customers, and our innovation that will continue to differentiate ourselves from our competition.

Thanks to each and every one of them for their hard work and for their dedication.

Our overall performance was commendable in what remains a challenging environment.

During the second quarter, we achieved stable, sequential financial results in our steel and fabrication operations.

Although earnings in our metals recycling operations deteriorated, as margins and volumes compressed.

We reported net income of $44 million or $0.20 per diluted share, on net sales of $1.9 billion for the second quarter of 2012.

This matches the $0.20 reported in the first quarter this year, but is substantially lower than last year's second quarter results of $0.43 a share.

It should be pointed out that the first half of 2011 was a time frame in which historically high margins in flat roll were achieved.

This past quarter, the combination of increased domestic flat roll capacity and increased imports outstripped the demand of the slow USeconomy that did not allow for that level of margin to be repeated.

Overall steel demand through the quarter remained steady, although the added burden from imports and the additional domestic flat roll capacity exerted downward pressure on flat roll pricing, muting second quarter sheet steel margins.

However, long products operations did see some level spread expansion in the quarter, as product pricing decreased less than scrap roll material costs.

Our steel mills operated at 83% production utilization rate in the quarter, slightly lower than the 85% for the first quarter this year.

This compares to a recent domestic industry rate of under 80%.

Notably, even though non-residential construction is still anemic, our structural rail division has operated at 53% utilization for the year.

Rail production has helped that.

We increased our rail shipments over 12% this past quarter, shipping 38,200 tons.

Dick and his team will continue to focus on increasing this number throughout the year.

Operating income per ton shipped for our steel operations decreased about 5% from the first quarter rate of $98, to a second quarter rate of $93 per ton.

Average combined steel pricing related to second quarter shipments declined $21 in the quarter, was just over 2%.

And based on shipping mix, the decrease in flat roll pricing was the most prominent factor in the overall change.

The cost of scrap used for production during the second quarter declined $20 per ton charged into our furnaces.

From a current market perspective, the automotive, manufacturing, energy and construction markets continue to be stable, while a slight tempering appears to exist in the transportation and agricultural sectors.

Steel backlogs have drawn down, to a small degree, since the end of March.

This has been, principally, I think, procurement-driven, as buyers have stayed out of the market in anticipation of even lower scrap prices or have taken the opportunity to realign their inventories, particularly in the SBQ arena.

Underlying demand appears to be stable, and with some capacity exiting the market, lower street imports and a strengthening scrap market, positive momentum may be gained.

Steel Operations continues to outperform our industry peers throughout the market cycle.

The team delivers best-in-class results by maintaining the laser-focus on being the low cost producer, with the determination to exceed the customers' highest expectations.

Now onto recycling.

The domestic industry experienced a tough second quarter.

The ferrous scrap market was over supplied, as the export market has softened dramatically, leaving a lot of material that would normally have gone to Turkey or elsewhere, here in the States.

On top of that, the USsteel mill utilization declined, so domestic scrap demand decreased, while scrap flow, particularly in prime grades, remained strong.

This created an oversupply in the market and some fairly significant price declines that continued into July.

Our ferrous metal spreads decreased 10% in the quarter.

The stabilization of scrap prices, going forward, will not only benefit our metals recycling platform, but would likely also support steel prices.

Nonferrous margins also declined in the quarter, most notably in copper.

Indexed copper prices fell $0.33 per pound during the quarter, resulting in a 43% decrease in our copper margins.

Since the end of the quarter, copper has seen some improvement on reports of the stronger housing data for the US and an easing concern regarding China's growth intentions.

Excitingly, in June, our SDI copper rod mill began operations on schedule.

The team is doing a great job as they work through the ramp up of the new facility.

I want to congratulate each and every one of them on a stellar safety record, as well.

They went without a single recordable injury throughout the entire 12 months of construction and commissioning.

Within recycling, we are implementing several initiatives in 2012 and into 2013 to help offset some of the margin compression created by the macro supply and demand dynamics existing within the metals recycling arena today.

We are planning to open additional retail yards, which tend to bring in higher margin materials.

We are introducing new technology to recover even more nonferrous material from our shredding operations to further reduce the yield loss and increase margin.

We are exploring the auto business -- the auto body business, albeit in a small way, in an attempt to garner more unprocessed material at cost levels that should improve margins.

And we are also exploring small strategic acquisitions to enhance our existing geographic footprint to further increase retail business and to support our shorter volumes.

Now turning to Minnesota, one of the key aspects of our success in the past has been controlling our costs as far into the supply chain as possible, coupled with innovative approaches to execution.

Our pioneering efforts in Minnesota is providing SDI with a captive source of iron, eliminating a dependence on foreign markets.

As stated in the press release, we have made significant progress since restarting the facility in May.

Plant availability increased to over 80% and we feel confident we can achieve our target plant availability rate of over 90% in the near future.

Additionally, our operating rate -- our actual rate of production also improved in June to nearly 25,000 metric tons for the month.

Operating at higher rates for longer periods of time, we have been able to observe other deficiencies -- or efficiencies, I should say -- that can be gained and that need to be implemented through each our target capacity, quality levels and financial goals.

There are several solutions that we believe are viable and we are currently determining the best approach.

Our expectations are to implement solutions as quickly as possible within the next 10 to 12 months, dependent upon equipment delivery, lead times and subsequent installation and start up times.

One of the financial hindrances of the project today, as you know, has been the sourcing the plant's key role material, iron concentrate.

From the onset of the project, we were intending to provide the concentrate through our own mining efforts.

I am happy to report that our iron concentrate facility is on schedule to begin supplying concentrate to the nugget plant later this quarter.

However, as we have stated in the past, we do have higher priced third party material in inventory, and that will be consumed through the first quarter of next year, depending on our production rates.

This is a critical step to improve our financial performance.

Iron concentrate prices peaked in February of 2011 at $193 per metric ton, and have been in the market range of $130 to $150 per metric ton in the last six months.

We believe we can recover concentrate for approximately $50 per metric ton on a fully loaded, all in cost basis, which obviously will be a significant savings to us.

If commercial pig iron prices remain at current levels and production levels continue to ramp up, second half 2012 losses associated with our Minnesota operations should be similar to those recorded in the first half of the year.

If future plant modifications are successful and pig iron prices remain stable, we believe these operations should still become profitable sometime in 2013.

As for fabrication, the operations continue to operate in a weak non-residential construction market that has created an incredibly challenging operating environment for our six fabrication plants.

Disappointingly, the Architectural Building Index began a downturn in April and continued declining in May and June, suggesting a potential extension of weak non-residential building activity.

However, although we saw a decline in new bookings in June, our order backlog was slightly stronger at the end of June compared to the end of March.

It is great to be able to report that Gary and his team made our first quarterly operating profit for our fabrication operation since 2009.

Congratulations to the team.

In this segment, our volumes continue to grow.

The team strategically set out to improve our financial results by broadening our geographic footprint to garner national accounts, and by continuing to focus on customer service and cost containment.

Our facilities and their operating teams are ready to execute as market opportunities present themselves, as we are configured today, with a national presence for the 425,000 tons of capacity waiting to be fully utilized.

The highlight is looking forward.

As a company, and despite challenging markets, Steel Dynamics is still delivering superior performance through the cycle, compared to our domestic industry peers.

Operating and EBITDA margins continue to be best in class.

Superior operating and financial performance clearly demonstrates the sustainability of our operating platform.

In keeping with the entrepreneurial spirit that flows throughout our company, we will continue to assess opportunities for growth, whether in new products, new technologies or new business lines.

The focus is toward not only top line revenue growth, but growth that will enhance and provide more consistency to margins.

We are squarely focused on positioning the company for long term growth.

And there are a number of earnings catalysts that I would suggest are compelling.

Since the 2008 downturn, we expanded our steel making capacity and have yet to have a steel economy in which to fully realize the benefit.

The additional capacity is principally in hot roll and structural steel.

We have over seven million tons of capacity and have only reached shipping volumes of 5.8 million tons to date on an annualized basis.

That leaves over one million tons of latent capacity waiting to be utilized.

We have already discussed our many margin enhancing initiatives within our existing businesses;our capacity expansions and use of innovative technologies within metals recycling and our geographic expansion within fabrication.

The $76 million SBQ Roanoke expansion enacted earlier this year is a very compelling project.

It hits all the key drivers for success;increased volume of 325,000 tons, product diversification into smaller bars, our customer support, increased margins, and I believe, great investment returns.

It will be among the largest single site SBQ suppliers in North America.

Our customers are very excited about the one stop shopping availability of our high quality products.

It will also provide us the ability to increase utilization in our structural and rail division, as they will supply balloons for the engineered division for their rolling operations.

Also the structural team is exploring long-term solutions for excess capacity of structural products, giventhe anemic non-residential construction market.

It is critical for us to lessen that metal's exposure to one sector and provide greater diversification and eventually, more sustainable earnings through the cycle.

This is being done partially through our rail initiative and SBQ expansion, though we must diversify that further.

We have also discussed the prospects for turn-around at our Minnesota operations.

And I think, collectively, all of these initiatives have the potential to be appreciable earnings drivers, going forward.

We look forward to keeping everybody up-to-date on the progress of these initiatives as they occur.

For now, I would like to hand it over to Theresa to give us some more financial color.

Thank you, Mark.

Again, good morning.

As Mark mentioned, our earnings for the second quarter for 2012 were $0.20 per diluted share, at the upper range of our earlier guidance, of between $0.15 and $0.20.

On a sequential quarter basis, that is comparing the second quarter of 2012 to the first quarter of this year, revenues decreased $72 million or 4%,caused by a 16% decrease in our mills' recycling revenues, which more than offset the 2% increase in sales from our steel operations.

During the second quarter of 2012, our gross margin percentage declined 62 basis points, eroding a portion of the 153 basis point gain achieved during this year's first quarter.

Margin compression within our mills' recycling operations more than offset slight gains in margins from our steel and fabrication operations.

In the second quarter, metals recycling saw decreases in both ferrous and nonferrous shipping volumes and in overall metals res, resulting in a $20 million decrease in sequential quarterly operating income.

Within steel, on increased external shipments of 4%, declines in our average sale price were virtually matched, as declines in ferrous raw material costs used in production.

When we compare the second quarter of 2012 to the same period of 2011, gross margin percentage decreased 375 basis points.

As Mark mentioned, the historically high flat rolled and recycled ferrous margins achieved during the first half of 2011 were not repeated for the industry in 2012, due to macro conditions.

Our operating income per ton shipped for steel operations declined $60 when compared to the second quarter of 2011.

And our operating income for metals recycling declined $13 million.

Our effective second quarter tax rate was 39%, consistent with the first quarter.

The rate still remains higher than our expectations, given the inability to recognize any benefit from research and development tax credit that has still not been approved by Congress for 2012.

Cash flows from operations provided $101 million during the second quarter, with operational working capital contributing $19 million, as receivables decreased 9% due to lower selling value, and work-in-process and finished goods inventory volumes decreased 12% during the quarter.

Strong cash flow generation during this challenging environment is a continued testament to our low cost, highly variable cost structure and diverse value-added product portfolio.

Our second quarter capital investments totalled $55 million, and were $100 million year to date.

Just over 50% of these investments were related to our copper rod mill, which started operating in July, and an iron concentrate joint venture, which is expected to begin operation yet this quarter.

Second quarter depreciation was consistent at $45 million, a full-year estimate of $180 million to $190 million remains reasonable for depreciation.

And $36 million for full year amortization of intangible assets.

Our cash flow statement shows a $56 million contribution from other investing activities this quarter.

This amount reflects the sale of certain short-term investments that were reinvested in cash equivalent instruments.

Our current estimate for second half 2012 capital investment is in the range of $125 million to $145 million, including approximately $20 million to be spent in 2012 for our special bar quality capacity expansion project which is still on target to begin operating during the second half of 2013.

Over 70% of the capital investments planned for 2012 are what we would consider growth-oriented, or projects that are intended to increase capacity, efficiency and margin in future periods.

At the end of the second quarter, total debt was $2.4 billion.

Our current net debt, defined as total debt less cash and short-term investments to trailing adjusted EBITDA, is three times.

Our interest coverage ratio is four times.

Our long-term preference is to maintain that leverage at below three times.

And our current expectations are that net leverage will be back to under three times by the end of this year.

At the end of the second quarter, cash, short-term investments and restricted cash totaled $459 million.

We also have the full benefit of our $1.1 billion revolving credit facility that had no outstanding borrowings at the end of the quarter.

Our balance sheet remains strong, with over $1.5 billion of liquidity and minimum secured borrowing.

Funds that were available to us after our minimum liquidity covenant were $944 million.

Looking forward, our current 2012 cash flow allocation plan remains to invest in our existing and announced operations to reduce the portion of outstanding debt while maintaining sufficient liquidity for growth and to provide for cash dividends to shareholders.

And lastly, for those of you who use a break down of our flat rolled shipments for your financial models; during the second quarter, we shipped 296,000 tons of hot rolled, 103,000 tons of PNO, 43,000 tons of cold rolled, 102,000 tons of hot rolled galvanized, 54,000 tons of cold rolled galvanized, 95,000 tons of painted product, and finally, 14,000 tons of gal balloons.

Thank you.

Now I will pass the call back over to Mark.

Thanks, Theresa.

In conclusion, we would like to again give our sincere thanks to our employees for their continued hard work and dedication, to remind them that safety is truly our highest priority, and thank our loyal customers and shareholders for your continued trust and support.

With that, Andrea, we would like to open the call for questions.

Thank you.

(Operator Instructions).

We will go first to Kuni Chen with CRT Capital Group.

Good morning.

Good morning.

Nice job in the quarter.

Just on Mesabi.

I think you previously guided to a target of 55% operating rate by the end of the year, but it looks like you ran ahead of that level in June.

Is there a potential to raise your outlook for the balance of the year?

And can you talk about more specifically on some of the process optimization opportunities and what type of work needs to be done for the plant at this point?

As I said, the team has demonstrated significant improvement since the shutdown.

Six months -- six weeks, seven weeks doesn't necessarily make a full year.

I think we are -- our confidence has been boosted.

As we said, the plan availability exceeded 80% in June, which gives us the confidence that eventually we will get to that 90%, 95% plan availability required to achieve rate of capacity.

The specific production rate has also improved up there.

We had an average rate equivalent to 25,000 metric tons per month or 63% of rate of capacity in June.

I know higher rates have been achieved with degradation in quality.

As configured, with minor optimization, we estimate the plant can run at 350,000, 375,000 metric tons of furnace ready nuggets per year.

And we have identified some key opportunities for process enhancement that we need to address to bring the plan up to its 500,000 metric ton per year rated capacity.

Specifically, the greatest opportunity is to increase the combustion efficiency within the rotary harp furnace.

We are losing a lot of energy, a lot of CO is going out the stack.

We have identified a variety of different solutions to eliminate that issue, have that energy being combusted within the rotary harp furnace, serving its useful purpose.

Great.

And this is a follow-up on the -- as far as working capital goes, your comments imply there is some inventory destocking in the channel.

Would you expect that to result in working capital, a source of cash, as well, in the third quarter?

It is a potential, yes.

I see the second half of the year bringing probably some funding from working capital, but not huge amounts.

Thanks.

Our next question comes from Michelle Applebaum with Steel Market Intelligence.

Hey.

Good morning, Michelle.

Hey.

Congratulations on the high end of the range.

Thank you.

It is nice to see, Mark, your conservatism coming through on this stuff.

That's showing up nicely, and the performance was terrific.

I wanted to ask about -- the whole discussion is really on the resource side.

It is getting frustrating because Iron Dynamics is working out really well now, right?

Iron dynamics is operating very, very consistently.

It is producing just month in, month out, about 18,000 to 20,000 metric tons a month of liquid iron.

I think Dick would attest, it is not only good material going into the electric out furnace, but it is integral to the high productivity levels that the flat mill is achieving today.

But it took how many years for that to happen?

Was it like eight?

It was a long learning curve, and it appears that nugget -- the whole Minnesota operation is turning into the same thing.

At the same time, we are starting to see resource prices collapse.

I don't even think that is too strong a word to use anymore.

Next year there is a big slug of DRI coming on in the US.

And that is going to probably -- that adds to the ferrous resource base of the country, right?

Yes.

Even though you may not have access to that,it is a competitor's project.

So when do we come to the point that we say the economics have changed permanently?

Or in this new world of lower priced ferrous units, are the economics of what you are doing in Minnesota going to -- do the economics still work, and do they work as well?

How has -- there has been a fundamental shift in the macro.

So how has that changed how you look at what you are doing?

I think, Michelle, first and foremost, a reduction in ferrous resources, whether it is iron DRI or scrap, the price puts us in a phenomenally competitive position against our competitive peers.

Having low cost inputs I don't think is a bad thing.

Right.

Relative to the savvy nugget itself -- in terms of Iron Dynamics, the team there has done a phenomenal job.

They are ahead of the iron concentrate arena.

They are recycling 100% of mill scales and other steel mill wastes, and we believe that will continue to be a great contributor to our results.

Mesabi Nugget has been a pioneering effort, not unlike Iron Dynamics.

I think the ramp up has already been steeper than Iron Dynamics.

If you go back -- and as Bogart said in Casablanca, too long ago, I can't remember -- in the early days of Iron Dynamics, we were in a start up, shutdown, start up shutdown mode for many years.

And so for the facility to have reached 60 plus percent of its greater capacity to date is promising.

Relative to the economics, I think things are uncertain.

One can posture that China will lose its appetite eventually for scrap, as it starts churning out scrap in its economic cycle with New Core and others perhaps building DRI.

The supply demand equation will change.

But I think the underlying issue is that cheap resources for us is a benefit.

Can I ask on the concentrate that you are getting, once you are integrated in Minnesota, could that concentrate be used to make a pellet for DRI?

Or is the sulfur content too high?

You would have to do some pretty good beneficiation.

Its not impossible, butit is not best suited for DRI pellets.

Would the economics -- gas prices were so much higher when you started this process.

Now that gas prices have plummeted, if you were to fresh slate drawing board, would the economics be that it would be worth while to put that concentrate into pellet into a DRI, instead of the route you are currently doing?

Would that be a lower cost alternative?

I know hindsight is 20/20.

One has to remember, when equating any of these technologies, is to go to the liquid hot metal.

There are some attributes, obviously.

The nugget is 96%, 97% pure iron.

It is more beneficial to put that into electric out furnace.

The productivity of that material is much higher than putting DRI in it,let's just say a 92% metallization rate, with only perhaps 88%, 89% actual metallic in the material.

I would say there was no doubt though, given the natural gas arena where it is today, and if you had a captive source of DRI grade pellet, that would be an attractive alternative today.

There is no doubt.

When you say captive source -- captive source at what price?

You say captive source at market, but just reliable source?

I am suggesting if you have a source of pellets that you are backwardly integrating to the mine, obviously the economics would be incredibly attractive.

Even assuming you were paying market for the pellet?

If you are paying market for the pellet, it is not as attractive.

Okay, thanks.

We will move to our next question from Luke Folta with Jefferies.

Good morning.

Good morning.

My first question was more of just broadly.

You made some comments regarding the demand environment you are seeing.

You noted some -- how you see there is a slight weakness in ag and transportation.

I am curious to know whether you think the pull back we have seen in these markets are isolated to those end markets?

Or do you think this could be the beginning of a more broad based patch of weakness?

Also I wanted to get some color on what you are seeing in scrap export trends, understanding it was weak in the second quarter, but with sentiment turning positive on scrap pricing in the US,has that changed the order patterns on the export market?

Let me hand it over to my peers.

They are the ones doing hand to hand combat in the trenches.

Russ, do you want to tackle the scrap first?

Sure.

Good morning.

On the export side, we did see earlier in the month of July, some increased activity export wise.

So the beginning of the quarter, we started to see some activity that way.

Although when you look at the troubles of Spain and Europe in general and the fact that the Euro has now dropped to low $1.20's versus a dollar, that will have some impact on the export markets in the short-term.

Whether that is sustained throughout the quarter, it is just too early to tell.

Despite that, I think the scrap market in general has firmed up.

I think it has taken a big hit over the last -- little bit more than a quarter.

And to the point where the flows have stopped, and very dramatically, we are sitting with a fairly low inventory throughout our yard as dealers are not moving material into our yards.

We reached bottoming out effect and we are seeing upward price pressure on the domestic side for our scrap.

From all indications, the near term should be an upward movement in the scrap market.

Dick?

Sure.

Good morning.

I think your question has to be looked at from a basis of individual plants and products.

And if you asked about what has the demand been and what has it looked like with end customers in mind -- you look at the flat rolled and I will say that the flat rolled has been solid.

Activity is good.

The price has rebounded and appears to be moving in a direction that is favorable in comparison to scrap.

I will tell you no speculative buying is going on in the flat rolled world, as well as anywhere.

So we are doing fine.

Construction residential markets are weak, but again those guys, I think we tend to see a slight improvement from.

I am not going to tell you that it is a major end to a problem.

But it continues to shop and buy on a very limited basis, but more activity has appeared.

When you look at the beams of the construction world -- and as much as it has all been dismal, or sounds like it for the first half of the year, order entry year-over-year has been up 20%.

I will tell you that in July it has fallen off precipitously.

Is that any indicator?

Well it is one month.

What does that make?

I am not too sure.

We need to be paying attention to it.

Our rail orders are up 8%, almost 10% year-over-year.

And here in the last month, our inquiry is about 200%.

And so we are making headway into the rail market.

As Mark mentioned, we have been focused on it, and there is still some good projects to be done there.

And so we are excited about rail and other products they are expanding into.

We can't talk about them, but they are talking about development of additional products.

That is a changing dynamic.

If you talk to the end users -- the end users say there is no reduction in output from off-road vehicles or end pipe in the ground utilization, but we all recognize the merchant bar is a $110 drop in price in one month.

That tells you in any market, you don't have inventory on your ground --push it back upstream.

I talked to my local Ford dealer the other day and he said, I can't get enough vehicles.

He said, I can't get enough vehicles on my lot.

I can sell just about anything.

I am shocked by that.

This is from a little guy in the local arena.

Things are still fine in SBQ.

There is some weakening in the food chain, but the end users are telling guys upstream, reduce your inventory.

I know if you have it, you will be looking for me to make good on it.

Therefore let's tighten up.

Everybody sees that big drop in the merchant bar.

As far as merchants go, we are fine there.

We see third quarter and forward, we are over 90% utilization in Roanoke and we were and continue to be.

We don't always like the price.

We are making more rebar than we ever have, but the fact is we are running and running well.

We don't have unscheduled downtime.

We had a maintenance outage in April for a week.

And that wasn't extended because of the market in any way, shape or form.

It was the projects.

We had a couple days down at the end of June and July due to the storm damage.

Other than that, we are not doing badly there.

In fact, our export bill of sales are up and our domestic bill of sales are up, so we are pleased with the operation.

Going on over to Steel West Virginia, it is steady Eddie.

Again (inaudible) as well as merchant bars, the melt shop is running flat out, has been running flat out, so we don't see any concern there.

From a Roanoke perspective, we have to take a little bit of time on number one mill, and I think that's really due to inventory adjustments downstream.

They are adjusted on time delivery person.

When someone says back off, we don't build inventory, we immediately react to it.

On the merchant side, we're still buying (inaudible) at number two mill.

I can't tell you that there is -- I mean, maybe Mark has a different opinion.

I can't see this is a weakening trend that has -- that will bode poorly for the second half.

It is normal for the second half buying patterns.

I would agree with Dick.

Obviously there is a lot of uncertainty right there.

The inflections of late, not unlike the inflections in the first quarter, it is more procurement driven than fundamental underlining demand driven.

The buyers continue to watch scrap intently.

And given the downturn and drop in scrap market the last almost three months -- they have been hanging out.

They have been waiting to order.

And hopefully with stabilization of scrap prices, as Russ indicated, we will start seeing stronger market order input rate.

Thanks.

That's great detail.

I appreciate the color there.

The second question -- last question, you talked about spending some money on nonferrous technology -- separation technology.

Theresa, if you went over this and I missed it, I'm sorry.

Can you talk about what you plan to spend on those types of projects?

And on a ferrous ton basis, what you expect the benefit could be?

Is it a couple bucks a ton?

Or any information you could provide would be helpful.

On the steel side, I will take a couple bucks a ton any day.

We haven't discussed the actual numbers around the benefit expected, Luke, on those projects.

The projects are about, I believe, $30 million in total and there are two separations facilities being placed.

The first one should be in operation --

-- fourth quarter this year.

The second should be the first quarter of next year.

So you should start to see the benefit of that through the rest of this year and into next year.

Great, thank you.

To give you a little caveat, the returns that we look for in any of our investments -- the hurdle rate are for an ROA of at least 20% and IRR of at least 15%.

Not everyone meets that criteria, but most do.

Thanks a lot.

Next we will go to Timna Tanners with Bank of America.

Hi, good morning.

Good morning, Timna.

Just a couple housekeeping questions.

On the rail side, I had written down that you were targeting 180,000 tons for the year.

Is that the right number or is that a longer term projection?

That was our projection at the beginning of the year approximately for -- by the end of the year.

We still think there is a good market in the third quarter.

We said the inquiry rate has gone up substantially and we are selling to turnouts that track appliances.

I don't know if we will get there ultimately, but that's our goal.

And the other question on Mesabi Nugget, I am still perplexed with the timing of any of the catalysts of the market you were talking about.

It sounds like through the end of the year we are probably working down high-cost inventory -- so status quo on the losses.

And then we should start to think about first quarter of next year, some contribution?

Maybe I missed it, but I wasn't sure how I should model the contribution and the timing.

I think -- it is difficult to project specifically because there are three legs to that stool.

One is concentrate price, that obviously we have any eventual answer to.

We have the higher priced market bought material flowing through.

That still is going to flow into the first quarter.

Obviously, pig iron pricing.

If pig iron price -- market price which is actually the index for the transfer price, if that remains stable and up and our volumes pick up, we still would suggest we will see profitability sometime in 2013, probably later rather than sooner.

The big change or the big swing, I believe -- it is really a 2014 story.

Obviously, the losses will dissipate dramatically in 2013.

But from an earnings potential, it is a 2014 story.

That's helpful.

The final question, I wanted to know if you can explore a little more -- you talked about the SBQ market in the short-term -- the new capacity you are adding is a compelling project.

It has been interesting to see quite a bit of new SBQ capacity coming in the next 18 months or so.

Can you remind us what gives you conviction that that market can stay strong enough to absorb the extra supply coming on?

I will try to answer that one.

We are a predominantly large bar supplier.

90 plus percent of our products going out are greater than two and three-quarter inches.

So when we have such a high concentration of those markets, and the largest market by far in North America is below three inches, as far as consumption rates.

So not a very large percentage of the overall market needs to be acquired in which to fully complement the mill and that of capacity.

There is a lot of extra bang for the buck in this project.

We knew it was justified and met the hurdle rate that Theresa earlier mentioned,scheduled in a manner that we only anticipated running the new mill half the time.

A quarter of the time there was maintenance or interference the way it is laid out with the large bar mill, but there are still extra upside opportunity there, should we want to take advantage of it.

We are currently using this moment in time when let's say inquiries are a little bit lower than we would like at the SBQ mill, to actually go out and start doing approval processing of potential orders with our existing customers, and saying, what will you be looking for, and let's get it in the food chain or in the approval process for many of these applications.

In addition to that, it allows us to run a small mill as currently configured,even a little more so, in an attempt to make either files or production runs.

Just to add a couple of thoughts.

As Dick said, we are not chasing a huge portion of the market.

You have a $10 million ton market, small bars are about 50, 55% of that.

As Dick said, we are not chasing a huge percentage of it.

Yet he and Barry Schneider and the team have done a phenomenal job with customer loading support.

And they are the ones who not urged us, but suggested we get into that arena, because there is greater advantage to them to have a one-stop shop where they can buy the little bars, the big bars and send one truck in and get all of their product.

From a customer perspective, it is a compelling project.

And then also the team has done a phenomenal job penetrating some very high quality applications.

That market is not one that you just turn on an SBQ mill and suddenly are able to penetrate all markets.

So there is a high barrier to entry, I do believe, when you are dealing with the graves and the physical tonnages that Barry, Dick and the team have been able to achieve.

Thanks.

Next we will go to Sal Tharani with Goldman Sachs.

Good morning, guys.

Good morning.

On the comment about diversification at Columbia City Structural Rail Mill, a couple things.

First, can you give us more color on what other arena you can use this metal?

What percentage of that mill actually right now has been diversified or will be diversified once the SBQ is running?

And if beam comes back two, three, four years down the road, and Dick you said when you first started rail, you weren't able to run rail because beam was so hard.

If that were to reverse, do you have the ability to switch back or add more capacity to fulfill that demand a few years down the road?

So first thing is, we have added the rail market in a serious way.

We are not going to go backwards on our commitment to the rail market, regardless of how hot the beam market gets.

That's just the way we do business.

We have committed to it.

We are moving forward.

We are developing better and newer products, and it is being reflected in our inventory rates and our operating rates.

The number two mill is where the most opportunities to diversify are available.

Number one, because we are only running it basically half the time -- a little more than half the time.

We only have two crews of mill operators assigned to it, and we do have additional maintenance people and roll grinders, because roll grinding is a 24 hour a day, daily process.

No matter how many tons go through the rolls, still once they are used, they are used.

Even if they are not consumed in the same manner as you might think.

We have the ability to expand tremendously on our small section mill as it stands today.

The places where we have the opportunity -- if you ask what are we doing today?

I would say next to nothing that we are shipping is what I would consider OEM direct opportunities that we are pursuing.

And most of them are eight symmetrical sections that are more difficult to make.

We make them at some of our other mills.

They give assistance to Columbia City as far as engineering goes, but Columbia City is attempting to market it.

We have the crew.

We can make it, as soon as we run some trials.

It is a great opportunity on some of these other sections.

Great, thanks.

Sal, more parallel thoughts more than anything, but the penetration of the rail -- we anticipate that 350,000, 400,000 tons would be our goal.

I think it aligns with us two very specific strategies of not only increasing margin, but getting more consistent margin through the cycle.

As you said, there would be times when the structural market will come back and the margins will be massive in the structural business itself.

Given the capacity in North America today, we feel there will only be short periods of time when it is fully loaded and those margins are going to be there.

It is more important for us to get consistent high margins as opposed to an occasional peak -- if that makes sense.

That makes sense.

Have I one more question, Theresa, was there any hedging loss or gain during the quarter on your recycling division?

Yes, there was a slight gain , Sal.

We have that on -- within our little supplemental information.

I think the gain for the quarter was $1 million, and that compares to a $2 million gain in the first quarter of this year.

I think you asked one more question.

The question you asked was related to when the structural mill starts to supply Pittsboro what kind of volume might that increase for the structural mill.

And I think that is 200,000 to 250,000 tons.

I apologize for missing that part of the question, but that's an opportunity number.

We looked at that and said, the worst case for Pittsboro, from a project justification -- going back to the hurdle rates, would be to have a higher percentage of the product supplied from Columbia City.

Yet we continue to work on the efficiencies and the output of the mill shop as Pittsboro continues to break records.

Needless to say, it is in their best interest to minimize what they purchased on the outside.

It is an extremely interesting dynamic within our company where Roanoke sells billets to Steel West Virginia when it is the right bottom line decision.

Columbia City sells billets -- blooms to Steel West Virginia, sometimes at the expense of Roanoke.

It is a dynamic that we have to constantly be looking at as to where the markets are, what are the costs.

And then for Pittsboro to receive some of their billets potentially from Columbia City is a dynamic that ultimately will play out.

And we are going to continue to move it around.

If the structural market comes back, there is no problem.

We have four strands on the number one capacitor installed and we have opportunity to expand the second if needed, and they have the horsepower in the furnaces that have never been utilized.

And so there is no concern on my mind of missing the mark and missing a market opportunity.

While we are on the rail, Dick, what is going on with the head-hunting process?

Have you ordered the equipment?

That is an on going development opportunity.

So I don't think we can comment on it, but we are just constantly working at improving our capabilities.

Great.

Thank you very much.

Our next question will be from Arun Viswanathan with Longbow Research.

Hi, guys, thanks for taking my question.

First off just wanted to get a little more color on what are you seeing on metal margins.

Thus far in 3Q, as you said, there was a sharp dropoff in scrap prices.

We have seen some firming in hot rolled.

Do you expect your metal margins to expand?

I think one might see metal margin expansion for July as that chief of scrap flows through.

As Russ indicated earlier, the market looks to strengthen, and we are anticipating that strength, and that will moderate margins for the rest of the quarter.

Only if the (inaudible) doesn't move in Indiana.

Exactly.

But again the crystal ball -- incredible clarity.

There is a lot of uncertainty out there.

And then the other question I had was just on overall supply demand, we have seen some maintenance by some of your competitors, we have seen some of the weaker guys potentially exit the market.

Are you taking any share from some of those moves?

And do you see any opportunities to maybe pick up where some of those weaker competitors are now out of the market?

Would you consider potentially looking at some of those opportunities of capacity as well?

I will try to address the current market situation -- and then say, as people exit there are local markets that we intend to capitalize on.

When one guy goes out of the Galvalume market, therefore our capacity looks more valuable.

As a Galvalume product than as a galvanized product.

We are looking to exploit those opportunities and push further east.

When Jefferson Build does more Galvalume than galvanized, it presents opportunities for some of our Techs operations in Pittsboro.

And they also had competing galvanized capacity that was available in the east, and therefore it strengthens the market there.

Gary and his team, from a manufacturing perspective, as we heard about them having increased backlog and so forth -- we don't supply nearly all of the steel to them, but every business is competitively bid, and we get a certain amount of that business.

But the market is improving and as people step out in those regional markets, and we are taking advantage of it.

We want every piece of the market we can get.

Given the -- looking at what the potential destiny for RD might be, we prefer not to speculate as to the end game there.

Although it is difficult to envision a profitable scenario for those assets, given the competitive environment we all face today.

In the past, you guys have considered Black Beauty.

Obviously, that's not on the table given where we are right now.

Is there any scenario where you would look at the assets that are available on the market?

I would say, and as we have said in the past, we keep our finger on the pulse so to speak and evaluate things as they come up.

Again it is difficult to envision the RG assets -- certainly the RG asset as a wholegetting a profitable -- creating a profitable position, given the competitive markets we are in.

For the record, Gary and his team and in this case the steel side, we look at all of the opportunities that are in the market, and trying with an open mind to consider the opportunities that SDI could improve upon things to benefit with the equipment, with the people, with the markets and the products.

And therefore we investigate each and every one and do not write anything off, regardless of the circumstances and the venues about those projects.

Thanks.

Next we will hear from Shneur Gershuni with UBS.

Good morning.

My first question is related to lead times.

You see imports moderating, ticking down a little bit.

We have seen RG file.

We have seen capacity reductions and so forth.

I was wondering if you can talk about how this will likely translate into pricing on a go forward basis, and if you are seeing an impact on the lead times as well?

Well, when you look at the markets, you have to consider the supply/demand balance.

The fact that imports have dissipated somewhat here of late and the fact that there is some domestic capacity idle.

That swings or changes the balance perhaps favorably.

But again, there is a huge amount of uncertainty over there.

The markets are very, very fickle.

People are unsure.

You have macro structural issues on a global basis, that is not only suppressing real demand, but it is also tempering consumer confidence.

And I think it is inducing a corporate reluctance to invest capital.

In an arena of such uncertainty, I don't think we really want to predict where pricing may or may not go.

But you haven't seen any improvement in lead times at all in the last couple weeks?

I don't know if that can be stated.

Again, it is product by product.

When you hear about a $110 a ton reduction in merchant bars,whether that overshadows a $40 a ton price increase on flat rolled as being the object of sales efforts.

It is a balancing statement that we try to answer.

There is no firm, clean answer for that.

Fair enough.

But that being said, we are seeing it in the markets,manufacturing, energy -- auto markets, as Dick said earlier, they are strong -- stable at least.

We are seeing mixed signals in transportation.

On the one hand, the indexes are coming off little bit, yet our customers are suggesting, keep on making, producing and supplying the steel.

Agriculture is the only arena that we have actually seen true softening, to some small degree.

But I think that was more a case of, it was an early construction start -- early season for those folks because of the good weather.

That arena is softening a little bit.

That is not a huge, huge market for us.

It is maybe 5%, 6%.

And to Mark's point, it might be just the Farm Bill that gets debated in Washington.

Those are influences on our customers.

They have to wait for the write-off or depreciation schedules for these large purchases they make.

Each and every one of those outside our control influences our customer base.

And one follow-up question, I know you don't typically comment on guidance for the upcoming quarter and so forth, but some of your competitors have indicated that they expect things to soften into Q3.

Given the fact that you recognize the benefit of scrap potentially, earlier you talked about it in July, for example.

Are you thinking similar direction?

Or do you think you can be flat to up?

Again, as I said earlier, there is a huge amount of uncertainty there.

As we have done in the last few quarters, we are not going to comment on Q3 guidance here.

We will later in the quarter, as we have done in the past.

Fair enough.

Thank you very much, guys.

Next we will hear from David Olkovetsky with Jefferies.

Hello?

Can you hear me?

Hi, David.

Hi, how are you?

Congratulations again on the good quarter.

First question relates to liquidity position and your current debt.

Are you content with the bonds that you have outstanding?

Is there any thought about doing a potential re-fi?

Well, we are -- the liquidity that we have right now is at record levels, we have $1.5 billion full availability on the revolver.

So we are quite content with that.

That allows for some growth as well.

Regarding the notes you are commenting on, there are $420 million that are maturing in November of this year.

With the strong cash flow, we are in a position where we could absolutely repay that in totality or we could decide to refinance some of that.

That's what we continue to look at, as we monitor our capital needs and where we see the business moving.

Thank you.

And then as it relates to pricing in the metals recycling in ferrous shipment segment and also your nonferrous segments, can you give me a little color as to what pricing looks like in those too?

This is Russ.

David, on the ferrous side of it, that's the blood bath on pricing over the last three or four months.

It has been down about $100 a ton.

We think it finally got to the point where the dealers are no longer content with bringing material in, because they can't afford it.

What we have seen is a dramatic reduction in inventories and a firming in July that we think will continue, at least in August and maybe even -- again, beyond that it is hard to say.

But I think we have hit the bottom of the scrap market under the current economic conditions.

I think the price direction on ferrous scrap looks to be upwards at this point.

On the nonferrous side, that's kind of a mixed bag.

It is going to follow the general economy.

We've seen it, in the quarter, decrease fairly dramatically.

China is such a big player.

If their growth abates, that will have a big impact on the nonferrous sector.

If it continues, and we will see a fairly stable price structure, but that can change tomorrow.

Thanks very much.

Next we will hear from Evan Kurtz from Morgan Stanley.

Hi, good morning, everyone.

Good morning, Evan.

Just a follow-up on Mesabi.

Just wondering what grade of coal you are currently using over there?

And I know you talked at one point of being able to eventually move to using weaker and weaker coals, perhaps even thermal coal.

Just wondering if that is something you still see in the cards going forward?

On a lab basis testing different coal, with the intent of moving to high vol coals moving forward.

Not sure we are getting to the real basic thermal coals.

Are you using the premium low vol right now?

Yes.

Just a separate question on SBQ and I know you talked about this, but would you be willing to share specifics on -- you said backlog was lower now.

And also on pricing, have you seen pricing fall more than scrap over the past quarter or so here?

I think going forward -- and I know we have tended to guide on backlogs on a mill by mill basis in the past.

We will give you directionally where our overall backlogs are, but we don't wish to define that by division by division.

Okay.

A little more color on SBQ, and very little is commercial or spot -- a lot of it is longer term, and most of those have index arrangements.

SBQ is the least of our products that are -- or the product that is least affected by the directional movement, from a sales pricing perspective.

Helpful.

Thank you very much, guys.

Next we will hear from Mark Parr from KeyBanc.

Thanks very much.

Hi, Mark, how are you doing?

Hi, Mark.

Doing well.

Good quarter.

It is too bad about the scrap situation, but I guess there is pluses and minuses for you guys that maybe some other guys that are all in the scrap market aren't going to get here over the near term.

I was curious, can you help at all -- if we assume that scrap is up $20 in August, I will assume that is really the supply for September.

How much would your scrap surcharges be down?

Or can you give us some color on how much reduction in scrap cost you could achieve or see in the third quarter?

Well, I am just going to talk to the mechanics that you have eluded to, and you are correct in the fact that the buy in one month is normally planned for the consumption in the following month.

There is a trailing effect of the price movement, both up and down.

When we have -- and we have since the acquisition of Omnisource, have done a much better job of being able to minimize steel mill inventories and take the risk out of that, like our customers are trying to take the risk out.

So it is pushed back, as Russ was saying, into the peddler arena.

Therefore nobody wants to bear that risk.

Many times there is reported indexes on the 10th of the month or the first Monday past that.

Usually, that is the indicator that is used for the next month's direction on pricing.

Sometimes it gives a reason to adjust and like on the merchants and on the SBQ it gives a direct indication as to by what dollar amount scrap will -- and there are other surcharges that are in affect, but they are relatively stable.

Therefore it happens immediately the first of the next month.

Mr. Parr, does that answer your question?

Yes, I didn't know if he was done or not.

Dick, what are you suggesting is that I should just look at that index on the 10th, and that would give me the information that I need if I wanted to estimate how much the surcharges might be down?

I won't tell you how you to do your job, and I won't tell you that is the only indicator, but it is a market direction.

We use different ones for different products and some are combinations.

Some of the things that Russ does are not only there from other publications, and so -- but it is a good indicator of scrap direction.

A directional indicator.

I appreciate the color.

Thanks, guys.

And we will take our last question from Aldo Mazzaferro with Macquarie.

Hi, everyone.

Thanks for all of the information.

Very helpful.

I just had a couple little questions on the metal recycling area in the ferrous resources -- the whole sector.

You show a loss in operating income line of $13 million.

I think you broke out the Minnesota at $11 million and the OmniSource at a $5 million profit, which seems to imply about a $7 million loss somewhere else.

Would that be in IDI?

No, Aldo, the Minnesota number we gave you is net income not operating.

Oh, it is net.

Okay.

I worked backwards on that then.

And if I could ask another one -- on the fabrication business, I noticed the profitability came in there.

I wonder if maybe Gary is there, he can talk about what the outlook might be for volume and sales revenues over the next few quarters?

If there is a seasonal pattern we should watch for?

Or whether there is impacts of acquisitions coming into the top line that might be helpful?

There really isn't that significant a seasonal pattern when you look across the whole of the year.

It is slower at the beginning of the year, coming out of winter, into January or February and slowing down in the November, December time frame.

But we shouldn't see too much seasonality.

What has been the bigger driver in the last couple years has been overall growth.

We are hoping to see this year be up 10% over last year's demand.

That is nice growth.

That leaves a market that is relatively small, if you look back to the pre 2009 history.

We are seeing group backlogs, good order entry.

We have seen a couple of quarters here where we see good one or two month form entry, and then a month that's not strong.

It is spotty.

The Architects Builders Index are pulling back, like Mark described earlier in the call, to us is a serious indicator that there is turbulence in that market.

It was improving nicely month over month for awhile and then pulled back.

I would say, Aldo, it looks spotty, and we have to keep executing every day.

Those new plants that are coming up are getting more stabilized and we are getting more productivity out of the groups.

We've put in additional manning that is now more experienced, better trained and more effective.

That will help us as we go forward to the end of the year.

I am still looking for improvements as we go through the end of the year.

But the market is a big question mark.

And some of the concerns Russ talked about with Europe and Dick talked about and Mark talked about, the concerns in the macro environment are dampening the enthusiasm for some companies to build projects right now.

Nonetheless, we are still looking to continued improvement.

That's great.

It is starting to show up for sure.

And just finally, Theresa, did you mention what the CapEx was for the full year?

I think you said something, but I missed the number.

I gave you the second half.

We had $100 million of CapEx through the first six months.

And for the second six months we are expecting between $125 million and $145 million.

Great.

Thanks very much.

With that, everyone, that does conclude our question-and-answer session.

I would like to turn the call back over to our presenters for any final and closing remarks.

I would just like to thank you all for your time today and for your interest and support of our company.

Be safe out there.

Thank you very much.

Once again, ladies and gentlemen, that does conclude today's call.

Thank you for your participation and have a great day.

Have a great day.