Steel Dynamics Inc (STLD) 2012 Q3 法說會逐字稿

Good day and welcome to the Steel Dynamics Third Quarter 2012 earnings conference call.

At this time all participants are in a listen-only mode.

After the management's remarks we will conduct a question and answer session.

Instructions will follow at that time.

Please be advised that this call is being recorded today, October 18, 2012 and your participation implies consent to our recording this call.

If you do not agree to these terms simply disconnect.

At this time I would like to turn the conference over to Theresa Wagler, Executive Vice President and Chief Financial Officer at Steel Dynamics Incorporated.

Please go ahead.

Thank you, Clint.

Good morning, everyone.

Welcome to the Steel Dynamics Third Quarter 2012 earnings Conference Call.

I'd like to take this opportunity to introduce one of the newest members of our team, Marlene Owen.

She joined us in September as Director of Investor Relations and we're excited to have her as part of the team.

Marlene's contact information is on our website and also noted on our Press Release.

I'll now turn the call over to Marlene for a review of our forward-looking statements.

Thank you, Theresa.

I am blessed to be here.

Good morning everyone.

I would also like to extend my welcome to you and thank you for joining us for Steel Dynamics Third Quarter 2012 earnings conference call.

As a reminder, today's call is being recorded and the recording 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 protection of the Private Securities Litigation Reform Act of 1995.

Such statements, however, speak only as of this date today, October 18, 2012, and involve risks and uncertainties related to our metals business, or to general business and 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 Annual Report under the caption Forward-looking Statements and Risk Factors, or if applicable in subsequently filed Form 10-Q filed with the SEC.

Joining today call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; Theresa Wagler, Executive Vice President and Chief Financial Officer; and the Company's platform Executive Vice Presidents including Dick Teets, President and Chief Operating Officer of our Steel Operations; Russ Rinn, President and Chief Operating Officer of 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.

Thank you, Marlene, and welcome aboard.

Welcome to our team.

Thank you.

We're glad to have you.

I'd also like to add my thanks to each and every one of you for joining us this morning to discuss the quarter's results and also to talk about some of the nearer term earnings catalysts that relate specifically to Steel Dynamics that will further differentiate us from our peers.

But before that, I'd like to applaud our team on its safety record in the quarter.

I want to especially congratulate certain employee groups for a stellar performance.

I think it's very noteworthy.

Our entire Michigan division of our recycling platform plus 47 other metal recycling locations have had zero recordable incidents this year.

Our Steel West Virginia, the Techs and Jeffersonville Steel Making locations have had zero loss time incidents this year and SDI La Farga, our copper rod facility, has had zero loss time incidents for 15 consecutive months, which I think in aggregate is a phenomenal performance.

As you know, safety is our highest priority and my congratulations to the entire team.

We continue to live and operate in a challenging time that constantly tests our metal.

The US market remains tepid as uncertainty surrounding the strength of Europe's financial condition, slower growth in China, and the near term the US economic and political environment continues to weigh heavily on businesses' appetite for both capital investment and product procurement.

Fortunately, we have a talented team that is up to the task.

Each successive quarter they continue to perform at the top of our peer group, maintaining our low cost position, a differentiating factor driving our success and superior financial metrics.

During the quarter we achieved sequential quarterly financial improvement in our Metals Recycling and Fabrication platforms but saw a decline in the profitability of our Steel Operations as overall shipments dropped 8%.

Operating income from our Steel Operations is down on a sequential and prior year quarterly basis, attributable mostly to decreased profitability in our long products divisions and most notably in our engineered bar products operations.

We reported net income of $13 million or $0.06 per diluted share on net sales of $1.7 billion for the third quarter of 2012.

This is below the $0.20 reported in the Second Quarter this year and lower than last year's Third Quarter results of $0.19 per diluted share.

It is important to note that most of the earnings decrease is attributable to two unique items we communicated to you in our guidance.

The first and most impactful was the refinancing expense of $26.3 million or $0.07 per diluted share and the second is a non-cash impairment charge of $7.9 million or $0.02 a share related to the termination of our two small joint ventures.

Theresa is going to provide greater detail for these items in a few minutes.

Excluding these charges our Third Quarter diluted earnings per share would have been $0.15.

Overall steel demand was down in the quarter.

Volumes fell most significantly, 32%, within our higher margin special bar quality products as customers began to realign inventories throughout their supply chain.

The exuberant 2012 growth expectations communicated late in 2011 and to this year related to the yellow iron transportation and other heavy manufacturing sectors dissipated somewhat, as actual growth was less than anticipated and customers realized their inventories who were mismatched to current growth expectations.

Our steel mills operated at 79% production utilization rate during the Third Quarter which is lower than the rate of 83% we displayed for the Second Quarter this year.

This compares to an estimated Third Quarter domestic industry rate of some 75% among US producers.

Notably though, even though non-residential construction is still anemic, our structural and rail division has increased utilization to 54% year-to-date.

Remarkably, the mill continues to remain profitable, which is testament to our highly variable cost structure and low cost position.

Rail production continues to provide support to our market diversification strategy there.

Our 2012 year-to-date rail shipments were 107,000 tons or about 14% of our sales mix compared to the same period of 2011 with shipments of 97,000 tons.

We remain focused on increasing this volume and providing greater market diversification for this facility to mitigating our dependence on the non-residential construction sector.

Operating income per ton shipped for our Steel Operations decreased 15% from the Second Quarter rate of $91 to a Third Quarter rate of $78.

Average steel pricing related to Third Quarter shipments declined $45 in the quarter, just over 5%.

The cost of scrap used in our furnaces for production during the Third Quarter declined $44 per ton.

Our steel backlogs are generally lower at the end of September compared to the end of June.

On our Second Quarter earnings conference call we noted that our market intelligence indicated some customers were preparing to reduce inventory in order to mitigate market exposure and release working capital from the supply chain.

We indeed saw that happen in conjunction with softening demand in some sectors.

Although customer sentiment remains relatively positive, there is an ongoing hesitancy to build inventories in this environment of uncertainty.

There is a mentality to order strictly what will meet near term needs.

End markets remain mixed.

Automotive and manufacturing sectors remain positive.

Transportation softened somewhat, and additionally, agriculture contains the remain muted due to the impact from extreme drought conditions throughout the US.

We've also seen some pressure in the energy sector, specifically related to reduced natural gas drilling, as natural gas prices remain low.

Nonetheless, our Steel Operations continue to outperform our industry peers throughout the market cycle.

The team delivers best-in-class results by maintaining their laser focus on being the lowest cost producer out there.

They also remain committed to creating customer value and exceeding our customers' highest expectations.

For Metals Recycling, the domestic industry experienced a volatile Third Quarter.

Going into the quarter, the first scrap market remained over supplied as the export market weakened, leaving material that would normally have gone to Turkey or elsewhere here in the States.

This resulted in significant price declines.

On top of that, US steel mill utilization declined, resulting in reduced domestic demand.

As compared to both the Second Quarter of 2012 and the Third Quarter of 2011, our ferrous scrap shipments declined 10% to 1.3 million tons for the quarter.

As we entered August, scrap pricing rose sharply due to increased export activity after seeing domestic inventory shortfall at our-- at the Steel Mills.

This uptick was a significant factor in achieving the 23% increase in sequential quarterly ferrous margins.

Non-ferrous margins held steady overall, although unrealized hedging losses during the quarter decreased earnings by some $9 million.

Non-ferrous volumes decreased 4% when compared to the sequential Second Quarter and 7% as compared to last year's Third Quarter.

Last quarter we said we were implementing several initiatives in 2012 and into 2013 to help offset some of the macro supply and demand dynamics that continue to hinder the metals recycling market.

We opened additional retail yards to increase flow of 4higher margin material and are introducing new technology to recover even more non-ferrous materials from our shredding operations to reduce yield loss and increase margin.

We expect these recovery operations to begin operating in the First Quarter of 2013.

The Metals Recycling business was quite a roller coaster ride throughout the third quarter and it's unlikely we will see that volatility subside in the near term in any meaningful way.

As is typical for us, we are taking deliberate actions to mitigate the impact market volatility has on our business performance, at least to the degree we can, and the team has done an excellent job developing, planning and implementing these initiatives.

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

We said that our pioneering assets in Minnesota will provide SDI with capital source of iron, eliminating dependence on foreign pig iron markets.

They have.

Even though we have purchased a small amount of third party pig iron this year, production at both our Minnesota operations and Iron Dynamics could have clearly supported our current steel production requirements for pig iron.

We currently don't expect the need for further third party purchases.

Last quarter we indicated that significant progress had been made since restarting the Nugget facility in May and that mechanical and process changes were necessary to fully achieve production and product quality expectations.

While operating during the third quarter, we were able to determine the exact nature of these changes.

As mentioned in our Press Release, beginning in mid September, we began a six-week outage to lay the ground work necessary to prepare for the implementation of productivity and quality improvements.

Our current expectation is to recommence operations in November with additional equipment installation expected to occur in the first half of 2013.

We obviously will provide more specific timeline as we go forward, and keep in mind some of this timing is contingent on equipment delivery schedules.

We're pleased to report that our Minnesota iron concentrate facility started operating in September and supplied its first shipment to the Nugget facility before the end of the quarter.

We are proud of the team there and appreciate their dedication and hard work.

This is a pivotal achievement toward lowering the eventual cost structure of iron nuggets.

As suggested in the past, please keep in mind we still have higher priced iron concentrate in inventory which must be used through the remainder of 2012 and into the First Quarter of next year.

Therefore we won't immediately realize the full benefit of the reduced cost concentrate.

We continue to pursue the permitting of our [Brownfield] mine and there are no new updates relative to that effort.

Moving on to fabrication operations.

The continued weak non-residential construction market provides a challenging operating environment for our six fabrication plants.

Although two months a trend does not make, and although only incremental, the architectural billing index began an upward turn in July and continued to improve in August, slightly breaking over the 50 threshold after declining the four previous consecutive quarters, I mean, months.

The upward tick would suggest a potential improvement in future non-residential building activity and the data suggest the growth is occurring principally in the South and West US which aligns well with our new plants in Arkansas, Nevada, and Mexico.

Our volumes are growing through gains and market share as the team continues to win new customers.

The group continues to broaden our geographic footprint to garner national accounts and remains focused on customer service and cost containment.

Our backlog in September was stronger than at the end of June, and we're pleased to report continued improvement in operating profit for our fabrication operations.

We said our facilities and their operating teams were ready to execute as the market opportunities presented themselves, and they are.

And as a reminder, we are configured with a national presence now having 425,000 tons of capacity and our team is working diligently to utilize that capacity.

They're making progress and we appreciate their contributions.

I think it could be seen that Steel Dynamics is still delivering superior performance despite very challenging markets.

And the Company continues to drive towards maximizing opportunities to effectively and efficiently perform through the cycle when compared to our domestic peers.

Our operating and EBITDA margins continue to be best-in-class.

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

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

The focus is to award not only top-line revenue growth but growth that will enhance and provide consistency to margins and provide our shareholders with the returns that demonstrate our commitment to making Steel Dynamics the preferred investment decision.

And to that end, I believe recognizing the late and long term value of our Company is clearly demonstrated in our ability to successfully weather the downturns, and 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.

As I mentioned on last quarter's call, we've expanded our steel making capacity to 7.4 million tons since the 2008 downturn and have yet to fully realize the benefit.

We will be expanding the capacity and product offerings of our SBQ operations, hitting all of the key success drivers, product and market diversification, customer support, increased margins, and great returns on capital.

The SBQ expansion will allow for greater utilization in our structural rail division as they are intended to supply balloons for the SBQ expansion.

The Minnesota operations will benefit from our lower cost iron concentrate and after equipment modifications are completed, we expect to achieve increased productivity, which should drive significant improvement in financial performance.

These are a few of many initiatives that have the potential to be appreciable earnings drivers and we look forward to keeping everyone up-to-date on the progress of these initiatives as they occur.

So now, I will pass the call over to Theresa for an update on our financial results.

Thank you, Mark.

As mentioned, our earnings per diluted share for the Third Quarter were $0.06 above our earlier guidance of between $0.01 and $0.05 per diluted share.

Two unique charges reduced our earnings in the third quarter.

Had those charges not occurred, the Company would have reported Third Quarter earnings of $0.15 per diluted share.

Those unique items included the incurrence of non-operating charges related to our Third Quarter refinancing activities of $26.3 million or $0.17 (sic -- see press release "$0.07") per diluted share.

Those charges are shown in our Income Statement as other expense below the operating income line.

I will detail the resulting average maturity extension and interest savings in a few minutes.

We also recorded non-cash impairment charges of $7.9 million or $0.02 per diluted share related to the intended termination of two small joint ventures.

One related to the manufacture of composite ties, of which we owned 84% and the other is the production of abrasive materials, of which we own 90%.

Just to note, neither of those operations were in our reportable segments, so you won't see that allocated to the earnings of any of those segments.

The decisions to terminate these joint ventures triggered an assessment for impairment in the third quarter.

The impairment charge reflects the difference between the estimated fair values of the assets compared to their book value.

On a sequential quarterly basis, that is comparing the Third Quarter of 2012 to the Second Quarter of this year, revenues decreased $216 million, or 11% caused by a 13% decrease in revenues from both our Steel and Metals Recycling businesses, as both volumes and pricing decreased in the quarter.

Our consolidated gross margin percentage declined 30 basis points.

Margin compression with our Steel Operations was more than offset by gains achieved in our Metals Recycling and Fabrication operations.

Despite decreased volumes, ferrous margins expanded in our Metals Recycling operations, resulting in operating income of $16.6 million or $25.9 million after excluding non-cash unrealized hedging losses.

This compares to operating income of $5.1 million or $4 million after excluding non-cash unrealized hedging gains in the Second Quarter of this year.

When we compare the Third Quarter of 2012 to the same period of 2011, our gross margin percentage decreased 51 basis points, primarily due to the macro industry conditions explained earlier.

Our operating income per ton shipped for Steel Operations declined $17 when compared to the Third Quarter of 2011 as average pricing fell further than scrap costs during the period.

However, operating income from Metals Recycling improved $5.1 million.

Gross interest expense for the third quarter was $41.8 million based on an effective interest rate of 7%.

Based on our current refinance capital structure, the Fourth Quarter of 2012 will benefit approximately $6 million in interest cost savings when compared to our pre-financed structure.

Moving into 2013, the expectation based on our current capital structure and prevailing interest rate is for interest expense to decrease approximately $20 million as compared to full year estimates for 2012.

Our Third Quarter effective tax rate was considerably lower than previous quarters at 15.4% including non-controlling interest.

The decrease in the effective rate was attributable to a favorable adjustment in our reserves for unrecognized tax benefits, which was based on new information gathered in the third quarter; however this benefit was largely offset by an increase in our overall estimated full year.

You may also have noticed that our diluted shares in the third quarter were lower than usual.

We were required to exclude the share impact of our convertible notes, about 16.6 million shares, because the result would have been anti-dilutive or in other words would have actually increased our diluted EPS during the quarter.

Cash flows from operations provided $117 million during the third quarter.

Funding operational working capital was $23 million, primarily related to decreased inventories which were more than offset by decreases in payables and accruals.

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 Third Quarter capital investments totaled $58 million and were $150 million year-to-date.

Just over 40% of these Third Quarter investments were related to our copper rod mill which started operating in July and our iron concentrate joint venture which began operations the last week of September.

Third Quarter depreciation was consistent at $45 million.

Our current estimates for Fourth Quarter 2012 capital investments is in the range of $50 million to $60 million.

As mentioned on our last quarterly earnings call, over 70% of 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.

We are very pleased with the execution of the tenders in August for our 7.375% Senior Notes which were due November of 2012 and our 7.75% Senior Notes, which were due April 2016.

We repaid $170 million of the notes with available cash and refinanced the remaining $750 million from net proceeds received from the issuance of new Senior Notes, a seven-year 6.125% $400 million tranche due in 2019 and the 10-year 6.375% $350 million tranche due in 2020.

We've created an even greater long term flexibility in our capital structure through the repayment of a portion of our debt which we indicated we would do earlier this year and through the extension of our debt maturity profile and through the reduction of our interest burden.

At the end of the Third Quarter total debt was $2.2 billion.

Our current net debt, defined as total debt less cash and short-term investments to trailing adjusted EBITDA, was 3.1 times and our interest coverage ratio was 3.8 times.

Our long-term preference is to maintain net leverage below 3 times.

If trailing adjusted EBITDA is adjusted for the full year 2012 refinancing charges of approximately $40 million, our operating net leverage remains below 3 times at 2.9.

At the end of the Third Quarter, cash and restricted cash totaled $315 million.

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

Our balance sheet remains strong with over $1.4 billion of liquidity and minimal secured borrowings.

Looking forward, our near term cash allocation plan remains to invest in our existing operations to reduce a portion of our outstanding debt while maintaining sufficient liquidity for growth and to provide for cash dividends to shareholders.

Lastly, for those of you who use the break down in our flat-rolled division shipments for your financial models, during the Third Quarter we shipped 254,000 tons of hot rolled, 82,000 tons of PNL, 38,000 tons of cold rolled, 89,000 tons of hot rolled galvanized, 50,000 tons of cold rolled galvanized, 100,000 tons of painted products, and 26,000 tons of [Galvalu] for a total of 639,000 tons.

Thank you.

I will now pass the call back over to Mark.

Thanks, Theresa.

I guess in conclusion on our opening remarks, I'd like to again thank all our employees for their continued hard work and their dedication and their commitment to safety.

Each and every one of you contributes and each and every one of you makes an impact to our Company.

And also we would like to thank our loyal customers and shareholders for their continued trust and support.

So now, Clint, I'd like to open the call for questions that you may have-- any of the listeners may have for myself or the team.

Thank you.

[OPERATOR INSTRUCTIONS].

Evan Kurtz of Morgan Stanley.

I was hoping to kick it off with a two part question on scrap.

Have recent conditions been tough enough to encourage some of the smaller, maybe less advantaged scrap processors out there to close up shop or are we starting to see any sort of a supply response given the weak profitability there?

And then also just wanted to get your take on maybe the five year view for scrap processing.

How do you see supply and demand playing out as we move forward here?

Well Russ, have you got your five year crystal ball?

[laughter]

The answer to the first one is certainly the pressure on scrap markets and scrap suppliers has been very difficult.

Again as Mark talked about the roller coaster ride, the ups and downs certainly put pressure on the margins and the profitability of all of us.

So cert-- I would-- I think as we suffer I think everyone else in the scrap industry suffers.

Have we seen a series of closings?

I haven't seen that but certainly I think everybody is under pressure.

On the five year look, I think, Evan, if you can tell me what the mill utilization rate is for the next five years and we might have a shot there.

But it's-- as you look at this year, roller coaster ride, up and down and up and down and not just up and down and small range, up and down big range, I think until we get some economic certainty in the global economy I think it's going to be that roller coaster ride.

Maybe I'll make it a little simpler and talk about the very near term on scrap then.

I was actually pretty surprised to see October prices come down as much as they did given that we've been hearing some of the supply was fairly lean going into the month, so I'm assuming that's probably still the case and just wondering how you see things setting up for November, where do in your opinion do scrap inventories stand at maybe both the yard level and also at the mill level as we go into negotiations here for November?

Evan, I think the inventories in this entire supply chain I think remain fairly lean and again with the roller coaster ride, the old adage, if you don't know, sell your flow.

I think everybody pretty well follows that in this time frame because it's just too risky to hold inventory.

Mill utilization rates are still, as Mark indicated earlier, are down from where they were earlier in the year.

I don't see anything that tells me those are going to jump up to 80% any time soon so I think we're just going to rock along.

As I look where we're at on the October levels, pricing levels, they are very similar to the July pricing levels.

If you'll recall in July, those loan price levels relatively pretty much shut the flow off at the dealer level and so I think we're experiencing some of that as these October prices are at that similar level.

What happens in November I think is probably sideways, strong sideways it would be my guess but again things can change very quickly.

I would say the indications are that we are at the bottom and I think the balance of the quarter should be upward pressure if anything.

Arun Viswanathan from Longbow Research.

I guess my question is a little bit along the same lines.

What makes you say that we're nearing a bottom on scrap?

Have you seen any difference in the export market because that-- to me it seem like that's what changed in August to get some momentum back in the market.

There has been a little bit of uptick in the export market.

It is again just like the regular scrap markets, steel markets go in fits and spurts.

But again, I think the real issue is the scrap yards are not attracting-- the prices are not attracting scrap out of the fields or out of the dealers.

It's just going to put a constraint on the supply so that the scrap yards and the dealers all will have to pay higher to get there, therefore the pressure is going to be to push the price up from those lower levels but again, it's such a volatile market, it can change very quickly.

Another question I had was on the SBQ side.

There's been a number of capacity increase announcements over the last year or so and maybe up to 30% or so being added to the domestic market and you've gone through some destocking recently.

I just wanted to go through your thought process for adding capacity at this point and where that is going to be soaked up.

I'll be happy to take a shot at that one.

I would tell you if you looked at a list of the announced SBQ expansions, the vast majority are capacity expansions.

The difference with us at Pittsboro is ours is a product mix diversification expansion and we're really driving down into the higher accuracy, the demanding the tolerance, demanding small bars that we have no-- really no significant presence in today and so I can't speak to the viability of the capacity expansion projects and their ending results but I would tell you I'm still very optimistic about the positive results we'll see because we have the early indications of customer desire and we are going through customer approvals and different evaluation processes during this time in anticipation of our next year start up.

So just to add, I think we consider that to be an incredibly compelling project.

It's an incredibly effective use of capital.

It's $75 million, $76 million or so to get 325,000 more tons.

That puts us into an incredibly low cost position in that arena and we already are one of the lower cost operators I think in SBQ, Dick?

Yes.

And so you're starting with a culture-- a low cost position and also sort of a low cost of overhead for fixed costs for that material.

As Dick said, there's huge customer support for that product, and I think one needs to recognize that Dick, Barry and the team there have done an incredible job over the last three or four years.

We are the beneficiary today of work we've done, engineering, new products, and new qualities of bar some four years ago and they've gone through years of approval and quality certification and that creates a higher hurdle of entry into that business.

It's not a matter of switching our SBQ mill arm and accessing some of those markets.

You really have to prove yourself, create the product and it's again difficult to get into.

So just to clarify then, these products theoretically would be somewhat more immune to some of the destocking that you experienced in this last quarter or so?

I'm not going to make that statement because we're not hugely penetrating that market today so I'm not-- I haven't followed it but I, again, I would tell you that we consistently earn our share of the market.

I would tell you that our belief as we've grown our percentage of market participation during this downturn and that we are fully believing that because we are bringing in new product, there's always a customer desire to have a new opportunity to have a new supplier because that changes the dynamics of the market and so therefore I believe we'll have a great acceptance and then it's up to us to earn the continued business.

I think we also should recognize the 3 5/8 inch and [dag].

That represents about 55% of the SBQ market which is probably an 8 million to 10 million ton market.

So you're looking at penetrating 325,000 tons into a 4 million, 4.5 million ton market which we would suggest is somewhat incremental and as Dick says with the customer support and loyalty that we have, the quality of our product and the fact that we're going to be the largest single site SBQ facility in North America, we have about 900,000 tons of product capability under one roof, which brings a lot of value and a lot of logistical savings to the customer.

Schneer Kruschuni with UBS.

I guess my first question is I wanted to talk about pricing but on the steel side.

There's been a couple of attempts in the last couple days to lift pricing by some of the industry participants.

Do you think that there's going to be some momentum behind some of these lifts and are there any areas of the market or indicators that you're looking at that you think we should look for pockets of strength to carry in a momentum if it should continue?

Well I think the-- again, Russ doesn't have the only cloudy crystal ball out there.

I think the steel industry in general is tough to predict.

But on a macro basis, we certainly have seen the street markets decline from its May highs and I think if you look at the drivers there, the elimination of the [storm] threat removes the support for the July increases.

We've had or had a premium to global markets and we certainly had destocking through the supply chain.

As we've seen in the past our customers are very, very closely linked or focused on the scrap markets and as an anticipation of a declining market and hence they took the foot off the accelerator.

I think all of those in conjunction tended to drive prices down to the recent levels, but I think we perhaps are at an inflection point to some degree, at least that there are drivers out there that might suggest that.

The recent pricing perhaps is testimony to that but customer inventories remain very, very tight and the Embassy [eye] data recently showed that on an absolute basis, total volume came off, ticked off a couple of percent so inventory through the supply chain is tightening, probably will still go through some additional destocking or realignment of those inventories but nonetheless, it's tight.

The pricing decline domestically and slight improvement in China is reduced the premium domestically and such we have seen a slight drop off of imports in August, licenses came up incrementally in September, like 5% or 10% but nothing too alarming and I think there's some rationalization taking place.

People are anticipating mill outages over the next couple of months, RG is offline, so there's some positive drivers to support the present pricing, prevent deterioration anyway, and maybe assure an uptick and have this to be another kind of mini cycle.

I think we're also entering the November to April time frame that over the last three years anyway has seen an appreciable increase in prices, don't necessarily suggest that there's going to be a huge increase as we've seen in other years because I think demand is somewhat muted but there are drivers there to suggest that an uptick is possible.

Dick, any thoughts/

All I'll say is that we're realizing the change in direction and are cognizant of the magnitude and pursuing it aggressively.

Maybe a follow-up to Arun's question on SBQ.

I was wondering if I can approach this from the demand side of the equation.

Are there any particular end markets when you say that there's expected to be some weakness but are any particular end markets driving the weakness in the SBQ market as natural gas or yellow goods or is this something that's just more broad across the board?

I think yellow goods has taken a quick inventory assessment and are constricting their consumption at this moment.

A little bit of energy, I think there's a lot of giddiness in the gas patch and I know there's still drilling going on but it's shifting.

It's shifting from the shale gas into the wet gas and oil exploration areas but every week if you've been-- if you track it there's two or three rig count decrease at least in the United States.

And last week I think there was a little bit of an uptick in Canada, but it's a attitude that is I think coming about in that field and that it's going to become a little bit tighter as the production continues to be pretty good and consumption is waning a bit.

Dave Katz with JP Morgan.

I'm just coming back, you've spoken a little bit about the demand is more muted than past years but you did say is that a possible future catalyst that capacity has been expanded to 7.4 tons per annum, or million tons per annum.

When do you think the market would support a more marked move towards that capacity?

I think if you look at that capacity of let's just call it a million tons for sake of argument, 1.2 million tons compared to 2011, we've shipped a record 5.8 million tons in 2011, so it's 1 million, 1.2 million of latent capacity there.

I think half of that over the next 18 months given our expansion-- hopeful expansion of rail offerings and also the SBQ will occur or come back regardless of economic recovery.

The other half is obviously related or principally related to the residential and non-residential construction.

A lot of that capacity remains at the structural mill and so non-residential construction has to come back to fully utilize that.

And then as a follow-up, given what you've said, with construction [be in fee], given that we've seen the architectural index move up for two months in a row its been so long since we've seen improvement there.

When historically would you see the movements in the architectural index show up and improvements in your volume?

The ADI has been moving up.

It was stronger earlier in the year.

It fell off a bit.

It's coming back and these are small incremental moves.

What we see in some markets though is continued growth.

The joint industry's demand for the year is up 15%.

The deck industry is up about 12%.

So we've seen pretty good growth in those two areas.

We've seen that reflected in our order books.

Our backlog is up year-over-year about 45%, so the growth has continued.

Any positive sign then in the ADI is certainly welcome.

We don't think there's some major catalyst that's going to come that's going to immediately change the world of construction and dramatically improve demand in that market.

We think it will be slow, steady growth from here.

Looking into 2013, the analysts that are looking at construction spending expectations are, some of them at least, are expected to see 6% to 8% growth in overall construction spending next year.

Whether that comes to be or not I think depends a lot on what we do in this country to handle some of the fiscal challenges we are facing, but we are looking for something to dramatically change the nature of the construction markets.

We do expect some continued steady growth barring slipping into some deep recession.

Then-- thanks, Gary, and then on the residential side obviously there's been a little momentum of forward movement there, housing starts have ticked up a little bit, inventories are falling, receiving and rents are going up so I think at least we take that as a positive sign.

Sal Tharani with Goldman Sachs.

Theresa, I just want to ask you a question on reconciling some numbers which you have reported.

On the ferrous recycling in the statement you mentioned that there was a OmniSource profit of $16.6 million but obviously reported numbers are a loss of $9.5 million and with intangibles $15.7 million.

So first thing is that which number should we compare with either pre amortization of intangibles or after that?

Second thing, I know that is including the Mesabi Nugget loss which was $11 million post-tax.

What would be the pre-tax and what are the other items in there which made the swing in the reported versus what you saw at the OmniSource actual numbers?

The number that I would look at is before amortization, Sal, only because the amortizations just really exclude the intangibles from the purchase accounting, so that's really non-operational and if you look at the components that are in both Metals Recycling and the ferrous segment you have not only Minnesota operations but you also have a very small component related to the copper rod mill and then Iron Dynamics.

We tend not to separate those out individually and what I would suggest is that the Minnesota operations number that we give you is a net after-tax number, so from a pre-tax perspective in the Third Quarter you're looking at Minnesota operations of a loss of approximately $23 million, and remember that $23 million is 100% of the losses and we only own 81%.

Is there any loss on the ramp up at the joint venture you have with Magnetation?

A slight loss of about $1 million and again we own 8% of that.

And the rest as you said La Farga has, SDI, La Farga was in there?

La Farga and Iron Dynamics, correct.

The second thing is, Mark, just want to understand the benefit of the iron ore joint ventures you have right now.

Just give us an idea of when Mesabi is running at a little lower rate or lower rate than what we had thought earlier, so how are you positioned for your iron ore which you had been buying or you had to buy because you had an agreement with Cliffs or whoever you were buying it.

So when would the lower cost iron ore which you are now expecting from the tailings is really going to impact on the P&L based on your run rate of the Minnesota project at the moment.

Sal, I think as we've suggested in the past, the impact will start to be seen in the Second Quarter of next year.

We still have a reasonable amount of inventory as you suggest to consume here in the Fourth Quarter and the First Quarter.

And would you be running Magnetation full out or are you going to slowdown because you have too much iron ore on the ground?

No, we will ramp that up.

Currently they are running or have achieved-- actually they've achieved design throughput at the plant.

There is some recirculation right now.

We need to install a ball mill to grind the incoming material to get full productivity, but the operation is working extremely well, the quality is running around about 62% to 64% total iron.

We need that ball mill to get it up to exceed consistently the 63% that we've targeted.

But no, the plan is to ramp that up.

This ball mill was it a afterthought or did you know that you'd need it in the-- from the beginning?

No, it was planned from the very beginning.

The equipment delivery, it's just delayed a little bit so again it doesn't stop us from producing.

It's just increases the recirculation of the facility and material going around I guess in circles you could say and so it just compresses the actual output for the next couple months.

And just one quick thing is are you going to reach your cost estimate of $50 after the ball mill is in?

Absolutely no problem.

Luke Folta with Jeffries & Company.

First question is on recycling.

Obviously if you look at the quarterly results, in the Second Quarter you experienced some inventory holding losses and I would guess by just looking at the movement in scrap in the Third Quarter you probably benefited from inventory holding gains from scrap acquired in July and sold later in the quarter.

I'm just trying to get a sense of what the impact of that could have been and more so just trying to get an understanding of what cash metal spreads did over the last three to six months in the recycling business.

Again I think it's a roller coaster ride.

The hard down in July and up in August and down again in September certainly made those spreads move as well.

Again obviously in a strong enough market you get the benefit of the inventory that flows over.

You get the opposite effect when you've got a strong down market, so I think across the spectrum I don't think we had a huge movement in the overall spread.

What we were able to do effectively I think is work very hard on the cost side of the basis.

I think that's one of the things that has been our focus and I think we are starting to see some impact of hard work by our team on focusing on the cost aspects of our business.

I think Luke, just for sort of intellectual and academic causation, we keep roughly-- or the flow is roughly two weeks of inventory at OmniSource and roughly four weeks of inventory at the steel mill, so as the market goes up and down, I think you could at least as a guide back calculate at to what that impact might give you.

But when you look at cash metal spreads month to month, I guess I'm trying to get a sense of if obviously they've come in because of increased competition and flow and various other factors but do you think that they've reached a point of stabilization or are they getting worse every month or better?

I would say they're relatively static over time.

I think there's, again as the utilization rate goes down and demand goes down it's going-- they're going to compress but again as I look back they are relatively static over time.

If you take it as cycles, Luke, if you go for [short] year-over-year, they're very safe.

It's just the monthly fluctuations that kind of change it dramatically.

My second question is when we think about SBQ into 2013, can you give us a sense of how many of the agreements that are in place as it relates to base pricing and that, do those all-- is there a high percentage of those contracts or agreements that reset January 1 and it seems like the negotiating environment this year is quite a bit different than last year so is that something we need to think about as a step down or how should we think about that?

I would tell you that we have agreements that are ending scattered throughout the calendar year and that's on purpose not only by us but by our customers and sometimes it coincides with models and life cycles on their products, but we don't believe that the markets that we are supplying is going to be a tremendous adjustment or a realignment.

There is in volume and there's always a cognizant of what's a fair base price because everyone has to recognize that it's an engineered product and it's not a commodity.

And then we have so many more out-- we have so many more surcharges in that business that tend to adjust the price without necessarily touching the base because of all of the alloys and the swings that each of those prices can be had on a per pound basis as well as scrap, so I don't think there ought to be a whole lot of alarm in thinking that there's a monster ship coming January 1.

And just one last quick one.

The Mesabi outage that's occurring late Third Quarter and into Fourth Quarter what sort of impact would you say that might have in Fourth Quarter results?

I think quarter-over-quarter should be somewhat similar.

Brett Levy with Jeffries & Company.

Can you talk about whether or not you've gotten a bit more granular on 2013 CapEx, a little bit of a sense of sort of project by project, just in case you want to revise your models a little bit and the second part of the question is it does look like, unless things really turn south, that you guys could generate decent cash flow here.

Are there growth projects and also you're not-- you weren't on the list of final guys bidding for the ThyssenKrupp mill, has the bidding just got too high for you or you just don't like the asset.

That's kind of an M&A at the end but sort of growth CapEx for 2013.

I'll take the first part of your question.

Related to capital investments for 2013, we'll be providing a lot more information on that on the First Quarter conference call.

There will be some rollover on the SBQ expansion project.

We'll spend probably around $20 million this year so the incremental $55 million to $56 million will be spent in the first half of next year related to that project.

Otherwise I think it's safe for you to build in probably $100 million.

So if I were looking at your estimates right now, I'd probably put in $150 million for CapEx next year and then after we go through our specific planning, which takes place in late October and early November, we'll provide greater detail on the First Quarter call.

And, Brett, I guess your question really relates to sort of capital allocation and I think our first thrust is to continue to strengthen the balance sheet and reduce our debt and as Theresa indicated we are making progress there.

I think that being said we're still a growth company.

We're not going to grow just for growth sake but our focus is to enhance the quality of our earnings and also to try and improve the consistency through the cycle so to speak and I think you can see that our immediate focus is on maximizing the potential opportunities within our existing mills such as the SBQ [part].

Just to follow-up, does that mean that ThyssenKrupp mill in your eyes is the bidding has already gotten too high?

Well I think, that's a big nut for us to chew and swallow in any way, shape or form.

The recent suggestion on their part they're looking for $5 billion, $6 billion $7 billion it's difficult to see that at that level of pricing, anyone is going to get a good return on their investment but that's up for those parties to figure.

But we will just wait and see and sit on the sidelines and be an excited spectator.

Dave Martin with Deutsche Bank.

Just one clarification first.

In response to an earlier question, Mark, on Mesabi Nugget, I think you said financial impacts will be consistent in the fourth versus the third.

Is that true for the entire Minnesota operation?

Yes, as we report Minnesota operations on a net basis, I think it's safe to look at the quarters being very similar, not materially different.

Yes.

And then secondly, coming back to SBQ inventories and destocking trends, could you maybe give us a sense of how high inventories are in the supply chain potentially on days of supply and how far you think they had to-- I'm sorry, need to come down and then secondly, would you expect SBQ shipments to be down in the Fourth Quarter versus the Third?

We had forecast the Fourth Quarter to be probably pretty equal to where the Third Quarter is.

We've made those forecasts and nobody's throwing up red flags of alarm.

We're always trying to be cautious but I would tell you that we're not running because of a fire.

And relative to the specific inventory, we don't necessarily have insights into our customers to that level of degrees because the inventory readjustment-- realignment is not just in bar stock.

It's in sort of the semi finished pieces that the yellow goods people assemble.

That's why I think its been a protracted realignment and I do think it's going to continue into the Fourth Quarter but I do believe, as Dick said, that hopefully our volume should be somewhat stable quarter-over-quarter, maybe down just a little but nothing material.

Timna Tanners with BanK of America.

I think a lot of the questions I was going to ask have been answered but a few final clarifications I think I had.

During the quarter definitely a volume decline but was that all because of weakness in demand or was there at any point a decision made on the part of your operations folks to not produce given slim margins?

I know that's something you've talked about in the past.

No, it is a demand driven issue.

Okay, so you're at positive operating margins throughout the environment?

Yes.

And then within OmniSource I thought it was interesting when you talked about generally speaking efforts to recover profitability in the scrap division and certainly excess supply and less export interest.

Can you talk a little bit about what can you do with OmniSource or is it just a structural issue?

Definitely margins have been under pressure there from historical levels so I was curious about how you're looking at that business going forward?

Well obviously there has been structural change there and we're cognizant of that.

I think the principle initiatives are first and foremost trying to shift the flow of material away or the percentage of flow away from the prompt scrap into more retail which is a higher margin business hence Russ and his team have been reconfiguring a lot of our retail businesses scrap yards along with opening up new ones.

So that is one initiative.

The introduction of new technology to extract more non-ferrous from the supply chain of the shredders is a significant one, as we said that it's going to be starting up one late this year, early First Quarter and the second one probably late First Quarter going into Second Quarter maybe.

But there is a handsome return I do believe on those two facilities.

We're also spending time and a little bit of money on technology to improve the products that we offer to the marketplace and thereby extract a little bit more margin, a little bit more value.

We have stuck our toe in the water on the order parts business but I wouldn't say it's meaningful, it's more to learn that business more than anything currently but it's natural to look at it backwardly integrated into the supply chain of [Holtz].

I think we from an investment standpoint don't necessarily intend expanding our geographic footprint within Metals Recycling, but we certainly are looking sort of on a surgical basis at small opportunities that will improve out sort of regional market presence and that's just maybe a small yard here or there and we're not talking about massive dollars, $1.5 million, $2 million or so.

But the intent there is to perhaps take advantage of the financial stress that some of the smaller players are having, as Russ indicated earlier, and improve our market position.

And then last one for me, fabrication is small but has had a nice swing.

Can we be comfortable that given the better backlogs and maybe some of the improvements you've done internally that that should-- any confidence in continued small profits going forward there or how would you think about that business going forward?

It's continued to improve, Timna, as we've gotten some stability in the hiring that we've been doing out West and staffing up those plants.

Those plants are now more stable in their staffing position and we should see increased productivity helping to drive more-- well, improved performance in those shops.

That helps a lot.

If the market continues to grow as it is we should see continued improvement.

Of course seasonality can impact that so the First Quarter may not be better than the Fourth Quarter but we should see continued improvement year-over-year and hopefully sequentially as we move forward.

Mark Parr with KeyBanc.

All of my questions have really been answered.

I just wish you well here in the Fourth Quarter and hopefully we'll see a little better economic environment next year.

We echo that, Mark.

Good luck, Mark.

I'll see you soon.

Cheers, mate.

Tony Rizutto with Dahlman Rose.

I love that dish.

Thank you very much and hi all.

I've got a couple questions.

I was wondering if you guys are seeing any discernible change or improvement in your order books in the past several days given obviously the flurry of price hikes and by the comments that you made, Mark, and I think I heard Dick comment about aggressively pursuing, can we draw that you guys have also followed this flat-rolled price hike?

I would say that we have seen better order entry a little bit more in the last few days, I'd say the last week and a half, which again is suggestive to us that perhaps we're at a little bit of an inflection point.

I think one has to stress that these market shifts are greatly influenced by procurement mentality almost more than anything.

The underlying demand probably has-- across-the-board has probably softened to a little bit but it's the volatility, the tight inventories, people staying out of the market and then an absolute need to get in whether it be on the scrap recycling side or whether it be on the finished product side that's exaggerating or amplifying the moves.

But to answer your question, yes, we've seen a pick up and, yes, as Dick said earlier, we're pursuing appreciation in pricing along with it.

And with regard to the scrap market in the past and seasonally we typically see a pick up as weather starts getting colder.

We are seeing some improvement in overseas scrap buying and I'm wondering if you see that playing out and maybe giving a further impetus as well in addition to these other factors?

I think we will, Tony.

I think that's going to happen.

And the final question I have, just to follow-up a little bit on SBQ and I was wondering if you guys could tell us is the weakness you're seeing a combination of demand as well as supply and if one maybe has a little bit more influence in your opinion at this point?

I would tell you that it's a demand driven adjustment and I don't believe it's a supply.

Again, I said I-- we firmly believe that we have increased our market participation in the arena and therefore it's totally demand, not supply.

And then the final question is the main weakness on the transport side, is that more ag and some truck as well or could you just be a little bit more-- provide a little bit more color on that?

I think it's across-the-board.

Ag is part of it.

You again-- earth moving equipment has, I won't say stalled, but it has been re-evaluated by the retail yards and therefore they've backed it up a bit.

And I think the large diesel trucks are slowing a little bit.

We see that when talking not only to what we sell but also other component manufactures.

And the trailer build rate has tapered off from the first half of the year.

So therefore it's just a realignment.

Needless to say every time there's really a drop off or an uptick in the trailer markets there's corresponding ones in related markets that's just for trucks, material handling, equipment and the like.

So it's just a harmonious movement across the board in many of these markets.

Aldo Mazzaferro with Macquarie.

Dick, just to follow-up on that question on the SBQ, can you say roughly how much the mix of SBQ shipments goes into automotive and light trucks compared to the ag, earth moving, the diesel trucks and the trailers that you just mentioned.

What kind of mix is automotive for you in SBQ?

Aldo, being bluntly honest I can not give you that-- the specifics of a break down.

I mean, we really look at it by products and some of the grades and sizes and our sales team maybe has some of that data but I look at it as purely only upon size, grades and where those movements go.

And I don't know the exact end-users.

Any feeling like is auto half of it or less than half?

I'd say it's less than half.

And then a follow-up question to Gary.

Nice improvement on the margins.

I'm wondering-- I heard your comments and I still just have a little question.

What do you think your 3% or so margin is compared to what you think your ultimate normal margin might be in this kind of market?

Our normal margin should be significantly higher, Aldo, bit it's going to change as we see continued expansion.

Right now our margins are compressed because we have again idle capacity and start up costs continuing while these plants haven't started up a year but productivity gains.

But there are plants that are still to come.

Our plants in the West are now running at about 60% of productivity of our plants in the East.

When we make up that difference, that's going to have a significant impact on margins.

I don't know what our 2013 projected or 2014 projected margins are right now.

(inaudible) that number out.

But obviously it's significantly higher.

And if I could just have one more follow-up for Russ.

Russ, some of your big competitors in the market have closed a few sites and I guess they're getting overhead reductions and labor cost reductions in there and I notice you attributed your improvement to the metal spread improvement there.

I'm wondering, if you exclude the impact of metal spreads, did you have any significant cost changes in your-- what might be considered labor and overhead in the OmniSource division sequentially?

Aldo, again I think as the markets move we're always going to adjust with the markets.

If they are expanding we're going to expand or contracting we're going to contract.

I think it's just the nature of the business.

It's not just overhead and people in that venture.

It's also how you're-- being smart about how you're doing business and making sure you're doing the right things with the product that you're trying to supply so that you aren't overreaching on the buy side or overreaching on the freight side or any of those things.

All that has taken a concerted effort of our entire team and I'm awful proud of them.

So no major changes in your-- in the structure of the Company in the quarter or anything?

Just better Management?

Yes.

Michelle Applebaum with Steel Market Intelligence.

Nice job in the quarter.

I wanted to ask you, Mark and team, now that this new team has had a chance to digest a couple quarters here, I was curious to know, Mark, your view from the top and what you think the kind of strategic challenges are going to be moving forward, of course besides the economy, and what the best opportunities you see moving forward.

Well I think the-- it's an exciting time for us, even though we're in challenging markets and a time of adversity, I think it creates opportunity.

It makes one look inwardly to your operations and where it can be streamlined, where you can cut costs even further.

So we're certainly going to come out of this as we've done in the past downturns strong before it.

We certainly have a phenomenal team, we have great bricks and mortar and technology over there, and the combination of our assets, and our culture and our people is driving, has driven and will continue to drive financial metrics better than our competition.

If you look at operating income per ton, you look at our EBITDA margins, they are consistently through the cycle good and bad at top of class and the team is squarely focused on continuing that.

Strategically, we're focused as I said earlier on maximizing the opportunities within our Company today.

The SBQ project I think is incredibly compelling.

I think we wish we had probably a dozen of those projects out there.

But looking at that, looking at expanding the-- or diversifying our structural mill is a focus for us.

If you look across our Company, having a diversified portfolio of value-added products has served us well in many arenas, in the sheet arena, in steel West Virginia, in engineered bar products, the structure mill being principally single market, single product focus has obviously had a tough time the last couple of years and our focus there is to diversify that through expanding our rail presence and secondarily diversing it through the supplies of blooms to SBQ.

If you think about that, it's sort of indirectly expanding or mitigating the risk because that SBQ product about 250,000 tons or perhaps a little more will go down to Pittsboro.

That material will be going into automotive and into off road and into manufacturing applications.

So the intent there is to (a) improve the margin profile of that business and then secondarily improve it through the cycle by having a diverse product portfolio.

So I think-- and again, the focus on our customers.

We have an even greater sort of focus I guess there, not only on serving them well, on creating value there, but as importantly-- more importantly identifying the products and the services that they are going to need going forward, not focused necessarily on just making the products of today but where will the automotive world be for instance in three years, four years and five years, making sure we can supply those products and expand further our portfolio and protect ourselves.

I think as we grow, we're going to focus on leveraging our core strengths and our culture.

I think also not just looking at margin and the quality of our earnings but recognizing that perhaps imports going forward could play a part and position the Company to insulate ourselves from that.

If you look at the SBQ with the engineer type focus of their product portfolio, if you look at the spread of the products at [Bubland] getting into painting products, looking at the steel West Virginia, the very, very unique products that they produce there, you look at rail, rail being produced at-- or welded together at 1,600 feet, I challenge any Japanese supplier of rail to put that on a boat and import it.

So it's just growing with a focus of maintaining our earnings through the cycle.

So we're excited.

That's great.

When the question much earlier about the sheet price increase, you went through the whole dynamic but then the four or five words that Dick got in, Dick sounded much more pumped than you do, so can Dick talk a little bit more about why the sheet price increase is happening and we did see an almost-- we saw one company and then the next day, everybody else followed.

I don't know that we've seen that kind of pile on I guess of-- that quickly in the past so Dick do you have anything else to add?

No, not a whole lot.

I'm the observer.

I'm 30 miles away.

I was up there on Monday and I was responding based on the fact that we swallowed the order entry rate two weeks ago as dismal.

The week prior it was a major uptick and that got everyone's attention and started making us look at whose buying and why they were buying and so forth.

The first two days of this week when I was up there were tremendous days of order intake.

And I would tell you that earlier this week the Techs had similar performance.

So it doesn't take a rocket scientist to say that's the time you want to be protecting what you're doing and taking advantage of the markets with very focused attention to the margin and bottom line and opportunity.

So you think-- you sense that everybody was responding to their book as opposed to looking at a posted price in China, whatever, it was a book driven kind of pick up?

You're the first call since this happened, so any more color you can give would be great.

I'm going to give you the lack of color but I'll going to tell you that Mark was probably kind to them little earlier.

I'd call it herd mentality in some cases that when it starts breaking, then all of a sudden everyone thinks they are going to be the one left behind in the gate and all of a sudden it just flows forward.

And so-- and again because of the nature of the downturn, the way it went down was people sitting on their hands, the consumption rate necessarily wasn't dropping off the cliff.

It was just a matter of everyone thinking, hey, there's a better price lower tomorrow, and that drives that kind of reaction.

So the buyers were all kind of waiting and then as soon as like one guy came in, everybody is panicking, so it's kind of a rush-- not out the door but a rush to get in the door on the buyers' side?

Yes, because ultimately we say, hey, we freeze order intake and the price is up and so if it isn't in, it's up.

Amazing.

Thanks for the additional color and great quarter.

Tough environment but it's awesome to see the D&A playing out.

Nice job.

Thank you, Michelle and to set the record straight, I am always pumped.

[laughter]

John Tumazos with Very Independent Research.

We really admire the steel mills and the superior operation of steel mills.

When we look at the segment financials, it looks like 45% or 50% of the assets in the steel division earn all of the money.

I was wondering if you see that as a problem and what you would do to change it and one of the spots I went to Vale's Carajas S11 D Project in Brazil where they plan to produce 90 million tons at a $13 cost in the boat.

And I'm concerned that the iron price isn't going to be the way it was the last few years.

It could be lower.

And your inventories of 1.2 billion are about the same as your tangible net worth and is that a particular asset account that you'd like to reduce?

Well John, I think you had a myriad of thoughts and I think two questions that I could discern.

Relative to looking at the profile of our sort of earnings engines, you're very right.

Steel tends to be our principal earnings driver.

No doubt about it.

The margins in that sector compared to recycling and compared to the fabrication is stronger.

Recycling margins tend to be naturally thinner than steel in any event.

But nonetheless, we are, as I outlined earlier and as Russ outlined, making or taking initiatives to strategically boost the margin and return them to fair territory.

As Gary is doing on the fabrication side, looking at the different products, cast [load] beams and different services so to provide greater value to the customer to expand margin.

Relative to ball pricing, again the crystal ball is pretty cloudy there, and if you look at the cost curve-- global cost curve you can substantiate most pundits that would suggest pricing through the cycle is going to range from $100 to $115 a ton.

Sometimes it may exceed that.

Other times it may drop, as we saw here a month or so ago.

Don't know much about Vale; $13 in the boat is-- would be a hell of a price if that's what they can achieve.

So Mark, you should have a strategy to make sure that the core strength of converting iron units, melding and rolling is exploited and that the OmniSource decision four years ago doesn't detract from all of the other wonderful value created.

I'd agree.

I think OmniSource has been strategic for us.

If you look at the synergies or whatever, it obviously gives us a stable source of supply.

It's allowed us-- having the transparency or the division into the supply chain, it's allowed us to reduce our inventories across our business.

We used to keep six, eight weeks of inventory at our steel mills; today, we're three to four weeks.

That's helped us, depending on where market pricing is, but that's probably $100 million, $120 million, maybe $140 million improvement in our working capital needs.

The other great driver on the recycling side is having a large pocket of scrap when we go to buy scrap from third parties for our steel mills because as I think you know, only about 45% of our scrap flows from OmniSource to the steel mill; 50%, 55% of the scrap is actually bought from third parties.

When you have that supply in your back pocket you can leverage the market to some degree and as you also know, scrap trades in a range.

It doesn't trade at a specific point.

It doesn't trade at the American Metal Market busheling price.

It trades perhaps $10, $15 a ton plus or minus that number.

With the OmniSource acquisition, we are able to buy our third party tons at the lower end of that range and sell them-- the OmniSource turns to third parties perhaps at the higher end of that range.

That value accrues to the steels platform, not the recycling platform today.

So we are happy with the OmniSource acquisition still Would have preferred not to have bought it at the top of the valuation cycle but, hey, we-- it's the way it is.

That concludes our question and answer session.

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

For those still on the call, we've dwelt, as the industry seems to dwell, just a few weeks ahead of ourselves and the horizon seems to be very short nowadays.

I just want you all to recognize we are squarely focused on positioning the Company for three, five, seven, ten years out and I think there's a lot of positives out there if you do look longer term.

We starting to see re-shoring of manufacturing.

It's not that cheap or it's getting more expensive to produce in China today.

The shale gas phenomenon is going to drive investment in this country.

You've got an aging infrastructure that will require dollars to be spent and turn into good product and good opportunities for the steel arena.

Non-residential and residential will come back, and I do believe the US, although we went down and downhill fast back in 2008, 2009 at least we did it ahead of other economies and we'll probably going to be the economy that comes out first.

So we're actually very, very excited and bullish longer term even though we have to deal with the challenges and the vagaries of immediate markets.

Thank you for your time today.

Thank you for your support and to our employees, a heartfelt thank you for your hard work and commitment.

Work safely out there, guys and girls And to our shareholders, thank you for your support.

Customers, thank you too.

Have a great day.

Be safe.

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

Thank you for your participation and have a great day.