Steel Dynamics Inc (STLD) 2013 Q3 法說會逐字稿

Good day, and welcome to the Steel Dynamics third-quarter 2013 earnings conference call.

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

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

Instructions will follow at that time.

Please be advised this call is being recorded today, October 17, 2013, 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 Marlene Owen, Director of Investor Relations.

Please go ahead.

Thank you, Melissa.

Good morning, everyone, and welcome to Steel Dynamics third-quarter 2013 earnings conference call.

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

Leading the call today are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and Theresa Wagler, Executive Vice President and Chief Financial Officer.

We also have the Company's operating platform's leaders, including Dick Teets, President and Chief Operating Officer for our Steel Operations; Russ Rinn, President and Chief Operating Officer for our Metals Recycling operations; and Chris Graham, Vice President, Steel Dynamics, and President for our Fabrication Operations.

Please be advised that certain comments made today may involve forward-looking statements that, by their nature, are predictive.

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

Such statements, however, speak only as of this date, today, October 17, 2013, 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 and our Form 10-K annual report under the captions Forward-Looking Statements and Risk Factors.

Or, as applicable, in subsequently filed Forms 10-Q, filed with the Securities and Exchange Commission.

For opening remarks, I'm pleased to turn the call over to Mark.

Thanks, Marlene.

Good morning, everybody, and again thanks for joining us for today's call.

We plan to discuss our third-quarter results and to share our view of the steel industry along with some potential earning catalyst that lay ahead for Steel Dynamics that I would hope further differentiate us from our peers and continue to grow shareholder value.

Before I turn the call over to Teresa for a summary and comments regarding the financial results for the quarter, I'd like to mention, regretfully so, the sudden passing of one of our directors, Jim Trethewey.

Although on the Board for just a year, he was a highly constructive contributor and a loyal friend of our Company.

He will be missed, and our thoughts and prayers are with his family.

That being said, Theresa?

Thank you, Mark.

Good morning, everyone.

For the third quarter of 2013, our net income was $57 million, or $0.25 per diluted share.

This was at the upper range of our earnings guidance of between $0.21 and $0.26.

Net sales of $1.9 billion were up 6% from the second quarter of the year and comparative consolidated operating income increased $44 million, or 64%, as our consolidated gross margin percentage increased 211 basis points compared to the second quarter of the year.

The improved performance was from our Steel Operations.

As a result of overall higher shipments, coupled with increased sheet steel selling values, operating income from our Steel Operations increased $61 million, or 69%.

Steel metal margins increased in the third quarter as our average overall quarterly steel price per ton shipped increased $13 while the cost of scrap used in our furnaces decreased $5.

Overall operating income for tons shipped for the Steel Operations increased from $59 in the second quarter of this year to $96 in the third quarter, a 63% increase.

Although there was improvement in all of our Steel Operations, excluding the special bar -- excuse me, excluding special [shanks] business, improved sheet profitability drove our results.

Comparatively, operating income from our [melter piping] operations, or OmniSource standalone, decreased $5 million from the second quarter resulting in third quarter 2013 profitability of $11 million.

During the quarter, ferrous volumes increased 10%, but metal spread contracted 19%.

In contrast on the nonferrous side, volumes improved 4% while metal spread remained flat when compared to the second quarter.

Directionally, Fabrication continues to be our bright spot which is a positive sign for the nonresidential construction market.

Record level shipments increased 18% in the quarter compared to second-quarter results and operating income, although a smaller number compared to our other segments, improved more than 40% making it our sixth consecutive quarter of profitability since the severe downturn in nonresidential construction.

Gross interest expense in the quarter was $32 million comparable to the sequential quarter but significantly less than the $42 million recorded in the prior-year third-quarter.

Over a 23% reduction from a year ago.

This is a significant benefit derived from our refinancing activities during the past year.

We're very pleased with the execution of these initiatives.

We've created even greater long-term strength and sustainability in our capital structure due to debt reduction of approximately $275 million, the extension of our debt maturity profile, and the meaningful reduction in interest burden.

Our third-quarter effective tax rate was 39.3%, and our year-to-date effective tax rate was 37.8%.

Based on current expectations, our full-year effective tax rate is expected to be close to 38%.

Moving to cash flow, cash flow generation from operations produced $183 million in funding during the third quarter of 2013.

Substantially higher than sequential second-quarter results of $33 million.

In addition to increased profitability of $28 million in the quarter, working capital items generated $62 million in operating cash flows.

This was compared to a $61 million usage in the second quarter of the year.

We currently don't expect significant working capital movement during the remainder of 2013.

As of September 30, our liquidity totaled $1.5 billion, an increase of $126 million from June 30.

This amount includes available cash of $370 million and the benefit of a $1.1 billion Revolving Credit Facility which currently has no outstanding borrowings.

Our credit metrics remain strong and well within our covenant requirements.

Total debt is $2.1 billion with minimal secure borrowings totaling less than 15% of our outstanding balances.

Our net debt was $1.7 billion.

Our trailing-12-months adjusted EBITDA was $637 million, resulting in net debt to trailing adjusted EBITDA of 2.8 times which is well below our preferred through-cycle maximum of 3 times.

Capital investments in the quarter totaled $52 million, of that, $34 million related to our Steel Operations, primarily for the continuation of the engineered special bar quality rolling mill expansion and the addition of premium rail capabilities.

Both projects are on schedule to be commissioned before the end of 2013.

Depreciation in the quarter totaled $49 million, and fourth-quarter 2013 capital investment and depreciation are expected to be very similar to those reported in the third quarter.

Current maturities of long-term debt were $335 million at September 30, primarily comprised of $287.5 million of convertible Senior Notes that mature in 2014.

16.7 million shares underlie the convertible notes with the conversion price of $17.17.

We're comfortable with the timing of the maturity and believe we have many options available to us including partial or full payment with available cash if the notes remain unconverted along with various other refinancing alternatives.

The strength of our balance sheet is derived from our low-cost, highly variable operating platforms which provide robust, through-cycle cash flow generation.

Our strong, resilient capital structure has the flexibility to both sustain current operations and support future growth.

To conclude, for those of you who track our steel shipments for the Flat Roll, by product, in the third quarter, we had hot-rolled shipments of 295,000 tons, pickled and oiled shipments of 117,000 tons, cold-rolled shipments, 26,000 tons, hot-rolled galvanized shipments of 127,000 tons, cold-rolled galvanized shipments of 52,000 tons, painted product shipments of 105,000 tons, which you'll note is significantly higher than in past quarters, and Galvalume shipments of 19,000 tons for a total of 741,000 tons.

Mark?

Great, thanks, Theresa.

I'd like to begin with safety, which is a key strategic focus having the highest priority for myself, the Management team, along with each and every employee.

We strive towards zero incidents, absolutely no accidents whatsoever, and in many of our locations, we have continued to make progress toward that goal.

87 of our locations were incident-free in the third quarter, and many have not incurred a single incident this whole year.

Notably, Steel of West Virginia has worked over 2.1 million man-hours without a lost-time accident, and I commend the team there.

Our performance continues to exceed industry averages, and we continue to improve.

I commend the dedication of our teams toward excellence.

While this is the case, tragically, we still lost one of our members of the SDI family this summer.

Our thoughts and prayers continue to be with his family.

An occurrence such as this drives even greater conviction and resolve toward our goal.

Safety is our highest priority.

It will remain so as there is nothing more important than the safety and welfare of each and every member of the SDI family.

Shifting our focus toward the macro environment, from my perspective anyway, the economy remains weaker than it needs to be to support a robust, sustainable recovery.

And, we continue to be subject to political headwinds.

The increased consumer confidence for trade through the third quarter is tempered somewhat under the cloud of government shutdown and fear that the US government may experience a financial default.

But, nonetheless, I believe the current economic climate gives reason for restrained optimism as third-quarter GDP should have expanded, and many of the macro market indicators such as the PMI, ISM, ABI, and housing starts continue to show positive directional momentum supporting increased steel consumption and continued demand growth.

Recent growth forecasts for the automotive market indicate a 16 million unit build rate for 2013, growing to 16.5 million units for 2014 and as high as 17.3 million for 2015.

Construction spending, albeit still low, continues to improve, up over 6% so far for 2013.

The homebuilding sector remains upbeat supporting continued sustainability in the residential construction market which is crucial component of a sustainable economic recovery.

Although there has been some noise in this arena with July and August housing starts that are falling slowly as compared to June, the general trend has been up.

The hesitations could have been related to rising mortgage rates but this unto itself has not curbed continued growth in past economic recoveries.

Residential construction activity remains materially improved over 2012 with August housing starts 19% up year over year.

On the nonresidential front, the ABI again reported by the 15 mark in August, the [15th] expansion in the last 11 or 12 months.

But, more important than the pure economic indicators which bode well for the recovery of the construction markets and steel consumption in general is our order book.

Since this is what truly defines where the market is going for us.

Increased demand for construction-related steel products is clearly visible in our order backlogs.

Our third-quarter Structural steel shipments were at the highest level since the third quarter of 2008, and Fabrication shipments were at record levels as we have broadened our geographic presence.

Similarly, in Flat-Rolled, order rate for residential-related end products such as raised garage door panel and HVAC have seen material improvement.

For the sheet market in general, the increased demand coincided with capacity shortfalls, and though steel sheet imports increased during the quarter, their impact was significantly less than the market expected.

The resulting demand strength, combined with tight supply chain inventories, allowed for an appreciation of US Flat-Rolled pricing through the quarter.

I believe the increased demand for construction-related steel products should be sustainable as many companies hold significant cash positions, which coupled with the historically low interest-rate environment we enjoy today, should lead to fixed asset investment.

Longer term, the availability of inexpensive shale gas, there's the potential to make US energy [long], providing a tremendous incentive for fixed asset investment and associated job growth, a catalyst for increased steel-related consumption.

We will be the beneficiaries of the associated growth as we lever our latent production capacity.

Since 2008, we have expanded capacity, and then we have been shipping at record levels, market conditions have prevented us from levering our full production capability.

As nonresidential construction demand strengthens, all of our operating platforms can benefit.

In 2013, with approximately 1.5 million tons of steel capacity that will not be utilized due to these market conditions.

And, of that amount, about 55% of the tons are correlated with the nonresidential construction market.

As domestic steel utilization improves, demand for ferrous scrap will follow, bringing benefit to our Metals Recycling operations.

Similarly, we have over 150,000 tons of additional Fabrication capacity which is directly tied to nonresidential construction demand.

In aggregate, I believe we have greater leverage to a recovering construction sector than most.

Focusing on Steel Operations, demand for our sheet and Structural steel products improved in the quarter, with utilization increasing from 83% in the second quarter to 89%, materially above the 78% recorded throughout the industry which I think is a testament to our talented teams and our broad product portfolio.

Flat-Rolled shipments improved, particularly for galvanized and painted products.

Metal Management -- metal margins expanded as average sheet pricing increased in the quarter.

Notably, our Flat Roll Division is on target to set an annual production record in 2013.

In fact, during the third quarter, the team already achieved this goal on a trailing-12-month basis by producing over 3 million tons, an absolute milestone for a North American-based, electric arc furnace flat-rolled mill.

Congratulations to the team, each and every one of them.

Our Structural and Rail division's utilization rate continue to improve, achieving 70% in the third quarter as Structural steel shipments improved.

Utilization was 5% higher than the sequential quarter and 16% over the third quarter of 2012.

This may moderate some in Q4 due to the annual week-long outage taking place in October and some seasonality impacts to Structural volume.

On the Rail front, Rail shipments are on track to hit over 200,000 tons for the year, well above our earlier expectations.

The domestic Metals Recycling industry experienced another volatile quarter.

Decreased profitability was the result of declines in both ferrous volume and metal spread.

Ferrous scrap supply outstripped demand early in the quarter from a reduced steel mill utilizations, and overall, reduced scrap export activity.

Although profitability from our Midwest locations improved slightly in the quarter, the weak obsolete scrap environment through the quarter, along with continued over-capacity of shredding operations in the Southeast, resulted in earnings deterioration there.

Moving to Fabrication, the momentum continues to be strong as the team exploits the benefit of our national footprint to make market inroads.

We are headed into the traditionally soft winter months but remain encouraged.

We saw strengthening in both our inquiry rate, and most importantly, in order activity in the quarter, and the team continues to gain market share while also improving operating efficiency at our new start-up locations.

Our pioneering efforts in Minnesota continue to make steady progress.

Production rates and plant availability achieved current expectations, confirming the plant's ability to produce in excess of 30,000 tons per month.

Our primary focus is to now decrease the overall cost structure.

As we increased the rate of production, however, product yield unexpectedly deteriorated.

We took a three-week outage toward the end of September for maintenance and some [current] modifications and restarted the plant in early October, and that restart has gone reasonably well.

We believe we will achieve further cost reductions throughout the remainder of this year, but given current expectations in cost structure, and pig iron market pricing that is lower than earlier estimates, we believe it will be difficult to achieve a monthly pretax breakeven run rate before the end of the year but should approach a monthly cash breakeven.

Much has been accomplished and a significant opportunities for yield improvement and cost reduction have been identified, but much work is yet to be done.

Relative to our other iron operation, Iron Dynamics, they achieved a new, record quarterly production of 65,000 metric tons of liquid iron.

My congratulations to the team for their outstanding performance and their contribution to the Flat Roll's Division productivity cannot be overlooked.

Likewise, their contribution to our resource sustainability efforts is important as they obtain 100% of their iron needs through recycling steel mill waste oxides.

A reflection of our entrepreneurial culture, we continually work to create opportunities rather than just wait for the market dynamics to improve.

Several organic growth projects have been implemented this year that will provide increased earnings potential specific to Steel Dynamics.

And, to recap two of the larger and more impactful projects, the engineered bond Division is adding 325,000 tons of rolling mill production capacity for high-precision, smaller diameter bars that will broaden our portfolio.

This project will make us considerably the largest single-site supplier of engineered and [SBQ] bar in North America, with an annual production capacity of 950,000 tons.

The project is on schedule and is expected to be commissioned in the fourth quarter this year with no material interruption of our current operations.

We are also excited about adding premium rail production capability at our Structural Rail Division and additional avenue to increase the mills' production utilization through the cycle as we further diversify our value-added product portfolio and broaden the markets in which we serve.

We will have the capability to produce in excess of 300,000 tons of standard strength and premium rail for the North America's railroad industry.

The product will provide exceptional customer value, having the capability for 320-foot [roll] lengths that can be further welded into 1,600-foot lengths, some quarter of a mile, which significantly reduces the installation time and track maintenance costs for the Rail customer.

[Depth] of the material has been enthusiastically received by several of the major domestic railroads and based on recent investment plans announced by the major North American Rail consumers, we believe the domestic rail market could grow meaningfully in the coming years.

Our new rail capabilities position us to become North America's preeminent Rail manufacturer for quality, straightness, and dimensional control.

We plan to commission the premium rail production equipment by the end of this year with product testing for the first quarter of 2014.

We continue to drive towards maximizing opportunities to effectively and efficiently perform through the cycle and maintain a sustainable, differentiated business.

We believe our superior operating and financial performance clearly demonstrates the sustainability of our business model, whether in good or challenging times.

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

We are focused on providing exceptional value to our customers, committing to the highest levels of quality and timeliness, and as importantly, to partnering with them to deliver what they need today as well as anticipate the needs for the future.

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

That will provide our shareholders with the returns that demonstrate our commitment, making Steel Dynamics the preferred investment decision.

The passionate spirit of our employees continues to drive us to excellence and outperform our peers both operationally and financially while maintaining our low-cost, highly competitive position.

I thank each everyone of them for their continued hard work and dedication and to remind them -- guys, always be safe, both at work and at home.

So, with that, I will open the call for questions for either myself or for the leadership team.

(Operator Instructions)

Michelle Applebaum, Michelle Applebaum Research.

Congratulations on a great quarter I have two questions.

The first question is -- you can answer them in whichever order you want.

I'd like to get an enumeration of the organic growth initiatives again, in terms of the impact and the timing, including any start up issues that might happen?

And then the second question is the other side of the same equation, which is the -- I'd like some -- a little bit more color on the laggards.

I'm not going to say the names.

And what kind of action plan you may have to either control what you can control, or any macro things that might be happening to improve those businesses?

Your second question, Michelle, did I hear laggards?

Laggards, yes.

Okay, all right.

I don't want to say Mesabi Nugget out loud.

I don't want to be the first one to break trump, but I guess I am.

No worries.

Go ahead.

Theresa, do want to answer the first one?

Yes, sure.

So, from the project perspective, the largest one that we have right now is the Engineered Bar Products expansion.

It is a $76 million investment, and it will be commissioned and starting up before the end of 2013.

The expectations are that, based on margins that we have today, that that payback period is less than two years.

We don't expect any interruption with our current operations in our Engineered Bar Products, as it's just an addition of a second rolling mill.

From the [iso] project that we have, it's the $26 million Rail project, and that is to bring on the premium capability.

It is expected to be commissioned by the end of -- or the start up -- start commissioning before the end of 2013, as well.

It will have a slower ramp up, potentially, to be able to enter into the premium rail market, but we expect that volume to ramp up in 2014 through 2015, to eventually reach the three -- in excess of 300,000 tons of both standard and premium rail.

That payback is expected to be in a 2 year timeframe as well.

We also have latent capacities that we have excess of 1.5 million tons of steel capacity that we're not using today.

And so that, as the construction markets come back on, we would expect to start to utilize into 2014 in addition to that.

And we also have a small project that we've not talked about very much.

It's a leveling line at our Flat Roll Division.

It is $19 million project, and that actually is operating now.

That's correct.

Just started up last week.

And we expect to have some additional hot rolled shipments, not large magnitude, but through additional shipments that come from that, because we'll have a better-quality product.

And I think we expect maybe that to have some impact -- slight impact in the fourth quarter of this year

That's correct.

Those are --

Volume.

And the leveling line is just add volume?

It -- what's happened is that we need to do some corrections with some of the products that we have.

On the lighter gauge -- it has the capability of almost 0.5 million tons a year, but let's not -- we won't have that need.

It's really for product that is a very light gauge, below about 0.55, that right now, the heads of it has more edgeways than some of our customers would like.

And so it has the opportunity that -- to take that sheet correction mode.

And so we will be selling product that we currently aren't selling, so the magnitude of it remains to be seen.

Interesting.

Okay.

And then in terms of the underperforming businesses, the --

The challenges that you note -- the conversation about Mesabi Nugget, and perhaps the OmniSource piece, should they track away from the phenomenal job the team is doing elsewhere in the Company, and also the earnings catalysts, as Theresa mentioned.

With that being said, I think through the quarter, we've seen further gains in specific production rate and planned availability.

It has increased our confidence that monthly production can be sustained -- could be sustained next year at 30,000 plus ton a month rate.

Unfortunately, as we have increased the fee rate -- or the throughput rate, we have seen an unexpected deterioration of yield, and the cost -- and that's producing a cost structure that is a little higher than we anticipated.

And we've identified, I think, several opportunities for that yield improvements.

We've identified several opportunities for further cost reduction on the reduction side and binder, and those sorts of things on the raw material fronts.

And this will obviously be the focus for the next few months.

And again, I think the team has accomplished a lot, and continues to complete the plan that we put in.

We developed the plan back in August 2012, and to date they have hit every hurdle.

And now we have the last hurdle to break through, and that's reaching a monthly cash breakeven by end of the year.

And we have said for a couple of quarters that we would perhaps detail of the cost structure in a little more detail, and I think, just to calibrate that, at it 30,000 ton a month rate, and based on current pig iron transfer price, which is transferring at $380 a ton, currently, that will, on a -- the impact of that from Minnesota will have a breakeven effect on a consolidated basis.

So that calibrates with -- we think are immediately.

Again, a lot of work to be done.

We have got to hit those rates and improve our cost structure.

We still believe (multiple speakers) -- go on.

I was going to push back -- pull back to the SBQ.

I just needed one clarification.

Your assumptions on the 2 year payback, does that assume any benefit from a fuller product line on your existing mix?

Or is that just looking at the new incremental?

It's only incremental, and actually the whole justification is such that we only plan to operate the new line half of the time, with two crews.

And so it's a very conservative justification.

Okay, great.

Sorry to interrupt you, Mark, but I wanted to get back to the upside.

Okay.

So there is room, potentially, for that kind of -- the kind of returns could be higher?

Sure.

Okay.

All right.

That's great.

Brett Levy, Jefferies.

Good quarter, guys.

Can you talk about the Pittsboro expansion?

Obviously, you are bringing on a second rolling mill and some new capacity.

Can you talk about the timeframe you see to fill that up?

And what's the level of interest?

Do you feel you're taking market share?

That kind of thing.

As this comes online here, how much of the new capacity is spoken for, and how long do you think you get -- it takes to get all the way up to that 950 number?

Needless to say, the full capacity of that mill is almost 100% of it is being -- going to be taken from others.

Very little of it is already ours.

We have not been rolling very much small bar product, because we did not have a precision mill in line.

We could roll the small product before, but we didn't have the necessary mechanical equipment in line to hold the tolerances that some of our competition did.

And therefore, we basically avoided rolling those products.

And now we will have the capability of providing the very best product that anyone can provide.

And so therefore, we will be out after all the very critical components.

We've already been grooming our customers to expect the product available and have had dialogues.

We have, again, started the process of soliciting the grades, and we're well on our way to attempting to fill it up.

Some of the larger products on that size they come from existing stuff we do, and then they will forget the little bit of capacity on our existing mill.

Some of the blooms we will be shipping down, ultimately maybe 10,000 tons a month or so from Columbia City.

And so Columbia City's melt shop is working with the melt shop from Pittsboro to understand what the expectations would be.

And so far, the whole gamut of people who are going to be playing in that field are already being exercised.

Just to quantify that market, the 3 5/8 diameter (inaudible) is roughly 50% or so of the whole SBQ Engineered Bar market, which typically is 8 million to 10 million tons.

So we're looking for 325,000 tons out of 4 million, 4.5 million ton market.

So it's not a massive bite out of the apple.

And Dick and Barry and his team have positioned the mill incredibly well.

They have got exceptional quality, perhaps equal to, if not the best in America today.

Our on-time delivery is phenomenal.

And I think there is a focus on engineered solutions and the relationships they have with current suppliers is second to none.

So you put all that together, you've got the largest single site source of SBQ and Engineered Bar products in the country, which also brings a lot of logistics value to the customer.

So we're actually very excited.

It's -- again, steel industry is challenging environment, but I think Dick and the team have done a great job positioning that mill for success.

And just one last note is that Barry and the team there have not ignored the requirements of finishing and testing and so forth, and therefore they've completed the project with all the necessary tools to deliver the full scope and the gamut of product required for -- whether it be foraging or any of the [cup] requirements that the customers might demand.

Second question relates to the new head-hardened Rail, or the premium quality Rail.

Talk a little bit about the ramp up there.

And then -- and this is just something, maybe, I should know.

Isn't there a good argument that all rails should be premium Rail?

And that it would last longer and that sort of thing?

Is there going to be some transfer of market share from you to you, as you bring on this premium Rail?

I think the answer to the last question is the easiest to say, and it's that transfer from standard Rail to premium has been going on for years.

Back when we built the Structural mill, and I put the capabilities to roll Rail into it.

Percentages of head-hardened rails, probably 25% or so.

And now it's probably exceeded 50%.

And it continues to grow, but there's a cost premium, and so therefore, like anything, people make choices.

And the reason it's growing is because of the cost of taking Rail lines out of service for the time necessary to replace the Rail, and to grind the Rail for maintenance purposes.

And so each railroad has their own thresholds of acceptable cost, and they will have to make those decisions.

So will all applications move to head-hardened eventually?

I sort of doubt it, but more we'll continue to go that way.

That being said, it's a -- it's our start up.

And start up is -- this is mostly mechanical equipment, and so the start up of the equipment isn't necessarily complicated and so forth.

It's movement, physical movement, and then just the associated interlocks and speed control and the like.

What we have tried to do is be conservative in our statements, because this is brand-new technology.

This is being developed by us.

And therefore it's -- there's nobody else out there that we can walk to or call and say - hey, why can't we get this exactly right?

This is some of the most critical product that SDI will be supplying to any market, with high liability, and therefore it's not going to be delivered to a customer with anything but the most thorough testing and acceptances by ourselves, by our customers, and by third-party testing agencies.

So we have tried to be resistant to being cheerleaders and yelling at the top of our lungs or -- first quarter, you're going to see the impacts.

The tonnages, I think, we have tried to say will be coming out of the equipment.

And we will bring into standard Rail applications as we do our testing, and we are going to minimize the [yule] bosses and try to minimize any of the impacts to our bottom line.

But there won't be an immediate revenue game to the head-hardened product line until second quarter and later.

But we are going to develop it as soon as we can.

So it's not like a piece of equipment that we need to learn how to physically move equipment through it, or the product through it.

It's pretty simple.

It's the process technology of making the product right, and how deep does the head-hardening go?

And can you make it each and every time you make the chemistry?

And as the chemistry dialed in heat after heat after heat along the full length of the 320 foot bar inch by inch, and so forth.

And all the way around the head and around the -- all the way to the flange and so forth.

So it's a complicated product, and we will make sure it's right

Just to add, I think I actually attended the arena symposium or exposition or whatever here a few weeks ago.

And it was incredible, the enthusiasm level that the major railroads and the minor railroads, for that matter, had for our potential entry into the market.

They have lacked good options in the past, and I think Dick and (inaudible) position that the Company well there.

Effectively, the stripping rate of a Rail this year is going to exceed, 200,000 tons, which is higher than our earlier expectations, which I think is a testament to their excitement and our future ability there.

The market begin to calibrate is typically 800,000 to 1.2 million tons through thick and this.

And if you look at the CapEx spending announced by the major railroads for huge infrastructure improvements, given the shale gas and oil phenomenon that is going on, the projection is about 1.5 million to 1.6 million tons a year in 2016 and 2017.

So I think we're in a great position to leverage that expansion in the market.

Very good answers.

All right.

Sal Tharani, Goldman Sachs.

I have two questions, one on Mesabi and one on the utilization rate.

On Mesabi Nugget, can you tell us what was your current cash loss was in the third quarter?

Sal, I don't have that with me.

I would just suggest that, from a consolidated perspective, the number we keep talking about is the impact to consolidated FDI, and that is because of the complexity of the joint ventures in Minnesota.

And again, net loss of $10.6 million.

I don't have the cash loss available.

My apologies.

Okay, that's fine.

And also, Mark, you mentioned that you are transferring the transfer costs for pig iron you are using at $380 per ton?

I thought that prices (inaudible) $400 plus.

So won't it be -- should be higher, or you think that's the right number?

We just have a slight discount to the mill, and also, it takes into account a slight difference in transportation cost from (inaudible) to Butler versus Minnesota to Butler.

Got you, okay.

On the utilization rate, when I look at the math, do the math, you're 89% utilization rate.

And look at what the shipment was.

I just can't come to that 1.5 million tons of latent capacity you mentioned.

I was just wondering, are you using -- are you including, first of all, tack in that utilization rate or not?

And is there something we are missing in this utilization rate?

We're using the capacity that's in the investor presentation, but we're using a flat roll capacity of 3 million tons.

A structural Rail capacity of 1.8 million tons, engineered, currently still at the six -- 625 million tons, Roanoke is at, I believe 650 million tons.

Steel of West Virginia is at 350 million tons.

And then The Techs are at 1 million tons

Okay, great

So we include that 1 million tons from The Techs.

Got you.

And one more thing on utilization rate, Mark.

Did you mention that the Structural mill ran at 70%?

The mill rail in the third quarter ran at 70%, yes

Okay.

Are you already shipping rounds to the -- to Pittsboro ahead of the final -- I mean the finishing of construction?

Or you haven't yet shipped that?

Sal, I don't -- we don't ship -- we don't make rounds, so I'm not sure -- You're talking about blooms?

Yes, I'm sorry.

Blooms.

You're going to ship blooms from Structural mill to --

We're were not shipping any from Columbia City.

And we won't ship any until there's a need.

Again, the charge from me to Pittsboro is, take as few as you can, because we don't want to make any transportation company rich.

So their charge is to continue to service themselves until they can't.

And they're going to be charged with always maximizing the utilization of their own melt shop.

Okay, because I though that --

The increase to 70% utilization, Sal -- I guess what you're getting at.

It wasn't inflated by bloom shipments from internal transfer.

They all came from increased wide-flange business.

Great.

That's what I actually wanted to [reach].

And also, I thought that you were going to ship some blooms over there eventually, and that would help you utilize the Structural mill than what has been utilized right now?

That's certainly the intent.

We wouldn't envision Pittsboro being able to facilitate all its needs for some time, but as Dick said, in a year or so, the intent is for them to drive their own ability internally and not make a trucking company or the railroads rich.

Yes, our budgets for next year show, toward the end of the year, Columbia City starting to supply some blooms to Pittsboro.

And Columbia City currently does sell some blooms to Steel of West Virginia, as our Roanoke plant sells some blooms to Steel of West Virginia.

Okay.

I think if you think of the additional need of 350,000 tons of blooms, again, I think it's safe to say that there's a material matter that will be moving from Columbia City for the foreseeable future, though

Okay, great.

Luke Folta, Jefferies

First question, just on the current market situation.

So there's been some things that have helped out on the supply side.

Some other mill outages, and it looks like the distributors have de-stocked a bit.

So -- and I understand that that's probably having a positive impact on your ability to perhaps get pricing.

But I wanted to dig deeper on the demand side.

It seems like all year, we've been fairly stable.

Strong auto and weakness in a number of other areas.

But when you look at the most recent few months of the MSCI data, it looks like we're starting to climb out of that.

And I'm just curious to -- if you have any comments on whether you think we're at a potential inflection point, in terms of end-use demand pick up, or maybe restocking or something like that, at the end-user level?

Again, for us, market wise, on the Street side of our business, automotive business is been very, very strong for us.

Manufacturing is good.

Again, optimism -- great optimism, actually, at least from my personal perspective, is created from the increase in residential order profile that we're seeing in HBAC and garage door panels, that sort of thing.

Because that obviously is the basis of a good, sound economic recovery, eventually.

The automotive manufacturing is flowing through in our SBQ mail is seeing better order activity.

It's suddenly rebounded from the second half of last year.

And engineered bar ran at around about 82% utilization for the quarter.

So things are good there.

Steel West Virginia is the beneficiary of, still, a strong transportation market out there.

Freight is moving.

Truck trailer fleet age is pretty old, so that needs to be replaced.

And we'll, I think -- at least in our minds continue that strength for a couple of years.

Roanoke and the motion shapes, a little sort of sideways, a lot of competition there.

And again, quarter over quarter, the utilization was, I think, is pretty -- actually it went up a few points, with again, kind of steady.

But tough on the margin front.

And again, with optimism, the Structural mill is definitely seeing some benefit here.

Wide flange business was up.

Rail was off slightly quarter to quarter.

I think it may have been a little seasonal.

Dick?

Yes.

Right now, we're already into the 2014 season.

And hence the shipments will be up in the fourth quarter over the third, but third quarter is usually the lag from the installation going to other wealth plants

The thing to drill into the essence of your question.

Inventories, MSCI data has earned a little bit, but we see inventories still being incredibly tight through the supply chain.

And as I have said in the past, I think perhaps we're closer to an inflection point than most people think.

That being said, it's not going to happen over the next two weeks.

We're projecting just a continued, slow, incremental improvement in the demand picture.

Okay.

And just to follow-up, as you look at uses of cash going forward, you're going to be wrapping up work at the -- for the SBQ mill and some of the Rail stuff.

What do you -- do you see the potential for meaningful project next year?

I think, as Teresa mentioned, our cash flow from operations is incredibly strong at $180 million, $185 million.

You back off CapEx, it is still $130 million or so, which is, I think, an admirable position to be in, and a credit to the team.

We paid down, over the last -- I will guess 12 months or so, we paid down about $275 million in debt.

That's improved our interest payment position by some $30 million or so going forward.

I think the team feels we should continue to pay down a little more in that vein, and help leverage some.

You also saw an increase on dividends by about 10% I think that was well-founded, and I think we would like to see a solid future dividend profile going forward.

Share buybacks wouldn't be -- although we continue to frequently look at that, that's not a preferred use of our cash right now, because we think we have further organic growth to get down.

And over the next year or so, companies are looking at the asset portfolios, and I think there's going to be some realignment, and there may be some acquisition activity.

Don't know.

But we certainly want to maintain our sort of gunpowder a solid financial foundation for doing what I think we've shown in the past.

And that's (technical difficulty).

To answer your question specifically, maintenance capital for all of our operations to keep things interesting condition tends to be around $85 million or $90 million per year, so you at least have that base level of capital investment next year.

And then, even when we model internally, we never really look at capital investments of less than $100 million per year, because there's always some sort of investment.

But we're in the process of going through a detailed project analysis now.

We'll be able to talk more about 2014 capital investments probably in January

Okay.

I was just trying to get a sense of, is the prospect of doing something like $1 billion plus new mills that you maybe had talked about in the past.

Is that even in the thinking for 2014, as of announcing or doing something like that?

That's not on the radar screen

Great

(multiple speakers) All opportunities are on the radar screen.

That is a dull sort of thinking.

And obviously, we assess all the opportunities as we go along.

Okay.

Evan Kurtz, Morgan Stanley.

Just wanted to get a sense of what you're seeing on Flat Roll hikes that are out there, been out there about three weeks?

How has customer acceptance been going?

Reactions, that sort of thing?

You read, and there's been an upward pressure.

And we are responding in kind.

Needless to say, I think the market is always pushing back, but people recognize that the economy continues to improve a little bit.

Demand -- supply remains the balance (technical difficulty) the imports.

Level of imports has increased a little bit in painted and galvanized.

And we continually watch that, so it's -- you can interpret it.

Have you seen any sort of noticeable change in lead times since the announcement?

Lead times for hot roll are four weeks out, which is something that we tend to control.

We don't allow the market to control that.

We want to make sure that is we can leverage or exploit any upward tick in pricing, or at least maximize that opportunity.

So typically, our hot roll core lead time is four weeks out, and it's solid right now at that level.

And our value-added products are further out than that.

Almost through the end of the year (multiple speakers) right now.

So I would, I guess, encapsulate it that the hikes have certainly stabilized the market.

That certainly has appreciated price over the last couple months, for sure.

And at least our order books are robust.

Great.

And maybe something -- similar question on SBQ.

I think we've seen some destocking, some weakness in SBQ pricing through a lot of this year.

Are you starting to feel that we're bottoming out now?

We're negotiating right now prices for the first quarter of 2014, and of course they're -- we're always under pressure, like any time.

But we're trying to hold the line and extend the current pricing.

But we will see where it all falls out.

That's -- our position is, things are still good, and we'd like to see it extend to where it's at.

Okay, and maybe just one final one.

In your conversation with Luke, you had mentioned that the industry might see some M&A activity in the space next year.

What were you thinking there?

Does that have something to do with the spin of the SBQ assets?

Or is there something else that you see going on?

I guess I was just suggesting that a lot of companies out there are, I think, have publicly indicated that they are assessing their portfolios, and where their core assets may or may not be.

And there may be opportunities that come up.

But again, we've got no -- nothing on the radar screen that we would want to share with you

Got you.

Okay.

Timna Tanners, Bank of America.

Wanted to just ask a few quick questions to try to get a little bit more of a read into the fourth quarter and beyond.

You mentioned the paint line improvements, so really wanted some more detail on what's happening there.

Similarly, we heard that there was an outage, I think, on the rolling side at Butler?

So wanted to know a little bit more about when that happened or what that might mean?

And then, I think those were the two big ones.

But just to the extent you could talk a little bit more about the downstream and what you're seeing there would be helpful, please?

Yes, as you know, Timna, we try not to guide until latter part of the middle of the quarter.

And would prefer to retain that philosophy.

But I think it would be reasonable to expect some seasonality in some sectors of our business.

And we do have outages at scheduled -- typical scheduled maintenance scheduled outages at our sheet-metal at Butler.

And --

Yes, we just took our -- we just took a four-day hot side outage up in Butler, and during the same time, we rebuilt the number one galvanizing line furnace at Butler.

We also rebuilt the Galvalume [putt] down at Jeffersonville.

We will be taking a 1 week shutdown at metal tech.

We'll take a week down at -- also in Pittsburgh, we'll be also taking Christmas week down at Next Tech, and we haven't decided yet when Galtech will go down.

But these are -- we try to plan these around the mix that we have on the books at the time.

We, again, look at what the opportunities are.

And some of the fluctuations in the shipments actually, when you look at painted products or galvanized, actually can be accommodated or explained through -- you could just gauge, as the order book changes, whether it be building products or others, it is really sometimes the thickness of the seal.

So it's not really availability or such.

We are doing an upgrade of the galvanizing line at Jeffersonville, adding, I think, another 150 feet per minute speed increase to it and increasing the capability of the cleaning section and a few other things.

So that, in the future, will show an increase, but nothing of significance has occurred on -- from a capabilities perspective on any of our [coating] lines here recently

Okay.

And not -- sorry, I don't want to overemphasize the -- these are typical fourth-quarter.

We (inaudible) be taking these outages, and you're going to see a typical -- a little bit of seasonality.

Sure, I didn't mean to imply I wanted a Q4 outlook is much just wanted to know, for example, on -- specifically on the coated products, is that a sustainable increase?

There's -- that's a high-margin products, so just trying to get a sense there.

And then on the leveling line, what might that add per ton, or how do we think about that?

We think the product value improvement is about $10 a ton.

And we think that's a fair value to be asked for.

And so that's what we're taking to the Street.

And it's -- time will tell how much of it what we sell, because it makes our product dead flat.

And it's a great product, especially as [right] as we go.

We go below 1/40,000 of an inch.

And that a very nice product to actually substitute in some cases for [total].

It's pretty unique.

(multiple speakers) in cases

Okay.

Great.

Dave Gagliano, Barclays.

Just a really quick question.

On the utilization, the 89% in the third quarter.

Sal covered some of this earlier.

I just wanted to pick your brain a bit on annual utilization rates.

How high can that go, given downtime et cetera, during the course of a year?

I'm not one big on use utilization rate, because as an engineer, I say it can never get under (technical difficulty).

But again, like you run a galvanizing line, you can -- when you add zinc, it becomes over 100%.

Depends on where you take your yield loss (technical difficulty) reversing mill, do you cut your head -- your heavy head and tail off.

You take it as the temper mill, you take it as (inaudible) line.

I'm being a little sarcastic, but those are all truths.

And so in theory, as an engineer, usually say about 93%.

You start with your yield all the way through the system.

But then, when you raise it, we said -- I think we said 620,000 whatever at Pittsboro, and we know we have more than that in melt, because we outrun the second rolling mill, we will be supplying some of that cast product out of the existing melt shop.

So therefore, really depends on what the order but currently is, and if we have a lot more large bars rather than medium bars, heck, we'll do more than (technical difficulty) theoretically, you could do more than the annualized 620,000 tons just in Pittsboro.

So there is no -- I'm not trying to give you the runaround.

I'm just trying to tell you honestly.

That's an answer that I can't even give you, because it can be exceeded over 100%, all depends on (inaudible), just as I said earlier.

Just on the gauge of the seal, in a Flat Roll world, you can exceed 100%.

And you say - yahoo, man, that was a great time, but you might even have more downtime and still have a great performance looking because the tons were up.

Just to try and clarify.

Over the course of a 2 year period -- 1 to 2 year period, that number can be over 100% for two years?

That 89% can be over 100%?

I would tell you no.

I mean, just the law of averages comes back.

If I tell you -- it would probably end up being in the low 90%s

Okay.

All right.

We wouldn't let a capacity -- we would report a number that it would reflect an appropriate --

(multiple speakers) You're an engineer (laughter).

So from the perspective of the actual volumes, let's forget about utilization.

But from the volumes, we can hit that volume that we report.

We report volume with a [tax] of, I think 7.4 million or 7.5 million tons.

We can hit that from a (inaudible) level.

But to Dick's point, do we start hitting it, just like the Flat Roll mill.

At one point in time, we (technical difficulty) capacity for 2.4 million tons.

Today, we get capacity of 3 million tons (technical difficulty) still higher than that.

Our goal is more.

When you talk about utilization rates (technical difficulty), it gets a little bit more difficult.

But from just pure volume, we would be able to produce and sell that volume on an annual basis.

Okay.

I'm just doing some quick math.

So what you're saying is, the 1.5 -- is this -- I am trying to clarify.

Can 1.59 million tons annualized -- can that grow to more than 7.1 million tons over the next 2 years?

Excluding all the other products that are happening?

Excluding.

But just that 1.59 million tons, apples to apples.

Can that consistently be more than 7.15 million tons, which is 100% of that number, over the course of a year?

I can be because our (technical difficulty) -- you're just annualizing a quarter.

Correct.

Exactly.

I'm actually putting it at that, 100%, and annualizing it.

Correct.

But our capacity that we believe we can produce in (inaudible) year, with appropriate markets, is actually 7.4 million tons, if you include the operations from The Techs.

So I would say that -- as a true statement, that that is possible.

Now obviously (technical difficulty).

Okay.

Brian Yu, Citi

The first question is just on the premium rails.

Bit of a follow-up.

Could you remind us to how this purchasing work typically, with the Rail companies?

So let's say that the testing goes well in the first quarter of next year.

When they start placing orders, how much visibility would you have?

Do you typically place enough where you are delivering (technical difficulty) for a couple quarters -- a few quarters?

You're asking about how railroads purchase their Rail ? Is that what the question was?

Yes, exactly.

I'm just trying to get a sense, in terms of how much premium Rail, when we might know how much premium Rail you would ship next year, assuming all the product testing goes well in the first quarter?

Again, I haven't been involved in it for couple years, since I left Columbia City, but I think in the -- towards the middle to the end of the third quarter, as I remember (technical difficulty) inquiries by many of the class one railroads go out, and the bids are expected to come in from the Rail suppliers and discussions start taking place.

And that's when railroads place their expected purchases for the coming year or years.

And therefore, that's when you start getting a picture.

Now those aren't necessarily guaranteed tonnages, but those are the parameters in which the two parties are expected to be capable of delivering.

And then other factors influence what actually transpires, and higher or lower numbers, and changes from head-hardened to standard and so forth can occur.

But it's usually by -- I would say by the beginning of the fourth quarter, that picture has become fairly clear as to what the next year will look like.

Okay, that make sense.

So that's why you think you'll end up shifting more of this in 2015, because 2014 will more or less be like product testing, maybe some sampling.

And then hopefully, you gain some contract wins towards the end of 2014, and then deliver more earnestly in 2015?

Is that the correct way to think about it?

Yes .

To Dick's point, there are contract negotiations going on.

I think we are making some volume commitments.

Yes.

For next year.

Obviously, there's a lot of [strot] Rail still sold.

Yes.

So it's not as though we are shut out of the market just because we're not going to make a full, full commitment for 2014.

Yes, a lot of our Rail right now is -- we are a major supplier to Amtrak and to a lot of the short lines and regionals and so forth, and to the contractors.

And we do a lot -- we have a lot -- a large customer base, and most of those are projects.

So we did, through distributors and direct, do quite a bit of work that's going on, even though we don't participate in some of the head-hardened annual bidding.

And we didn't have a product.

We still did put a number out there and say look, we have to put a qualifier on that, should our development not be on time, there has to be an escape clause, and you have to work with us.

But we truly expect to be a participant by the end of the year

Got it.

And Mark, if I could follow up on Mesabi Nugget.

So as I see it, you've got three variables, the uptime, the production, while it's up, and then the yield.

It seems like you've got that 30,000 ton per month production run rate locked down.

And then the uptime (inaudible) drift apart (technical difficulty) the uptime and yield (technical difficulty).

Do you expect any outages in the fourth quarter, and is that an area where maybe it will run on a more consistent basis as we look at 2014?

We certainly hope it runs on a more consistent basis for the end of the year, so we need that consistency to fine-tune the processing and get that yield improvements.

We have been running -- can run at an input rate of in excess of 30,000, but because the yield is not there, you don't get the finished product at that same level.

We do -- have identified, as I said, a lot of opportunities for some gains, and the focus of the team is -- always has been on what they are doing up there, purely on getting the cost structure in shape so that by the end of the year, we'll have a very, very good idea of what the ultimate plant capability is.

Do you have any planned downtimes in the fourth quarter?

For Mesabi Nugget?

There are no planned -- we had one in September.

Came up, I think, end of the first week or so of October, but there's nothing planned for the rest of the year -- rest of the quarter

Got it.

Curt Woodworth, Nomura.

Mark, I was wondering if you could elaborate on metal spread trends you're seeing within the Business.

I know that the sheet market -- metal spread has obviously expanded this quarter, with price appreciation.

But what are you seeing in the long product [foreign] B markets?

Are you seeing spreads expand at all with some of the momentum you're seeing on the shipment side?

I think the spreads on the Structural side tend to be some a flat.

I don't see any major drivers there.

The market has come off its index adjustment every quarter, which of think is a benefit for us all, and perhaps we'll see a little benefit there.

On the sheet side, obviously spreads are improved that -- through that -- this past quarter, as pricing has accelerated at a higher rate than scrap.

Where scrap is going over the next months, I'll let Russ answer that, with the caveat that -- [remember] that our crystal ball is only about three days out (laughter).

Maybe not even that far.

Obviously, the scrap market -- certainly, it's firmed up here the last few months, and you've got seasonality in scrap is when winter comes, and we have predicted difficult winter, I think the general direction on scrap is going to be firm just (technical difficulty) next 2 or 3 months.

Okay.

And then on Mesabi, just thinking through potential scenarios, and if the yield challenges remain and you can't hit the production run rate targets, do you have optionality to sell excess concentrate third-party into the market?

And will you even consider potentially looking to do that as more of a permanent component of that segment for you guys?

I would say at this point, we still feel that there is room for meaningful gains at Mesabi Nugget.

That will be seen.

Again, as I said earlier, there's a lot to do yet.

And over the next 2 or 3 months.

We're executing the plan that we set before the team, and by the end of the year, we'll know, I think, a lot more clearly as to what the cost structure is and the production capabilities of the plant.

At that point in time, I think we'll assess where we are.

That being said, though, I do believe we have the optionality on the iron concentrate coming from mining resources, being able to sell that if we want to.

Or do we not?

We'll take a look at that time unravels.

Okay.

Phil Gibbs, KeyBanc Capital Markets.

This is Tyler Kenyon filling in for Phil Gibbs.

I guess I'll start on non-res.

Could you talk about where geographically you might be seeing pockets of strength or weakness?

And is that any different, relative to last quarter?

And then one more on Mesabi.

What does cash breakeven equate to on a pretax basis?

And at this point, what is a realistic timetable to get to pretax profitability?

I don't want to be redundant on what I've already said at Mesabi Nugget, but we will see what that level is, hopefully in the next 2 or 3 months when they complete the trials on the cost savings and yield improvement opportunities.

For a non-res perspective, Chris?

Yes, I think we still see that the Northeast and the East are the strongest sections of the country.

We're not seeing the levels of improvement in the far West or in the Southeast quite yet.

We are seeing some life in the Southeast.

I would say that the Western markets have been slowest.

Okay, great.

And then just one last one for Russ.

I know you've talked about the outlook over the next couple of months for ferrous scrap being a little bit more positive.

But what do you see in terms of volume and price, specifically as it pertains to East Coast and China exports?

I know we've seen some significant movements in currency, especially in the lira, and just wanted your thoughts there?

I think, certainly, with the big exporters off the East Coast are the Turks, and they've been fairly noticeably absent since about the middle of the second quarter.

We've actually seen exports decline, probably -- I think first half is down 20% from the year before on the export basis point.

And it looks like that (technical difficulty) continue to boost into the first couple months of the third quarter.

A little bit more activity here in the last month of the quarter -- of September.

And it looks like it's going to continue somewhat in October.

But I think you (inaudible) because you have euro versus the dollar, and normally when that rate is $1.35 or $1.34, whatever it is now, generally that brings the Turks back in.

But obviously, their currency against the dollar -- their currently matches up better against the euro than the dollar at this point.

So they are bringing more of their materials out of Europe.

I think as far as China is concerned the big impact on our business with China is really in the nonferrous realm.

The [Greek] fence that they -- inspection that they put in early in the year are enforced early in the year.

I think we've all -- the entire industry has begun to adapt to it.

And I think we are now producing product that is exportable, although regulations that they have established.

And I think you'll see those nonferrous export opportunities growth as we get into the fourth quarter and into the first.

Okay, great.

Appreciate the color.

Nathan Littlewood, Credit Suisse.

I just had a question about your scrap business.

You have obviously reported consolidated volumes and average for the entire business, but I was interested in some of the commentary about there being a difference between the profitability of the Southeast region compared to the Midwest?

I'm looking at a map, which I'm sure you're familiar with, with all the OmniSource locations.

And it looks to me like there's roughly just as many dots in the Midwest as there is in the Southeast.

Can I read that as an indication that the volume is roughly 50/50 between those two regions?

And second part would be, are you able to give us a little bit more color on what the difference in earnings is on margins for each of those two regions?

Nathan, first question, when you look at the dots, the answer is no, the volumes are not 50/50 there.

It's more along the lines two-thirds, one-third.

Maybe even three-quarters, a quarter.

Significantly more volumes in the Midwest.

And so that is part of the difference.

The other part of the difference, and we talked about earlier about the Turks and the export market.

The choppy (inaudible) the East Coast, which is where all that wet --all that export market flows from.

With that tonnage, it is not going export flowing back it.

It puts a lot of pressure on the focal areas, the closest proximity areas.

And I think that's a good part of what they're doing.

I will tell you that -- I do want to make one quick comment on the Southeast, and I will tell you that the team down there, when you look at it from the performance level this year versus the last couple of years, they have made some marked improvements.

They have really done a tremendous job.

So again, it's just a difference of a geography.

I think they're located and the types of material they're dealing with.

Much less primes in the Southeast, and we deal with in Midwest.

And so some of this product mix, to the large part, is approximately to those export markets.

Valuable export markets (technical difficulty), not so valuable in (technical difficulty).

(technical difficulty) They have gone through considerable cost contraction there, and have done a great job.

And the market has certainly not been good to them, relative to the Midwest.

And to empathize Russ's point on product mix, the Midwest -- and just in big, round numbers, we -- if you look at Omni as a total, we -- 6 million, 6.5 million tons, perhaps, of capability.

4.5 million tons of that is Midwest, 1.5 of that is Southeast.

The product mix is dramatically different.

The Midwest is squarely focused -- or its flow anyway is probably 75% premium grades.

And if you look at the premium market through the third quarter, it was off a little bit, but it was relatively stable.

And that allowed those operations a little bit more flexibility, some greater option to retain their earnings profile.

The Southeast operations are principally obsolete scrap, [shredded] scrap, which, as Russ said, incredibly competitive marketplace.

You've got the export market competing for that flow, and you've got too many shredders competing for that same flow.

And if you look at the marketplace of shredded, it went down substantially through the quarter.

So whereas Midwest had a more of a stable pricing on a product mix scenario, the Southeast had to fight a downward trend in pricing almost every quarter, which is not good for a scrap organization.

Sure.

That's very clear.

So just to clarify, though, if we were to take the Southeast assets out of the mix here and just look at the Midwest stuff, was that three-quarters of the tonnage profitable in its own right, or is that making a loss as well?

No, it's profit.

Okay.

The Midwest was profitable, and the Southeast is dragging the business unit down.

I don't know (technical difficulty).

They (technical difficulty), but there again, it's much more challenged in the Southeast overall.

And so they've had a tough quarter, but again, (technical difficulty) precisely where they come from on consequent (technical difficulty), and the other references they put into last year.

They have made huge strides.

Okay, great.

That's very clear.

Sam Dubinsky, Wells Fargo.

Two quick ones.

How much CapEx is being spent on Mesabi Nugget in 2013, and how much is being spent in 2014?

And then I have a follow-up.

In 2013, the CapEx has been a little bit higher, and it's not just Mesabi Nugget, but it -- what we call Minnesota Operations.

And so that includes the Nugget facility and the [concentrate] facility.

And we just completed -- or we had some capital (inaudible) both of those in 2013.

I think the number for 2013 is (technical difficulty).

As it relates to next year, it's a little bit hard to tell.

I think the current expectation in all of the Minnesota Operations, capital next year would be closer to something around $10 million or [slightly] less.

But we'll have to see how the next few months of operations occur to able to say specifically what that might be.

Okay.

Great.

And you said you couldn't -- you didn't have the exact cost structure for Mesabi Nugget realized yet, but any idea what you think it could be, if the operations were running 100% utilized?

As we said, we will give you that in the January call.

Okay.

And then last question.

Steel fabrication has had a good quarter from a shipment perspective.

Do you view this as a new level of demand, or was there something like an inventory restock that propped up volumes for a quarter?

No, we had seen steady improvement from a low of about -- the joist demand dropped as much to a level of 40% of historical norms.

We can say it is about 70%, and that's all come gradually.

No step changes.

And we see continued opportunities for -- to grow steadily.

No, that was all natural increase in an improving environment.

Okay, great.

Charles Bradford, Bradford Research.

Your major competitor claims to be likely to start up its CRR plant at the end of the year.

Presumably, the big impact will be on less imports of Brazilian pig iron.

Have you been seeing any panic sales or offers from Brazil?

I don't believe you will buy much of it, but have they started to come after you to maybe dig in?

Or take some product?

We've been out of the import pig iron business for some time.

We may have bought an opportunistic (inaudible) here or there, but we really don't entertain, and don't have a good knowledge of those markets.

And we certainly -- I don't remember the last time we bought DOI and HBI from Venezuela or South America.

So I can't qualify that.

We just follow the plats and the general market news.

That's why I was asking about whether you were seeing offers.

I knew you weren't buying it.

But presumably, getting 2.5 million tons of more iron units into the market will have some impact on something.

The question is, is it -- do you think it will be more scrap?

Or where?

I think (technical difficult) price will follow the past, and wherever prime pricing is in North America, that's going to position the pig iron market.

I think on the scrap side, I think it's a commodity business.

Any time you add supply, it is going to have pressure somewhere.

I think longer-term, we are quite optimistic (inaudible) 2.5 million tons and of course, (inaudible) bringing some to market, albeit -- still, right now, I think they still have some merchant coming in to -- and will have some merchant coming into America.

But we think that that will give a little bit of pressure to scrap pricing, and stabilize or push it down some.

Which for us, obviously, is a huge advantage over the integrated mills.

I would agree.

Sal Tharani, Goldman Sachs.

Has SDN fiber been profitable so far?

What was the question, Sal?

(multiple speakers) the [rad] mill for copper, has it been profitable so far?

It has not been profitable so far.

I would say, in the broad scheme of things, it hasn't got much of an impact to our consolidated earnings.

The team there continues to increase its market, and I think we are getting to a point where the shipments are going to approach 5 million pounds, right, Russ, in the next couple of months?

And that tends to, at least we feel, to be a breakeven point for that facility.

Great.

And on the concentrate facility, I was just wondering if Mesabi is going to run at a lower rate?

I was wondering, would you be able to reach the breakeven over there at this lower?

Because the cost is very low, certainly.

And my guess is your transfer price is -- I don't know if you are transferring it at the market price (inaudible).

But when do you think that facility will be profitable or at least break even?

The -- again, it gets a little complex with the movement of materials back and forth between all of the divisions up there.

But mining resources is certainly profitable already.

Okay, great.

That concludes out question-and-answer session.

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

Fantastic.

Thank you for everyone's questions.

I guess in closing, we would all like to thank our employees for their continued hard work, their dedication, their loyalty to our company.

We're a family, and all I ask -- all we ask is you be -- continue to be safe each and every day out there.

And to the customers on the line and to our shareholders, again, we appreciate and thank you for your support.

And with that, from us, have a great day.

Be safe.

Ladies and gentlemen, that concludes our conference for today.

Thank you for your participation, and have a wonderful day.