Steel Dynamics Inc (STLD) 2014 Q2 法說會逐字稿

M>> Operator Good day and welcome to the Steel Dynamics second quarter 2014 earnings conference call.

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

After Management's remarks, we'll conduct a question-and-answer session and instructions will follow at that time.

Please be advised this call is being recorded today, July 22, 2014, and your participation implies consent to our recording of this call.

If you do not agree do these terms, please disconnect.

At this time I'd like to turn this conference over to Marlene Owen, Director of Investor Relations.

Please go ahead.

Thank you, Kevin.

Good morning, everyone, and welcome to Steel Dynamics second quarter 2014 financial results conference call.

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

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

We also have our leaders for the Company's operating platforms including Dick Teets, President and Chief Operating Officer for our Steel Operations; and Chris Graham, President of our Fabrication Operations.

Just a note that Russ Rinn, our President and Chief Operating Officer for our Metals Recycling operations is on vacation.

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.

As such, statements, however, speak only as of this date, today, July 22, 2014, 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 10K Annual Report under the captions forward-looking statements and Risk Factors, or as applicable in subsequently filed form 10-Q filed with the Securities and Exchange Commission.

And now I'm pleased to turn the call over to Mark.

Thank you, Marlene.

Good morning, everybody.

Hopefully everyone is enjoying the summer months.

It's certainly been a pleasant change from our first quarter conference call.

We had the opportunity to speak with many of you yesterday concerning our strategic acquisition of the Columbus steel mill and as a brief recap, the purchase is an incredibly compelling needle-moving growth initiative for us.

We've been positioning ourselves, our balance sheet and organizational structure for a growth just like this and it's exciting to see our plans begin to unfold.

We've been evaluating a number of strategic growth options for some time now and are generally excited about the step-change prospects Columbus will bring us, our shareholders and our collective employees.

And again, a real strong welcome to the Columbus employees to the STI family.

Acquiring Columbus is an incredible opportunity for Steel Dynamics.

With the benefit of our strong balance sheet and flexible operating base we're in a position to execute on this highly strategic and value accretive transaction.

The transaction price is substantially below Greenfield replacement value, particularly considering additional working CAP and capitalized interest needs of a new plan.

The transaction represents a significant step in the continuation of our growth strategy and allows Steel Dynamics to leverage our strong core strengths.

The acquisition introduces a state-of-the-art mini mill into our portfolio.

Columbus, which was constructed in 2007, and has a hot-rolled production capacity of 3.4 million tons.

It will significantly expand our steel operating platform, increasing our total steel production capacity by more than 40%.

We will have an annual shipping capacity of 11 million tons for the Company.

The mill is technologically advanced with 2D gasses, thicker slab casting, and rolling technology that provides greater capability than our Butler facility to make high end, energy pipe scale and advanced high strength dual-phase auto grades.

It is fully capable of achieving the efficiency and low cost structure consistently demonstrated by our Butler team.

We'll also expand our geographic market presence into the southern US, with exposure to growing southeastern industrial markets in Mexico, which again is another area where we see significant growth in upside.

In short, this transaction allows us both significant growth and exceptional financial returns, all the while maintaining a prudent credit profile, which I believe is a win on all fronts.

But now shifting our focus to our second quarter results and our broader end markets, all our reporting segments achieved meaningfully higher profitability compared to the first quarter, improving well beyond the bad weather impact experienced in that quarter.

The meaningful improvement in our second quarter financial and operational performance supports our continued optimism, as does the positive sentiment from our customers.

The results are indicative for the strength of our business model and culture, both significantly important for maintaining our best-in-class position.

Furthermore, we are seeing the benefits of our organic earnings catalyst that started up earlier this year.

But before continuing, I'd like to turn the call over to Theresa for some brief comments about our financial performance this quarter.

Theresa?

Thanks, Mark.

It's great to be back online with everyone again this morning.

Our second quarter results are also something to be excited about.

All of the operating segments, as Mark mentioned, improved considerably and went well beyond recovery from the first quarter.

Our second quarter 2014 net income was $72 million or $0.31 per diluted share, which was at the upper range of our guidance of between $0.28 and $0.32, an increase in net income of $34 million compared to the first quarter and an increase of $43 million compared to the second quarter of last year.

While our Second Quarter net sales of $2.1 billion were more than 13% higher than both the first quarter and prior-year second quarter, the true improvement in earnings was driven by improved margins based on both metal spread and volume-related cost compression.

Second quarter 2014 operating income was $132 million, an increase of $51 million compared to the first quarter.

Steel drove the increase in our second quarter operating income based on record quarterly shipments and metal spread expansion.

Our scrap raw material prices decreased while steel product pricing was mixed.

Sheet pricing declined in the quarter while long product pricing appreciated resulting in our average quarterly steel price declining $2 per ton in the second quarter compared to the first.

Total shipments increased 16% over the first quarter hitting a quarterly record 1.7 million tons.

This resulted in steel operating income of $158 million or $98 per ton shipped, an increase of $50 million compared to the first quarter.

Regarding our Metals Recycling operations, the environment is still challenging.

Shipments improved and metal spread expanded for non-ferrous materials, however ferrous metal spread contracted when compared to the first quarter.

Material procurement costs remained elevated from excess shredder competition.

Second quarter 2014 metals recycling operating income increased $9 million compared to the first quarter, as ferrous shipments improved 4% while non-ferrous improved 17% primarily from improved aluminum demand.

Moving on, our fabrication operations continue to shine.

The second quarter 2014 benefited from record quarterly shipments of 105,000 tons which resulted from seasonal and general improvement in non-residential construction as well as market share gains.

Product sizing increased in the quarter as steel costs decline expanding profitability.

Additionally volume is a powerful lever for our fabrication operations.

It allows the team to fully utilize our technologies and incentive systems resulting in dramatic cost compression of our conversion costs.

Second quarter fabrication operating income increased $4.5 million to $7.6 million compared to the first quarter.

For comparison purposes, this quarter's earnings alone surpassed all of 2013's results.

We continue to see improvements in the underlying non-residential demand as well as an opportunity for further market gains.

Good news all around in fabrication.

Moving to cash flow.

During the second quarter of 2014, we generated $76 million of cash from operations, compared to utilizing $27 million in the first quarter of this year.

Year-to-date working capital has increased $177 million with Accounts Receivable driving the increase.

The key drivers are good things though.

They are based on improved demand environment and our organic growth ramp which impacts both Accounts Receivable and, to a much lesser extent, inventory levels.

While the quantity of our receivables have increased, the quality has not deteriorated and days outstanding are appropriately maintained.

Our capital structure remains strong.

Liquidity was $1.4 billion at June 30th.

This includes cash of $357 million and the benefit of our unused $1.1 billion revolving credit facility.

We're also pleased with conversion of our convertible notes which matured June 15th of 2014.

The holders of 272 million of the security exercised their option to convert the notes into approximately 15.9 million shares of our common stock.

The remaining $16 million of outstanding notes were repaid in cash.

The conversion will be net cash flow positive as interest savings are more than offsetting our current dividend payment rate.

This security provided an important component of our capital structure over the last five years and its conversion to equity further strengthens our financial position for growth supporting the planned acquisition of Columbus as well.

Our credit metrics are getting even stronger.

Our net-debt capitalization ratio went from 40% at June 30 to 34% at -- excuse me, from 40% at March 31 to 34% at June 30th, with total debt of $1.8 billion and net debt of $1.4 billion.

Our trailing 12 month adjusted EBITDA was $711 million which results in net leverage of 2.1 times.

We're really in great shape.

Finally to conclude, as a brief confirmation from yesterday's call, I'll summarize a few points that were mentioned.

The Severstal Columbus purchase price is $1.625 billion which we intend to finance through our available cash and new debt.

It's early in the transaction but we currently believe future annual maintenance capital for Columbus will be in the range of $25 million plus, as currently configured, an additional $10 million to $15 million for contracted services.

Additionally we currently believe future depreciation and amortization will be in the range of $80 million to $100 million.

That's before any purchase price allocation, but because of the recent construction of the facility, we don't expect a big step up in fixed-asset base.

Several of you also have asked about the Mississippi State income tax rate.

For 2013 and 2014, for income above $10,000, the rate is 5% and that compares favorably.

Last year's Indiana income state tax rate was 7.25%.

Finally we believe our pro forma total leverage will be in the range of 3.5 types at closing with a clear path to return to our preferred net leverage of less than three times within around 12 months.

Our balance sheet continues to be very strong based on our low cost, highly variable operating platforms which provide robust through-cycle cash flow.

Our capital structure has the flexibility to sustain current operations, and, more importantly, support our growth.

Mark?

Super.

Thanks, Theresa.

Well, we'll begin with safety.

And as I consistently communicate, it's the absolute highest priority for me, for each employee and for our families.

Simply said, our goal is for all employees to work each day incident free.

Even though our results are better than industry averages, I believe there is more work to be done and we continue to make progress.

Toward that goal, 90 of our 119 locations achieved zero recordable incidents through June.

My personal congratulations and thanks to those teams.

Thank you for demonstrating that our goal to reach zero accidents is achievable and is sustainable.

Keep up the great safe work.

Corporately, our safety results continue to be better than industrial averages.

As we suggested, the first quarter softness in the US economy was weather related and temporary and not a structural change in progress of the economic recovery.

As the US economy regained its growth momentum and continues to improve, we believe the non-services sector growth is capable of increasing at a higher rate than the over GDP and we continue to see evidence of this.

As the employment rate continued to improve, consumer confidence followed.

The June consumer sentiment index was the highest level attained since January 2008.

The automotive market remains strong.

Sales continue to outpace expectations.

The expected build rate for 2014 is currently 16.5 million units and is forecast to grow to 17.8 million units over the next couple of years.

Energy, certainly one of the brighter spots for the US, is a significant contributor to overall domestic steel consumption.

The US oil rig count continues to increase and for the first time in 19 years, the US is producing more oil than it-s importing.

Fixed asset investments that support the domestic energy market are and will continue to be needed.

The manufacturing sector, particularly for end use products that require steel, continues to strengthen.

And very importantly, construction, we believe, also continues to improve.

Through May residential construction is up 9% year over year.

Non-residential construction also continues to trend upward and through May has increased 8% year over year.

And for us, more importantly than the macro market indicators is the strength of our order books.

And we continue to see them strengthen across our steel and fabrication segments.

Our Steel Operations segment had a strong second quarter both financially and operationally.

They shipped a record 1.7 million tons.

Both the Flat Roll and Structural and Rail divisions hit quarterly records.

Structural and Rail division achieved a new monthly shipping record in June, the majority of the increase being from steel beams although rail continues to have upward momentum as well.

We continue to work closely with the Class I railroads through their qualification process for our premium rail.

The quality of our premium rail is receiving high praise from our customers.

Premium rail expansion positions us to become the preeminent supplier in North America, as measured by product quality and value.

We're the only North American producer of 320-foot long rail, which is a strong competitive advantage for us.

Additionally, we're able to weld these longer rails together to produce 1600-foot length standard or premium rails that require significantly fewer weld points than our competition.

That creates significant value for our railroad customers through reduced installation costs, lower ongoing track maintenance expense, and is importantly improved rail safety.

Our new engineered bar, smaller diameter rolling mill is on schedule to be fully commissioned this month.

Our customers are pleased with the limited product we've ship to date.

Throughout the expansion the team is not distracted from its principal task delivering quality products to our customers.

The team maintained a superior performance in quality and customer service as evidenced by the second quarter Jacobson & Associates survey results.

They were ranked the Number 1 domestic SBQ mill overall.

Quite a feat given the tremendous effort required for the expansion project, so great kudos to the team there.

We've heard comments regarding the impact of SBQ capacity being built and its impact on our ability to fully utilize the new 325,000 tons of capacity.

Our expansion is specific to the small diameter bar market which is approximately 4 million to 5 million tons of the total SBQ arena, so we're not taking a big bite of the apple.

Furthermore, we are confident that our trusted customer relationships that are built on quality and on-time delivery will allow us to increase that market share.

Our steel mill utilization rate increased to 9% in the quarter across all our mills, positively influencing the Steel Operations profitability as high utilization resulted in cost compression.

Of note, our Flat Roll Division achieved two back-to-back record hot band production months, an incredible achievement for that mill.

We continue to see our steel order book strengthened and in spite of the recent elevation in volume of imported steel during the quarter, likewise the domestic industry utilization has edged up.

The considerable global over capacity will certainly be a headwind for steel pricing for the foreseeable future, but I believe the historic through-cycle level of imports as a percentage of demand will continue to remain in the low to mid 20% range and that we will not see a glut of any consequence on a sustained basis.

Nonetheless, as an American steel producer, we understand and desire the dynamics of a competitive market as long as it's fair and it's equitable.

We must remain vigilant as a nation and our administration must enforce world trade laws in order for us to compete on a level playing field.

Our Metals Recycling business continued to work through another challenging quarter and the team did a good job managing through it.

The Midwest region realized scrap flow improvement in both ferrous and non-ferrous volume as the spring thaw took hold.

However, downward pressure on ferrous prices the last few months of the quarter tightened ferrous metal spread.

The scrap export market for ferrous material appears to be shaping up similarly to 2013 as year-to-date total export volumes through May are lower than recent historical volumes for the same period.

Compounding the domestic scrap market volatility is the continuing over capacity of shredders.

Non-ferrous metal spread was a bright spot for our recycling segment and improved over the first quarter, largely due to higher metal spreads for copper and most particularly aluminum.

Moving to fabrication.

They also achieved record quarterly shipments.

Our order book continues to strengthen and inquiries remain robust.

According to the Steel Joist Institute, domestic year-over-year joist shipments have increased 14% as of May 2014.

Our joist shipments increased over 30%.

The team is doing a phenomenal job, it's increasing market share and successfully leveraging our national footprint.

As mentioned in our press release, remaining operating trials were completed, and a four-week outage was taken to upgrade the rotary [hot spots] during the second quarter at our Minnesota operations.

As anticipated, these trials and the outage resulted in second quarter losses similar to those experienced in the first quarter.

However, the trials resulted in very encouraging results related to the improvement in yield, quality, volume, and raw material input costs resulting in a potential cost structure that we believe is competitive relative to anticipated long-term market pig iron pricing.

We believe we can achieve a $340 to $350 per metric ton cash cost basis before the end of 2014.

This assumes an operating rate of approximately 32,000 metric tons per month or 360,000 metric tons annually.

Given the pig iron prices have historically ranged from approximately $380 to $550 per ton NOLA since January 2010, we believe the Minnesota process is a good hedge based both on secured supply as well as quality and cost.

However, this cost structure must be confirmed on a consistent, ongoing basis over the coming months.

In the meantime, as the operations ramp back up, third quarter 2014 losses related to the Company's Minnesota operations are expected to be meaningfully less than those incurred in the second quarter.

Iron Dynamics operation produced 64,000 metric tons of liquid pig, slightly lower than the prior-year first quarter but our team continues to perform well.

IDIs an integral contributor to the Flat-Roll Division's productivity and it's also a great sustainability story.

100% of their iron needs are attained through recycling steel mill waste oxides.

Regarding outlook, we remain very optimistic.

If you couple our organic-growth projects and latent-steel capacity with a planned acquisition of Columbus, and our belief that steel consumption will continue to improve, we foresee incredible growth for Steel Dynamics for our employees, customers and shareholders alike.

Our resolve to maintain a differentiated growth Company that effectively and efficiently performs through the cycle is unwavering.

We believe our superior operating culture and the strength of our financial performance provides evidence of our successful business model, regardless of the market environment.

We recognize that we are in a relational business.

Our focus on providing exceptional value to our customers, delivering the highest quality products when and where they are needed, and actively engaging customers in discussions about their future needs are critical to our success.

We believe Steel Dynamics is best positioned to capitalize on the phenomenal growth opportunities that lay ahead.

The strong character and fortitude of our employees are unmatched.

Their dedication to customers and passion for excellence compel us to achieve higher standards of performance.

And I thank each and every one of them for their hard work and dedication and remind them that safety is the first priority always.

Again, thank you for your time today, folks and, Kevin, we would like to open the call for questions, please.

Thank you.

(Operator Instructions)

Luke Folta from Jefferies.

Good morning.

Long time no talk.

Good morning Luke.

The first one I had was on SBQ.

Can you talk about of the new 325,000 tons capacity that you have at Pitsboro, how much your shipment from those operations now, the new line?

To tell you the truth, Luke we've produced about 3000 tons off of the new mill so far during just last month or two of commissioning it, because we really just put the sizing mill was the last component to be commissioned, and that was just here in the month of June and July.

And so, the dimensions are dialed in and the surface quality has been dialed in and so now we look to ramp it up.

But about 3000 tons and we're looking to move that up a couple thousand tons each month now.

Okay and also there's been a couple rounds of price increases for SBQ products this year.

Curious on your thoughts.

So far have those price increases stuck, and does that imply that if prices are flat second half into 2015 that you could see price increases on the annual agreements into 2015?

Well, a lot of our agreements are contractual and those, we maintained spot business.

We took that in the upward direction, but we honored all of our prior agreements and needless to say, the alloys and so forth are subject to surcharge mechanisms and those will move.

But we took the general direction but did not try to go out and run in a hard upward direction to alienate anyone.

Some of our competitors have been having some problems and we've been the beneficiary of some of that business.

We have our most solid booking and our strongest book for the next quarter ever, and I think we've been the beneficiary of our marketing philosophy, so we're very pleased with our position.

Okay, just on the target for Columbus for next year, there was some discussion around this on yesterday's call, but just maybe add some granularity.

Can you give us some sense of what the shipment expectation, is or utilization expectation is, for your 2015 outlook?

I'm just trying to -- and also, can you just discuss, I guess, what the discrepancy is in profitability between Columbus and Butler?

I know you talked about over time you expected those could close and perhaps even Columbus could exceed that of Butler longer term.

But just to get a sense of what that discrepancy is in your 2015 outlook.

Yes, I think, Luke, in total, we are looking at shipments around about 3.1 million tons next -- in 2015.

That actually is not a great deal more than they're shipping today.

But you have to take into account a shift into downstream value add and the associated yield loss there.

So I think 3.1 tons is a pretty solid number, particularly as we anticipate the markets going to continue to improve.

Relative to the differences in cost structure there, I think again, several areas of improvement was synergy.

You have just the conversion cost.

I think when you combine the talent and expertise of Columbus with our team, we're going to edge that down.

We're certainly going to get a benefit from our diverse portfolio.

Obviously, there's synergies between Butler and Columbus from a product standpoint and directing the right orders to the right place for the least amount of freight.

OmniSource will bring some benefit.

We have the ability to increase its volume.

We certainly have a huge appetite for scrap and everyone else is still going to have their supply capability.

But we'll be able to leverage OmniSource and bring perhaps a little more scrap in from the Southeast.

And then, New Millennium, obviously, is a -- can be a good source of value.

They have purchased -- Chris how much did you purchase from them last year?

A little over 60,000 tons and that was with one of our Southwest plants just in a start-up mode.

This year we look to exceed 80,000 tons.

But given the geographic location of the mill and proximity to our Southeastern and Southwest plants, we expect that volume could quite easily grow to 180,000 tons, so that gives you almost an immediate boost in utilization of the value-add downstream lines down there.

And that's probably an area, given better utilization and utilizing our knowledge in that arena, we certainly I think grow value.

Certainly we mentioned yesterday that there are legacy costs, what I call contracts there.

The way the mill was built originally, a lot of CapEx was distributed to the -- or delegated to the service provider and it's kind of a shift of CapEx to an operating cost.

And as those contracts unwind naturally over the next year or so, two years, we believe we're going to get some synergy from that.

And then finally, just logistics.

I think combination of OmniSource and a couple of the things that we have going on we can, I believe, get scrap and raw materials down to the facility at slightly less, again not massively less, but slightly improved cost.

So if you add those all up, I think there's meaningful synergies and I think we talked about $30 million yesterday and I think we also said about $10 million, Theresa, or so is in the very, very near future.

And the other $20 million will come on over the next year or two.

Just for clarification, the 3.1 tons, that is a short ton?

Yes.

Just as that compares to Butler should we be thinking of like $110, $120 per ton as a normalized Butler number?

$110, $120?

Good try, but I don't think we necessarily have given that number out.

Okay, thank you.

Good try.

Last one, Theresa.

What's the diluted share count and interest expense going to be now with the convert retirement?

Just to square that up.

Sure, so the shares actually for the third quarter come down slightly because not all of the notes converted, so I'd say probably like 240.2 million is probably a good number to use.

And for interest expense I'd say somewhere around $27 million to $28 million per quarter.

Thank you and congratulations again.

Thank you.

Brett Levy from Jefferies.

Hello.

Can you talked about -- earlier you said the order books are stronger.

Can you talk about how far they go out in each of the relevant product areas?

Well, I think the sheet mill is very strong.

Obviously there's upward price momentum just recently.

I think on the hot-rolled band side of things, we're probably into --

Again we don't know our policy is we don't open our books in flat-rolled except like a month out for the hot band and a little bit further for our quoted product, and that's our standard, because we really do play in the spot market.

So we're -- and that's why we've got a little bit of notoriety here recently in the press when we sent a note to our customers to say we were, full because that was in the close order.

So that four weeks or so for hot band--

And six to eight weeks for our coated products, and that's basically full across the board.

Our structural and rail has a good backlog, solid for July, probably three quarters of August, but we always expect to pick up the orders as we go through the rollings, and so August is not an issue and I know that we have orders in rail so forth already passed that.

We look at only quarter to quarter and don't open up the final quarter yet at all in the structural and rail yet, even if someone wanted to place an order we won't see it on our logs.

As far as I mentioned the SBQ, we've had strongest backlog right now that we've had in years and actually the strongest book in the month ever and so that's very heartening.

Probably the weakest place we have is at Roanoke, but strongest in most recent past because we're back to rolling the mill full time, because we were taking two days a month out.

But we're rolling back.

And we've cut back on the amount of rebar that we've been taking and more merchant bar and shapes, so we say that that as strengthened.

And Steel West Virginia this past week, we've been rolling full and there's a little bit of weakness possible but we're not concerned about it, it's going to be a very solid year at Steel West Virginia.

And because we're working in the flat-rolled the sales is working as a team.

Again metal tech is the strongest book we've had in quite a while.

And the most difficult place I'd tell you is that next tech, which is the very light gauge products, and that's what's under attack from China and India and so forth.

And now that the old country [tubes are] good trade cases behind us, we're gathering data and we'll deal with it as we see fit, along with our competitors and that's to be dealt with.

So on the steel side, thanks Dick, very, very solid.

I think additionally though our optimism comes from the -- we see the improvement in the construction arena.

So Chris can you give us a little insight as to your non-residential construction?

Yes, Mark.

We quote activity remains strong.

We mentioned in the past call or two that the Southeast was lagging a bit.

We're pleased to see that the Southeast activity is picking up at a nice pace.

Bookings remain strong and our joist and deck backlogs currently are at record levels.

The joist industry bookings are on pace to exceed 950,000 tons for 2014.

That would represent the biggest year by far since 2008 and the team is capitalizing on these new opportunities.

Dan is prepared to handle even higher levels of activity going forward.

We find strength in being able to move work around our national footprint and so the team is ready to go.

The earnings for the second quarter were pretty good too.

Well we don't, yes, we've got work to do, but it's all improving.

Okay, and then you guys mentioned on yesterday's call that you potentially look at Gallatin if it were offered for sale.

It fits your footprint down the middle of the country.

Would you guys be committed to keeping the same sort of conservative debt-to-equity ratios if you were to look at that transaction, as well?

From a financial perspective we're very much committed to, again, growth.

But if growth gets us outside of our metrics of preference which we really do look at as net leverage at three times or less, we'll do it as long as within an 18 to 24-month period we're able to get back into that alignment.

So I think yes, we still are committed to that.

And then the last one is sort of a cute question, 16 million of the converts were just matured.

Would it have been possible to buy them back and then convert them?

Or it seems like somehow money was left on the table there by somebody.

Money was left on the table by them, yes.

No, it wasn't at our option, so we had to pay them in cash.

Got it.

Thanks very much.

Thank you.

Matt Murphy from UBS.

Good morning.

Just wondering for a bit more color on Minnesota operations where you're talking about a need to confirm the cost structure.

Trying to get a sense how well do you understand the process right now.

Has there been sort of--in these trials has there been sort of a clear outcome, and you just want to run with that for awhile?

So just a bit more color there, thanks.

Well I'm not so sure I can articulate it any better than you just did, Matt.

The trials were very indicative, showed us a combination -- well, Theresa used the analogy that we know the ingredients and how to bake the cake.

We just got to do it each and every day.

I think the start up -- and again we started back up at the end of June, but July month to date we were running ataround about 95% availability, and a little over actually it was 340,000 ton annualized run rate.

So, the volume, I think is we're very comfortable with the 360 tons or perhaps even more run rate.

The unit improvements and the raw material input changes all point to a cost structure, as I mentioned, in that 340 tons to 350 tons range and it's just a matter of doing it month in, month out so we'll see what that yields in the next month or two.

And you said a significant change in the degree of loss in Q3.

Is there any scenario you'd look at where you'd actually not be loss making there in the near future?

Well Q3, we wouldn't get to a non-loss posture in Q3 on a pre-tax basis, probably not the fourth quarter.

But again, the financial profile will be meaningfully improved.

Okay, thanks a lot.

Expected at least to be meaningfully improved.

Tony Rizzuto from Cowen & Co.

Thank you very much.

Congratulations on the acquisition and all of the progress across the Company.

Thank you.

It appears there's huge potential alone in the product mix shift at Columbus and I just wanted to pursue that a little bit more.

I think in 2013, Hot-Roll comprised about 70% of the overall shipments there.

Can you provide some guidance as to where you expect that mix to be, say, two years down the road, hot-rolled, cold-rolled and coated?

I'm not so sure I've got that from a percentage basis.

I think just in general, just like with Butler, we pull it down closer to 45% to 50% hot band.

They don't really ship much pickle and oil because they run their tandem mill and they don't have a disconnect for the pickle line there.

They have a push/pull pickle line, but it only runs one or two turns a week, which I won't say tragic, but an asset that is being totally underutilized.

And then from a galvanized standpoint we recognize that, and I know they do too.

So I'm not trying to criticize them, but that's where we look to push the tons through and get the value there, and so there for, that will pull those hot band tons down, and we need to get the tons through the mill and down through either those hot-band galvanized or cold-rolled galvanized, and it will become more of a balance like Butler, I would believe.

Obviously, Butler as we mentioned yesterday, the capture is much thicker down there.

We have the ability, the heavier gauges, wider widths and the team there is already working on developing and evolving to the X70 grade energy scale, which carries a good premium so I think there's continued focus there.

They are having some preliminary success with some of the dual-phased steels, again good premium with those and that will be a focus also.

Can you give me an idea of what the approximate cost would be going from hot-rolled to cold-rolled and to coated?

Again, we don't really give our conversion costs out.

Okay, and I've got a question on the OCTG market, if I may.

Of the hot-rolled coal at Columbus that's going to tubers currently, is it fair to say this is the more basic low carbon alloy substrate, and could you give us an idea of what price level the tubers may be selling this product for at present?

The ERW product?

Well, in all honesty the focus at Columbus is not necessary, and correct me if I'm wrong Dick, but it has not been the focus to supply, just the absolute basic carbon ERW.

They're supplying the X40, X50 today, X60?

It's a full range.

They do have quite a nice job of supplying quite a few different tubers and a full complement of across the board.

So what they sell for-- what the tubers sell for I couldn't tell you, and -- no idea.

No problem, and then finally just a question on the overall domestic flat-rolled market and I wonder do you feel that the supply demand improvement may be partly related to the lack of CapEx in 2009 and 2010 time frame, principally by the integrated players?

And the effect this may be having somewhat on the equipment uptime or operational stability?

How do you guys feel about that?

Well, obviously they've had over the last 12 months a few outages here and there, to be honest, I'm not so sure we're close enough to know whether it's regular maintenance or moneys they haven't spent over the last two or three years.

I don't think we can comment on that, Tony.

I always respect your views, though, Mark, on that, because you obviously have some great vision into that.

But appreciate any comments you can make on that, thank you.

Timna Tanners from Banc of America Merrill Lynch.

Hello, good morning.

Good morning.

Okay, I wanted to ask a little bit about the margin in the second quarter.

So prices fell, what, an average of about $2 and scrap fell $16, which is a bit unusual.

You also had the problems with some of the integrated peers in production; you just mentioned some of your SBQ peers had some problems producing.

So I just wanted thoughts on how sustainable the second quarter margins might be in light of those elements.

I think the -- as we see the market today, most of our arenas it's stable to positive, from a pricing standpoint.

I think the potential, and we don't really like to prophesize as to where the scrap market is going.

But given the export market is not incredibly strong and flows are good, we expect scrap at least in the near term to be sideways to edge down maybe a few bucks.

So I think the current environment is probably sustainable.

So, even if the production comes back from some of your peers on those products we just discussed, it can continue to see the differential between scrap and steel at where its been, you're saying?

I think SBI at least will not be impacted by that.

Switching gears I want to make sure I understand on Masabi, I think I missed the number on your cost structure going forward.

And could you also just provide -- I'm sorry, I'm still not clear on what it's going to take to get to a more advantageous position there.

I'm sorry if I'm being dense, but I'm not clear on what's improved.

And if you can give us a little more detail there.

Well the number, the range I gave was cash cost basis of $340 to $350 per metric ton.

And again, it's a matter of executing on the results that we saw in the prior trials earlier this year.

Maybe I'll follow-up offline.

Thanks a lot.

Evan Kurtz from Morgan Stanley.

Hi good morning.

Good morning.

So just to follow-up.

It sounds like heading into Q3 you're looking for scrap to be sideways to down, pricing is certainly stable, maybe moving up a little bit right now.

Are there any sort of offsets to that, or should we expect to see some improving margins in the third quarter?

I think I've already opened our Crystal ball as far as we would like to go, to be honest.

Okay, I thought I'd give it a try.

Maybe moving on then to Columbia City.

How much upside is left on the long product side here?

I know you had a pretty strong quarter but seems like there's still quite a bit of availability at that plant.

And as the non-residential recovery unfolds, if you could just provide some color on where you see upside as B volumes improve and perhaps B margins improve.

I know back in 2007, B margins were probably better than rail margins.

Do you think we could get back to a time and place like where we were back then?

I'll say this, Columbia City does have the opportunity to continue to move up in volume.

That doesn't say the number one mill, the original heavy section mill is fully loaded and with rail and heavier section products.

We have recently added a third crew on to the medium section mill, and now that they have trained and operating, the sales force is out trying to fill up that shift and so there's -- the opportunity is there.

And so, again it's lighter sections, so you need to say you'll end up selling time on the mill, because it turns into a lot of linear feet.

From a margin perspective, I think the industry has done well, the support from the customers and so forth.

And imports of recently backed off a little bit, and so we've cleaned up, I think, our discounts that were floating around out there, and now I think we're back to nice pricing.

And there is maybe an underpinning of some upward movement, so it depends on scrap.

So, I think the opportunity is at Columbia City out of all of our mills, and so the sales force is out working their tails off.

Okay, can you tell us, I'm sorry?

[multiple speakers] basis, if you think, well not think, you see we shipped a record level at 6.1 million tons last year and excluding Columbus for a moment, we have about a 7.8 million-ton shipping capability.

So you know, we have a about a million and a half tons of what I consider latent value or volume that we've never had a steel consuming economy to exploit.

So, that, I think, is considerable upside to us.

And what sort of operating rate was Columbia City running at last quarter?

I never calculated it.

Again the heavy section mill was full, and so they shipped at a record rate of about 117,000 production.

But we'll get that for you while we take another question.

Okay, great.

Just last question then.

We've heard a lot in the trade press about the potential flat-rolled trade case, and cold-rolled, and perhaps some of the coated products, as well.

Any thoughts on when we might see that?

Is it close?

I would just say again, I can't speak for everyone.

All I know is that we continue to be distressed by the amount of imports that are out there, both on light gauge cold rolled and Galva loom and other coated and painted products.

So, I think we're out gathering data and looking at our own results.

And so, we talked to our trade attorneys and they are out there having discussions.

So I have pushed them to be sooner rather than later.

Great, thanks guys.

From a utilization perspective, the structural rail division operated around 75% during the second quarter.

Great, super helpful.

Thanks.

Michael Gambardella from JP Morgan.

Yes, good morning.

Good morning.

A question on the potential for the integration between Butler and Columbus.

Currently, how much of an overlap do those two Mills have in terms of regional competition?

And is there quite a bit of potential to really shorten up your markets or tighten up your markets?

Maybe Butler doesn't have to go as far South and Columbus doesn't have to go as far North?

And what's the potential for that?

And also how are you going to handle the integration, in terms of making sure that the Mills aren't competing against each other?

I think again, the purchase has been fully based on where we think we can drive it for a cost perspective and mix shift.

If you look at the geographies, it is a Southern mill I would say versus the Midwest Northern mill, so there's very little overlap per se geographically.

And then also from a product perspective, a little overlap, I think Dick articulated.

They are heavily into the energy pipe markets today, 45% to 50% output, whereas Butler is, I think we said, 10% to 15% ish, if that.

Butler is we estimate about 30%,32% automotive, unexposed automotive but still automotive, where I believe Columbus currently is about 5%.

So there's a very large sort of dislocation in both geographic and product overlap.

And again, until we're closed, we've announced the purchase agreement, but until we're closed, we're full competitors.

Right, sure, and another question, just on the non-residential construction demand.

Have you seen any additional improvement sequentially in the last quarter?

Yes, this is Chris.

I was just looking at six-week trends versus 13, 26, 52.

We've seen an increase from our 52-week average to our 13-week average of probably 30%, 30% to 40% so we continue to see signs of increased strength.

And then down to the six-week?

Six-week is, that's where we start to talk about how far our Crystal ball works and the six-week averages are as high as they've been.

6 and 13 are about right on top of each other, which are marked improvements over the last 26 and 52, and so as far as we can see, the strength continues.

Okay, thank you very much.

You're welcome.

Sal Tharani from Goldman Sachs.

Good morning Mark.

Good morning, Sal.

Wanted to ask you a question.

Yesterday you made a remark that since the new management has come in there has been quite a bit of change in terms of profitability of the Company and last six months have been pretty good.

Have heard similar remarks from AK Steel.

I was just wondering, I'm sure when new Management came in selling of the plant was probably on the table immediately, and I was just wondering how much of this, and these are big ships that turn around quickly, and I'm just wondering for due diligence, are you comfortable all these measures they have taken, which have improved profitability over the last six months, are sustainable and not much -- there's not an element of window dressing in there?

And have you done quite a bit of diligence on that?

Well, I think we have done more due diligence on this project, Dick, than anything we've done before by far, and we brought in the only source recycling team and they've done a great job looking at the logistics of getting scrap to the mill where the scrap draw regions will be and have been.

And we see the changes that the team has made, and they are definitely sustainable.

There's no doubt about it.

Great, thanks.

So, I have another question on the metal recycling and ferrous (inaudible) operations you report.

So if I look at your OmniSource operating income, and even if I subtract or add or adjust for the realized or unrealized hedging losses or gains, I come up with a number per ton which is much better than where we see at other scrap companies or other steel companies which own scrap.

So that's pretty good, and Kudos to your OmniSource team that the (inaudible) profitability has been pretty good compared to others.

But when I do the math and I look at your $18 plus million dollars worth of operating income in OmniSource and take the unrealized hedging loss out, and then if I subtract your loss from the Minnesota iron producing asset, $9.1 million post tax, or $14 million pretax, it still leaves me a gap of $3 million of loss.

Was that at IDI, or is there something I'm missing in here?

No, Sal, we can go offline with this if you'd like.

The number that you're looking at for Minnesota is actually net of tax.

It's not pretax and it's not the operating level, so the number that you're looking at for metals recycling and for the whole segment is operating and the number we gave you for Minnesota is net, so there's a bridge to do and I'm happy to do that with you offline.

Okay, we'll do that.

Thank you very much.

You're welcome.

Andrew Lange from Morningstar.

Hi, good morning.

Good morning.

A couple questions here.

First, you mentioned that the purchase of the Columbus facility will provide you with access to the Mexican steel market.

I'm curious as to what portion of Columbus' sales are currently derived from Mexico, and along those lines are there already significant business relationships in place, or is this more of a growth opportunity that would come from a low base?

I think it's the latter.

I think it's a very large growth opportunity coming from a low base.

Okay, are you willing to share--

Fortunately, we have existing customer relationships that have assets in Monterey in particular currently and I would certainly think that--and they are trusted loyal relationships.

I think we can expand on those and create commercial opportunity for the Columbus Mill.

Okay, and then could you provide some color as to just the broader big picture strategy for addressing the Mexican steel market?

It would be interesting to hear what product types might constitute your key exports and what end markets might predominantly fuel growth in the region for you?

I think, well the right answer is, we haven't explored and got an absolute precise strategy in place, but given the relationships we've had, the items would cold-rolled sheet, cold-rolled valve and hot band.

Yes there's a lot of industries that are growing down there; needless to say are appliance, automotive and energy.

Okay, thanks.

Phil Gibbs from KeyBanc Capital Markets.

Good morning.

Good morning.

The contracted service piece that you mentioned, I think it was $10 million to $15 million annualized that you expect to wind down over the course of the next couple years, is that right now in the operating expenses of Columbus?

Is that what you were saying?

It's actually capitalized through CapEx.

Typically these services would be part of our operating expense, but for Columbus it actually comes across as capital investments.

Okay, so are we seeing that $10 million to $15 million then when it's transferred over to your P & L, we should see that as operating expense then?

Is that what you're trying to convey?

Not necessarily, Phil, because again we're looking at what we believe operating rates and things might be going forward.

These are some of the contracts that Mark talked about earlier that we might be able to renegotiate at some point in time, but so it's a little less clear than that.

Okay, I was just trying to decipher whether your EBITDA thought process included a head wind from those contract services, or it was included in your CapEx assumptions.

It's currently included in our CapEx assumptions.

But just so we're clear, and we're on the same page, Theresa mentioned that there was CapEx of 25 plus $10 million, $15 million of contracted services.

That is a little different than the legacy contract services I was alluding to whereby certain service providers that shouldered some of the CapEx, which in those contracts are going to unwind over the next couple years.

Okay appreciate that, and Theresa, can you provide the mix of flat-rolled products in the quarter as you typically do?

Oh, sure, Phil I'm sorry.

Okay, so for the flat-rolled division, second quarter shipments, hot rolled shipments were 358,000 tons, P& O 91,000 tons, cold-rolled 47,000 tons, hot-rolled galvanized 128,000 tons, cold-rolled galvanized 42,000 tons, painted products were 101,000 tons and finally, Galva loom was 11,000 tons.

Thanks so much.

Thanks, Phil.

Nathan Littlewood from Credit Suisse.

Good morning.

Congratulations again, and thanks for the opportunity.

I just had a question following up on yesterday and I apologize if I missed it among all that was going on, but Theresa, you were kind enough to break out your estimate for next year's EBITDA for this Columbus Mill.

Now clearly, that has a lot of the same macro and commodity price drivers as your existing steel fabrication business.

I was wondering if you might be able to help us sort of close the gap between 260 Mill at Columbus and what the equivalent number would be for your existing steel fabrication business as we can see it today.

Well a couple things.

First of all yesterday we didn't confirm what we thought EBITDA would be for the Columbus mill.

What we did was we talked around a multiple that was given during the presentation.

But secondly, I think more importantly, our steel fabrication business is not related to the Columbus mill.

The steel fabrication is really producing joist and decking and we have a similar facility at our flat-rolled division which is very similar to Columbus, but not our steel fabrication operations.

So when you look at this, I gather they're different products, but when you look at the general macro environment scrap prices demand, all that sort of stuff, these things are all incredibly correlated and when in fact you look at the historic correlation between service styles North American earnings and your own earnings, or AK Steel's earnings, again they are all highly correlated, so in an environment where Columbus can do 260 [not specified -- tons?] what sort of ballpark range would you think the existing business is doing?

Oh, you're looking for us to give an estimate for Steel Dynamics for 2015 EBITDA.

Yes, we don't do that.

We don't believe in giving guidance out that far, so I'm sorry I can't help you with that.

Okay, no problems, thank you very much.

That concludes our question and answer session.

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

Super.

Thank you, Kevin and thank you for all those still on the call listening.

I would like to thank you for your support, ongoing support for our Company.

And to our customer support also, and to our employees, keep up the great work and be safe each and every day, guys and girls.

Thank you very much.

Thank you.

Once again Ladies and Gentlemen that does conclude today's call.

Thank you for your participation and have a great day.