Steel Dynamics Inc (STLD) 2014 Q3 法說會逐字稿

Good day, and welcome to the Steel Dynamics third-quarter 2014 earnings conference call.

(Operator Instructions)

Please be advised, the call is being recorded today October 21, 2014, and your participation implies consent to our recording this call.

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

At this time, I would like to turn the conference over to Miss Marlene Owen, Director of Investor Relations.

Please go ahead, Miss Owen.

Thank you, Manny.

Good morning, everyone.

And welcome to the Steel Dynamics third-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; Russ Rinn, President and Chief Operating Officer for our Metals Recycling Operations; and Chris Graham, President of 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 21, 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 page on our Steel Dynamics website, and our Form 10-K annual report, under the caption forward-looking statements and risk factors, or at the (inaudible) 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.

Well, thank you, Marlene.

And good morning, everybody.

And hopefully you are having a good fall, and we certainly appreciate you taking the time to join us today to discuss our third-quarter results, which we believe are pretty terrific under the circumstances and to share with you exciting opportunities ahead for Steel Dynamics.

Once again, a full-hearted SDI welcome to our new Columbus employees.

As the new proud owner of Columbus Mississippi flat roll mill, we are pleased with the progress of integration.

I had the opportunity actually to attend the Company picnic there this past weekend, and it gave me an opportunity, a chance to meet a lot of our employees and their families, and their kids, and I got to tell you, they were a phenomenal group of people and they are going to fit in perfectly with the SDI family.

The teams themselves, the integration teams are doing a phenomenal job.

The acquisition represents a transformational step in the continuation of our growth strategy and allows us to leverage our core strengths.

It is meaningful to our business, and delivers significant additional value to all our stakeholders.

In short, the Columbus addition brings us significant growth and exceptional financial returns, all while maintaining a good credit profile with the capacity for additional investment opportunity.

In addition to closing the acquisition mid month, our existing SDI operations saw meaningful growth in profitability during the third quarter.

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

I would like to turn the call over to Theresa for comments about our financial results this quarter, and then I will follow with additional market commentary and where I see both near-and longer-term additional growth and performance opportunities, so Theresa?

Thank you, Mark.

Good morning, everyone.

We're quite pleased with our third-quarter operating and financial results.

Third-quarter 2014 net income was $91 million, or $0.38 per diluted share, including the negative impact of $0.09 per diluted share related to Columbus acquisition costs, financing fees, and purchase accounting adjustments.

Excluding these charges of approximately $40 million, third-quarter diluted earnings per share would have been $0.47, above the upper range of our adjusted guidance of between $0.42 and $0.46 for the quarter.

The acquisition and financing costs are reflected in our income statement as other expense.

You will notice the elevated level.

The purchase accounting adjustments reflect our initial purchase price allocation estimates, which resulted in a preliminary step-up of inventory and fixed asset values.

The associated negative impact of approximately $14.5 million from additional depreciation and margin reduction are reflected as an increase to our cost of goods sold.

Based on our early estimates, it appears that our purchase price is very close to the book value of the assets.

The operational results for Columbus are included in our results as of the acquisition closing date of September 16, 2014, basically about 15 days.

Our third-quarter net sales of $2.3 billion were 13% higher than the second quarter of this year, and 22% higher than the prior-year's third quarter.

The improvement in earnings was driven by increased margins based on both metal spread expansion and volume-related cost compressions.

Third-quarter operating income was $189 million, an increase of 43% compared to the second quarter.

Regarding our Steel Operations, record quarterly shipments were achieved again in the third quarter and metal spread expanded across the business.

Scrap raw material prices decreased as overall average steel product pricing improved $7 per ton.

Quarter-over-quarter pricing improvements were more pronounced for our Flat Rolled and Structural Divisions.

Total shipments increased 13% over the second quarter, hitting a quarterly record 1.9 million tons, driven by improved long product shipments.

We even would have achieved record volumes without the 175,000 tons of shipments from Columbus.

These operating results led to operating income from our Steel Operations of $202 million, or $110 per ton shipped, an increase of 28% compared to the second quarter.

Excluding the Columbus purchase accounting adjustments, operating income would have improved 37%.

Metals Recycling continues to be in a challenging environment.

Shipments improved and ferrous metals spread remained relatively steady.

However, non-ferrous metal spread contracted over 20%, primarily due to falling copper prices.

From July 3 through the end of the quarter, copper pricing reported on COMEX fell over 14%.

Third-quarter 2014 operating income decreased $5 million compared to the second quarter.

Ferrous shipments increased 2% and non-ferrous shipments increased 13% based on improved copper and aluminum volumes.

Moving on, our Fabrication Operations continue to shine.

The third quarter 2014 benefited from another record quarterly shipment level of 144,000 tons, surpassing second quarter's record by 37%.

Increasing volumes continue to compress costs and both margins and market share continue to expand.

During the quarter, increased average product pricing [faced] higher raw material steel price increases, expanding profitability.

Additionally, volume is a powerful influence for our Fabrication Operations.

It allows the team to fully lever the technology and performance-based incentive systems, resulting in a dramatic compression of conversion costs.

Third-quarter 2014 operating income increased to $19 million, more than doubling second quarter's performance.

We continue to see improvements in the underlying non-residential demand, good news all around.

During the third quarter of 2014 we generated $249 million of cash from operations, compared to $76 million in the second quarter of this year.

Working capital reductions contributed $86 million to the quarter.

Year-to-date working capital has increased $102 million, excluding the Columbus acquisition.

This is really related to accounts receivable.

The key drivers are positive factors based on the demand environment and our organic growth ramp, which are increasing aggregate customer account balances.

However, while the quantity of our receivables have increased, the quality has not deteriorated, and days outstanding along with our aged accounts are in good stead.

Regarding our capital structure, we funded the Columbus acquisition through the issuance of $1.2 billion of senior unsecured notes.

The remainder of the $1.6 billion purchase price was paid through a combination of available cash and borrowings on our revolving credit facility.

Rick and the team did a great job, and accessed the high yield bond market at an opportune time, raising $1.2 billion at an attractive long-term average interest rate of 5.3%.

Although our debt maturity -- excuse me -- additionally, our debt maturity outlook is incredibly flexible.

We don't have any near-term meaningful maturities, yet our callability profile allows for prepayment if warranted.

Even with our recent acquisition, our liquidity and credit metrics remain strong.

At September 30, our liquidity totaled $1.2 billion.

This includes available cash of $160 million, and available funding under our revolving credit facility of $1 billion.

We had outstanding borrowings on our revolver of $60 million at the end of the quarter, however, we have since repaid that outstanding balance, and we again have our full revolver available at $1.1 billion.

Our total debt was $3.1 billion, with minimal secured borrowings, less than 10% after repaying the revolver.

Our net debt was $2.9 billion, with trailing 12 months adjusted EBITDA of $1.048 billion.

That includes pro forma historical Columbus EBITDA.

This results in net debt to trailing adjusted EBITDA of 2.8 times.

So on a pro forma basis, we are already back in line with our preferred through-cycle net leverage of less than 3 times, a great accomplishment.

Looking ahead, we believe that our capital structure and credit profile have the flexibility to both sustain current operations and to support additional growth investments.

Thank you.

Mark?

Thanks, Theresa.

Well, once again, safety is first for us.

It is the absolute highest priority for me, for each employee, and our families, and simply said our goal is to work each day incident-free.

Even though our performance is better than industry averages, I know there is more work to be done, and we are moving in that direction.

Toward that goal, 85 of our 121 locations achieved zero recordable incidents during the quarter, the third quarter.

Many of these locations haven't incurred a single incident this year.

So my personal congratulations, and thanks to those specific teams for demonstrating that our goal to reach zero accidents is both achievable and sustainable over the longer-term.

Turning to business, I think understandably, recent geopolitical events, coupled with concerns regarding stalled international growth have decreased consumer optimism, and wreaked havoc on the equity markets.

However, the strength of our third-quarter financial performance, recent conversations with our customers, and the current profile of our order books do not reflect a structural shift to the continued positive growth we have seen all year.

Durable goods and non-residential construction, two components of the non-services GDP, accounted for roughly 47% for the improvement in overall GDP in the second quarter.

This supports our view that non-service related GDP continues to be an important contributor to our overall domestic economy, which is good for steel consumption.

Although consumer spending decreased slightly exiting the third quarter, sales of our steel-consuming products such as appliances increased.

Forecast for key steel-consuming end markets remain positive.

Automotive continues to be strong at 16.5 million units, growing to almost 18 million over the next few years.

Overall construction spending continues to trend favorably, increasing 5% through August as compared to the same period in 2013, while non-residential construction increased 6%.

Additionally, growth in the domestic shale arena continues to require infrastructure investment, which we believe will positively affect demand for steel.

Recent concerns regarding stalled growth in international markets have caused large energy companies to redirect their investments to North America.

So midstream, downstream investments will be required to support projects stemming from that redirected capital.

Our Steel Operations delivered another strong quarter, both financially and operationally.

They shipped a record 1.9 million tons.

And I believe it is worth emphasizing that our pre-existing steel-making facilities surpassed our prior record even without the inclusion of the Columbus volumes.

Our Structural and Rail and Engineered Bar Divisions each achieved record quarterly shipments.

Although the majority of the volume increase stemmed from structural products, and special bar quality steel shipments, we also increased rail shipments by 12%.

We continue to make considerable progress with the Class I railroads through the qualification process for our premium rail, which we began producing earlier this year.

We are already qualified with five of the seven Class I customers.

Our quality and customer service standards are receiving exemplary commentary.

This product addition positions us to become the preeminent rail supplier in North America.

Currently, we are the only North American manufacturer that welds quarter-mile length strings, using 320-foot rail versus the conventional 80-foot rail.

This is a strong competitive advantage.

It reduces the welds per string by more than 75%, a significant advantage for our customers as it dramatically reduces the potential for weldment failures, which is an obvious safety benefit for them, as well as reducing track maintenance costs.

We believe domestic rail consumption will continue to increase during the next three to five years, which both replacement and new rail are required, as suggested by railroad investment forecasts, driven in large part by the US energy sector.

We plan to increase our rail shipments in parallel with this growth, and have told our rail customers that we are committed to this market, and will supply up to 350,000 tons annually to meet their needs.

This enhances our profitability through both product margin expansion and provides cost compression through increased volume.

We shipped just over 200,000 tons of standard rail in 2013; we expect to increase that amount by 10% or more this year, and with further improvements in both volume and mix in 2015.

Our Engineered Bar capacity and product offering expansion is also progressing well.

We have commissioned over 75% of the entire new smaller-size range, and we are receiving positive customer feedback.

We have been balancing commissioning with providing our customers the on-time delivery that they have come to expect from us, and we certainly appreciate their support during this time frame.

We are confident that our trusted customer relationships built on quality and on-time delivery will allow us to increase our market share to fully utilize the added 325,000 tons of annualized rate in the coming year.

The annual domestic SBQ market is generally between 8 million to 10 million tons.

And of that the 3 5/8, or the smaller diameter bars, which is the area of our expansion, represents about 55% of that.

So we don't believe our market share expectations are unreasonable.

We shipped 480,000 tons from Engineered Bar Division in 2013; we expect to increase that amount by 30% in 2014, with obvious further improvements in both volume and product mix in 2015.

From the closing date of September 16 to the end of the month, our shipments include 175,000 tons contributed by Columbus.

Acquiring the Columbus mill was an incredible opportunity for Steel Dynamics, creating a single flat roll group which provides us a platform to fully utilize our core competencies.

It allows us to develop stronger relationships with our existing and new customers, maximizing logistical benefits to create further value for them, broadens our steel sheet product capabilities through width, gauge, and strength diversity, complements our current product portfolio with further exposure in the growth areas of energy and automotive, and it further diversifies us geographically into the high-growth southern US and Mexican regions.

Leveraging synergies across two highly efficient flat-rolled steel mills and eight coating lines provides us a unique opportunity to significantly increase value for all our stakeholders.

Collectively, production utilization for our Steel Operations was 90% in the third quarter, compared to 95% last year.

However, the rate though is not a reflection of decreased demand, but rather it is a function of increased capacity from our SBQ expansion, with 350,000 tons or so adding to the denominator obviously, and a four-day scheduled outage of the Butler flat roll mill.

Excluding the impact from these items, utilization would have been slightly above the second quarter.

There obviously remains general concern regarding the recent level of steel imports, and the associated headwind to pricing and industry utilization.

While we obviously monitor the activity closely, we continue to see relative strength in our order backlogs.

We have had two consecutive quarters of record shipments.

Part of our strategy is to not only develop strong customer relationships, but to also manufacture market-niche products that are more difficult to compete with on a global basis, such as our painted flat-rolled steel, highly engineered SBQ steels, and longer length rail.

This helps us insulate us somewhat from the import threat.

We believe the current growth expectations in both Europe and China, combined with global production overcapacity, will be a headwind to steel pricing for the foreseeable future.

But I continue to believe that historic levels of imports as a percentage of domestic consumption will return, and that we will not see an import glut of consequence on a sustained long-term basis.

We continue to understand and desire the dynamics of a competitive market, as long as it is fair and equitable.

As an American steel producer, we must remain vigilant, and our administration must enforce world trade laws in order for all of us to compete on a level playing field.

Our Metals Recycling business continued to work through another challenging quarter, reporting lower profitability.

Both ferrous volume and non-ferrous volumes improved, notably in copper and aluminum.

However, ferrous metal spread was flat quarter-over-quarter, as decreased selling values were somewhat offset by cost compression from the volume improvement.

Non-ferrous metal spread was negatively impacted by weaker copper and nickel commodity markets, resulting in decreased profitability for our non-ferrous segment.

Year-to-date July 1 scrap exports were 19% lower than the same period 2013, and both years being significantly lower than recent historical norms.

The continued significant overcapacity of shredders, particularly in the southeastern US, continues to compound the volatility and continues to constrain margin, as processors are all competing for the same material.

Regarding our Minnesota operations, as discussed on last quarter's call, we plan to ramp up volume, while improving yield, quality, and cost on a consistent basis during the third quarter.

I'm pleased to report that our team achieved all of those things.

And we expect further improvement in these areas as we continue to operate and make some enhancements to the iron ore and retrievable process.

We will be installing equipment that Magnetation has already utilized in other operations to bring our cost structure for iron concentrate back to the levels established in 2013 of under $50 per metric ton.

Lately, the cost has been elevated and higher than that due to the lower yield recovery emanating from finer-sized tailings that we found in the current basin.

Had we been at that cost level during the third quarter, our net losses would have been reduced from $5 million to just less than $3 million.

We still hold the view that these operations have the potential to achieve a $340 to $350 per metric ton cash basis, but in order to do this volumes must reach about 32,000 metric tons per month, or a 360-metric ton annualized rate.

During the third quarter our average monthly production rate was just over 27,500 metric tons per month.

This significant improvement over months past, gives us solid footing to ramp up to the required volume.

Our Fabrication Operations also achieved another quarterly shipment record for both joist and deck products.

The team has positioned that sector incredibly well for the returning construction markets.

Industrial utilization continues to improve and it is certainly true for us.

Based on sustainable increased demand and market share improvement, we have added production shifts at several of our plants, employing additional people in our communities.

And according to the Steel Joist Institute, as of August, year-over-year domestic joist shipments have increased 21%.

Our joist shipments have increased over 35%.

The team continues as they say, to perform exceedingly well, both in market share advancement and leveraging our national footprint.

Driven to maintain a sustainable differentiated business, we are focusing on opportunities to maximize our financial performance.

We are focused on providing exceptional value to our customers, committing to the highest levels of quality and timeliness, partnering with them to deliver what they need today, and anticipating what they need for tomorrow.

As we look ahead, we are optimistic concerning the industry, and even more so for Steel Dynamics.

Columbus is one aspect of our story.

And our organic growth projects that are beginning to benefit our operations now, are another.

We have great leverage to the recovering construction markets, and are fully equipped to take advantage of new opportunities that lay ahead.

Our resolve to maintain a differentiated growth Company that effectively and efficiently performs through all market environments is unwavering.

We believe our superior operating and financial performance clearly demonstrates the sustainability of our business model throughout the market cycle.

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.

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

Again, thank you, everyone for your time today.

And Manny, we would like to open up the call for questions, please?

(Operator Instructions)

The first question comes from Luke Folta of Jefferies.

Please go ahead.

Hi.

Good morning, everyone.

Good morning, Luke.

Congratulations on the quarter.

Thank you.

A number of questions.

First question: during the past, you have been able to go around the horn and give us some color in terms of what the order book looks like across the divisions.

How are things comparing now versus the way you exited the third quarter?

Well, let me take a quick shot and Dick I'm sure can chime in.

But just looking across our Steel platform, the Structural and Rail Division, continuing to see steady growth in structural, structural beams, and I think the team has done a good job increasing market share there.

We have experienced a growth of about 16% compared to year-over-year market growth of 6% to 7% or so.

And as I said, premium rail product continues to be well received.

We'll likely ship 40,000, 50,000 tons of premium rail this year.

Dick, I think, yes?

Yup.

Which obviously adds to our value add product mix there.

And I think the rail arena is shifting to a more premium rail percentage of the market, and so we are in good position there to capture some of that.

I think the non-residential markets remain strong, as indicated by an uptick in the MSCI structure shipment data and recent construction starts.

And I think non-residential strength is evident from our Fabrication's New Millennium inquiry and booking rate.

That is seeing a little seasonal adjustment, but still remains very, very strong.

So I would say structural and rail still continuing to build momentum, and the order book is very solid there.

The Engineered Bar, that market continues to be strong.

Back orders are at a pretty high level compared to the last couple of years, so we're excited there.

The Roanoke team, even in a tough market, they reported the best results in Q3 since 2008.

And their backlog remains pretty decent about four weeks or so, 35,000, 40,000 tons, and I think pricing has remained somewhat firm in the merchant arena.

Steel West Virginia, it sells primarily to the truck, trailer, and material handling sector.

And that has seen a little softness the last month or two, and that they're expecting a little softness, probably off 5% next year, but I should add that is 5% off of very, very strong market, so their business continues to be pretty solid.

In sheet, or flat roll, the order rate, I think, continues to be -- and backlog continues to be strong at Butler across all sectors.

I think there is a little softening on the coated products, which is likely, I think, seasonable in one aspect but also we are seeing some building product imports I think that is impacting our Galvalume Jeffersonville business.

And I think that is also impacting Columbus backlog a little bit.

But the lead times continue to be four plus weeks out.

So Luke, generally, I think our order books are very, very solid and seeing a couple of tweaks in turning over a little bit, Dick, but any thoughts?

I can only add to what you said that at the structural mill, that we do have some time on the medium section mill because we have never gotten to a fourth crew, we filled out the third crew.

And so medium section products, we're out selling and selling hard, and so filling that up, the third crew.

And we have developed that market down in Pittsboro.

We have added new products, and that's what we're doing across the board.

We have added threaded bar with our customer there.

We are now making number 8, 9, 10, and 11 threaded bars and going to get this month number 18.

We've done number 20 bars, and so that is an exciting product for very high rise buildings and for bridges being used across the country.

And so these are new products that are coming on.

Also, you mentioned Steel West Virginia.

We had some weakness in a little bit of their product line.

And so therefore, we are developing bulb flats and seven-inch channels and so forth, so we are adding new sections all the time down there.

And again, down at the Roanoke, we are running 100% of capacity, so no weakness showing there.

So I imagine the flat roll, nothing more to add other than we're watching the imports.

We watch the coated products imports.

There's a suspension agreement now getting the 60-day notification there and going back to the way the things were in 1988, 1989, with much higher duties going to be applied to it, things are going to clean up there I believe.

And so, I think it will tighten itself up come the first quarter, so things are good.

Thanks for the color, as always.

Secondly, it seems like a weird point in the cycle to be asking this question, but you're breaking shipment records across the construction divisions, both at the beam business at Columbia City and then in the Fabs business.

Just as we think of -- it seems like we are just in the beginning of a recovery in construction.

As we think of what a full construction recovery could look like, how would you handicap how much more shipment upside you may have?

Well again, not to poach 2014's results, but 2013, we shipped a record for us, 6.1 million tons, obviously we are headed above that this year.

And that was 6.1 million tons where our capacity today, excluding Columbus, is around 7.8 million tons.

So as we said we had about 1.5 million tons of latent capacity there from 2013, so we've got, I think, great leverage going forward on the returning residential and non-residential.

And obviously, we got a new Columbus mill that is absolutely revved up and raring to go.

Okay.

Thank you.

I will turn it over.

The next question is from Evan Kurtz of Morgan Stanley.

Please go ahead.

Hi, good morning.

Good morning.

Just had a question on trade cases.

I saw the Russian suspension elimination this morning.

That was a nice positive for the industry.

But also, one thing we heard a lot about towards the end of the summer was that there was a potential for a trade case to be filed on Chinese cold rolled and coated products, and I'm sure you probably were involved in that.

But we haven't seen anything yet, and I was just wondering if you could perhaps provide an update on what is going on with that one?

Well, I would just tell you that we are constantly monitoring the imports, we have done the investigations, a number of our competitors, along with ourselves, have worked together, through our attorneys to do the investigations, both domestically and in the foreign countries to determine what domestic pricing are of those countries that we believe are guilty of dumping and flooding our shores.

But we don't believe, along with our legal counsel, that the timing is correct at this moment for a successful case.

But that may change, as the markets change, and so we are constantly vigilant and ready to go upon a discussion and enough agreement amongst our parties that we are ready to do it.

So we are vigilant is, I guess, the best way to say it.

I think the general sentiment as a trade commission, I think, is turned positive toward our industry.

If you look at, obviously, the recent ruling on the Russian suspension of duty issue, that obviously helps us, helps the industry, and I think in particular, helps Columbus and the Southeast markets.

And you've seen the industry won the Korean OCTG ruling, and their filing for -- or the industry is filing a welded line pipe case against Korea and Turkey.

And I think this bodes well for us.

It supports, I think, our sentiment that in the next year or two the country is going to be constrained on hot rolled coil, and give some very, very positive market dynamics.

Great, thanks.

And then one other question on imports, one thing we've been hearing is that because of the rail issues and the higher trucking rates and higher barge rates that there has been a lot more regionalization of pricing in the past several months.

And I was wondering if you can confirm that, now that you are actually both in the South and the Midwest.

Are you seeing a big discrepancy in hot roll pricing around, say, the Chicago area, versus some of the more coastal regions in the South?

Well, I think that given steel is a freight-sensitive commodity, obviously, closer to the supply, you are going to get better pricing.

And right now you have had a lot of Russian, I think, material come into Houston, and so the supply is down there.

You definitely are going to get that freight differential.

Fortunately, our Butler facility is Midwest.

It is a reasonable distance from the coast, and we're not impacted quite as much as many of our competitors, I would say.

Great.

Thanks for the color.

The next question is from Tony Rizzuto of Cowen and Company.

Please go ahead.

Thanks very much.

Good morning, everyone.

Good morning.

Got a couple of questions here.

First of all, the ferrous scrap market seems to be in a bit of a free-fall.

Obviously, a lot of factors driving that fallen period of stability, raw materials are down, strong dollar affecting Turkish purchases, and we're hearing more about the Chinese semi-finished billets moving to other countries.

What are your thoughts and how do you see prices directionally over the near term and longer term playing out?

You answered most of your question with the currencies and exports, but the lack of exports and currently the crash, or the crash and the very low levels of iron ore pricing, I think certainly bodes that things are going down in the scrap market.

I think there is an abundance of supply, due to the lack of exports, so there is nothing that I can see that is going to put a real solid floor underneath the scrap market until we see some movement in the iron ore pricing on the international basis, or the dollar weakens to a point where exports are attractive.

And wouldn't you say Russ that that pressure is going to help re-establish the iron concentrate/scrap ratio that has been at a little bit of a high last six, eight months?

Absolutely.

Which is in my mind a huge plus for the electric arc furnace producer, which is going to hopefully put us back in the bird seat from a hot metal cost perspective again.

What about you?

When you mentioned the Russian suspension agreement, obviously we have seen that come out, obviously a positive for the industry.

I was a little bit surprised how quickly the discussion came together.

There was a lot of talk about a review process that was not expected to be completed until maybe even the first quarter or next year.

Wondering how you feel about that, and obviously this should be helpful, particularly should it be helpful to you as you increase your exposure in the southeast?

How do you tend to look at that?

Well, given Russia is one of the largest importers of hot rolled coil, constraining them is, obviously, I think, a big benefit to our industry.

As I said earlier, certainly a huge benefit for our Columbus facility that trades in the southeast arena.

I'm not so sure we know what happened behind the scenes, obviously American/Russian relationship is not the best, and maybe that accelerated it.

Well, just for the record, we have been petitioning the commerce department for months.

We have been signing documents and submitting records to them since midsummer.

And so, we were disappointed with how slow it was going mid year, and so then the signals we were getting were disappointing, so this unexpected year-end movement is basically a catchup to me.

So I'm pleased with the performance of the Department of Commerce.

And so, it appeared to be fast, but it has been in the works for quite a while.

The petitions have been in the works.

It is interesting because I was in Australia recently, and I was talking to some of the big iron ore miners over there, and I was asking them questions about how they felt about possible trade laws against the Chinese in steel.

And they seemed to hint that there was much greater sensitivity to that by steel makers in other countries.

And this whole thing, obviously, Russia, and the sentiment against what is going on, for obvious reasons, I think that is a key point here.

Can you make any comments about, is there some increased sensitivity on the Chinese front?

Is that why you made the comment earlier that it is just not the right time?

Maybe you can elaborate on that a little bit more, because we haven't seen, obviously, those trade cases filed; much rumored, but it is not the right timing.

Maybe a little bit further expansion on that might be helpful.

Well, I would just tell you that we have to look at all of the possible participants in any trade case.

We have to look at our -- the government looks at a lot of parameters, including your financial performance and the order intake, what your sales prices have been.

And again, the documents as to what the local prices have been, both in their originating countries, as well as here.

And so when you take a broad brush approach to it, all that has to be considered, and then you start gleaning out of the whole field as to which countries may or may not be suitable for a case.

And if you have to eliminate too many of those countries and too many of the tons, it plays against you.

And you want to make sure that you have a -- you don't want to keep going back to the well for small pickings, let's say.

So we want to make sure that you have a deliverable, number one, and then number two, that it is a worthy one.

So we are watching it, and we have our data, and we will continue every quarter to refresh that data.

Understood.

Thank you very much.

That is helpful.

You're welcome.

The next question is from Sal Tharani of Goldman Sachs.

Please go ahead.

Thank you.

First, some housekeeping questions.

What is the -- Theresa, what is the interest expense, depreciation, CapEx, et cetera, how we should think of, over the coming quarters?

The interest expense on a quarterly basis with the new cap structure is probably going to be just less than $45 million per quarter.

Depreciation this quarter was $58 million.

But that would be estimated purchase price allocation, these numbers could change.

But it is more likely to be closer to maybe $75 million per quarter going forward.

But that -- we'll have to give you a better number on the January call.

And then CapEx for this year, we expect it to be somewhere between $120 million and $130 million for the year.

And moving into 2015, the early estimates would be somewhere between $150 million and $175 million.

But that is without specific projects or anything like that.

Great.

Thanks.

I want to ask a question on the Fabrication side.

Your shipments revenue, operating profit, operating profit per ton, every one of those metrics was highest we have ever seen, even before the 2008 or late 2008 downturn.

I was just wondering was there any specific projects you got this quarter, or is this something like a trend we should think about going forward, or something special in this quarter which drove this significant upside?

Well, you talk about a little housekeeping, let's just -- I would make a few comments on Fabrication.

Our joist and deck backlogs remain strong entering the fourth quarter.

And I wanted to just mention specifically, our teams and our customers were executed very well year to date.

Together, they have worked on a lot of mutually beneficial projects, but to your point, nothing out of the ordinary.

They are poised to continue to do so going forward.

We would like to thank our joist and deck customers for continuing to afford us the opportunity to earn their business each and every day.

The biggest impact on -- the biggest outside factor was probably that the capacity in the industry more matches the demand better than it has in the last 30 years.

So we would like to believe that this is a new paradigm, and we stand prepared to service current levels or even higher levels.

The question earlier about fabrication capacity and how that affects things, to achieve our current output, 90% of our production occurs during daylight hours, five, maybe six days a week.

This leaves an awful lot of room for continued growth.

And it is a matter of adding crew here or there as Mark mentioned earlier, to respond rather quickly to a larger demand.

So we don't see New Millennium up against any kind of ceiling in almost virtually any scenario.

Sal, one thing I would just point out is in 2008, we are configured much differently today, with the national footprint with fixed, basically operating facilities, so we're structured much differently than we were in 2008, as well.

That's a good point.

And also on the rail side, Mark or Dick, what is the market and where do you think you will be in the next couple of years when the premium rail qualifications are done?

And what percentage do you think of your mix will be premium or head hardened by, let's say, the next few years?

Well, I think in general, the mix in the industry -- well, first off the markets, the market continues to strengthen, as Mark pointed out, in the growth of the maintenance track, as well as the new track.

It is probably over 1 million tons, 1.1 million is a good steady market.

In general, I would tell you that head hardened premium product is greater than 50%, and it continues to move in the upward direction as a percentage year over year.

And that is for two reasons, number one, it is a reduction in the spread between premium rail and standard rail.

And number two, the higher utilization rates of the various tracks give the railroads less time to take the tracks down for replacement.

So therefore, they are willing to spend a higher amount of money on the track itself when it is being installed.

And so our own attempt to take advantage of that, as Mark pointed out, we're committed to pursue about 350,000 tons of rail product, and our production will mimic the national percentages as best our equipment can handle.

And of course, the Structural and Rail Division is always asking for, like any division, more money to expand, and we will watch what they do and how they utilize it, and make those decisions appropriately.

Great.

Thank you very much.

You're welcome.

The next question is from Jorge Beristain of Deutsche Bank.

Please go ahead.

Good morning.

Jorge with DB.

My question is really on the steel fab side, as well.

Not to beat a dead horse, but if you can just really talk about what is driving that sequential uptick in EBIT performance?

We saw a very strong gain in volumes there, and you have intoned you're not capacity constrained there.

Can you just talk about what is the demand driver?

What is pulling that product?

And do you believe that those products are import defensive, as you flagged earlier?

Well, I think, obviously, the demand is picking up across the industry.

I think the team has done a phenomenal job building a national footprint now.

And so they are getting into the, what we call the big box consumers, the Walmarts, the Home Depots, people that want a national supplier, not a regional supplier.

So, the market has picked up.

I think the team has done a phenomenal job picking up market share because of that.

And the financial, or the step function improvement in the financials is volume driven.

It is a business that when Chris puts on a new shift at one of his plants, I mean the profitability of that plant shoots up dramatically.

Increased demand today.

And we still -- it is still very elastic, our capability.

But when we need more tons, it is not a matter of spending capital; the lines are there, it is just a matter of increasing our crews.

But is it just -- you said that are you now accessing these big box retailers, is that something new or can you point to any specific end use that would be driving product demand in the US?

No, I think Mark just makes the point that we are more diverse in our approach to the market, not just auction marks, but national accounts, metal building accounts and things like that.

So we have not only expanded our physical footprint, but we have also had a different approach to market, and continued then leveraging the volume, compresses all of our costs across the board, and this is not something that was unexpected at these levels.

This is what the team has been planning, and we are poised to continue to capitalize on those opportunities.

And as I said earlier, if you look at the steel joist institute numbers, year over year, joist shipments have increased 21%.

That is just the general demand and it supports our view that is continued that non-residential construction continues to grow.

The national footprint I would say, has allowed us to surpass that overall industry growth and our markets, our joist shipments increased 35%.

Great.

Thank you.

And the projects, I'm sorry, the projects, are not just limited to big box.

We are into a good healthy mode where if you're just doing institutional private work, it is never a good sign; if you're just doing the big box, it is not as healthy, but we are doing a good mix and our industry is seeing a good mix across the board.

Great, thank you.

The next question is from Timna Tanners of Bank of America Merrill Lynch.

Please go ahead.

Hey.

Good morning.

Good morning, Timna.

Two questions.

Now that you have got into the Columbus facility and gotten to look around, anything that is surprising or new?

And any thoughts on ramping up volume?

Is there enough market appetite to bring it to full speed in terms of both value add and volume?

Well, we were pretty excited when we were the fortunate winner.

The truth, the basic value without synergies, without anything, it was an incredible opportunity for us.

I think we only have become more and more excited.

As the teams and again, this is not a top down, we are injecting and forcing SDI stuff into them.

It is a two-way street.

You've got two incredibly talented teams, and it is a case of one plus one is going to be at least three, four, if not five.

So, we remain incredibly excited about the bricks and the mortar and the technology there, and the product diversification that it is going to provides us, and provide our customers.

We are incredibly excited about the geographic diversity it gives us, that access into the southern markets.

But as importantly, probably more importantly, access to the Mexican market, which is a -- that's growing from an automotive standpoint almost exponentially in Monterey and to the south.

The capacity, if you look at -- or I should do a little bit of back calculation, we did ship as I said about 175,000 tons, or 175,000 tons of shipments accrued to us for the couple of weeks we owned Columbus.

You got to be a little careful there.

There is about 30,000, 31,000 tons of that which is coil sales and that Severstal already had in the works.

So a real number from the mill is about 144,000 tons.

And you extrapolate that out, it comes out to roughly the 3.4 million tons of hot band capacity that has been advertised.

I think it was a production record last month?

We had CSP, a Castor record, a record 30-day month record, and we also had a Camden mill cold mill record and we also had galvanizing tonnage records.

Again, that is not just -- that is not because of SDI.

That is because of cooperation and integration, communication.

It is a whole lot of things.

So everyone is excited.

So it is small things.

Small tweaks.

And there is just a lot of potential.

Again, not overnight.

But a lot of upside opportunities.

I think we already stated, the purchase price was pretty conservatively six times the expected 2015 EBITDA.

Obviously, our expectation as that the markets remained as they are today or strengthening to achieve that.

And in all honesty, I think it should allow for higher than through-cycle for our metal spreads.

I think we stated at some point that synergies over the longer term are going to be about $30 million, and $10 million, $15 million of that perhaps last year, or not last year, but 2015, next year.

As Dick said, over the longer term, we expect from what we see to garner a lot more than that.

So it is an incredibly exciting opportunity for us.

And again, just being down there, for the guys and girls and the families and the kids on Saturday, they are pumped.

Okay.

And if we could get over to the uses of free cash flow.

So I think you have been really clear that even with this transaction you are pretty excited about your ability to pay it down quickly and have a lot of extra liquidity, further alternatives.

Can you just remind us of some of the options you're looking at, or the priorities of free cash flow use?

Well, as we look post-acquisition, our capital profile, our balance sheet remains incredibly strong.

As you said, we currently plan to pay down some debt next year to allow us to get more comfortably within a sort of preferred net leverage of 3 times or less.

CapEx as Theresa suggested looks to be in the $150 million, $160 million range.

I mean that is preliminary.

We are still looking at and still analyzing some organic opportunities, growth opportunities for us.

Earlier this year, even without the Columbus addition, we increased dividend by 5%.

And we would like to continue a positive profile there.

And as we always said, and we will continue to be committed to prudent growth wherever that growth may take us.

Okay.

Thanks.

The next question is from Matt Murphy of UBS.

Please go ahead.

Good morning.

On the prudent growth, I mean we saw the Gallatin Mill sale.

Are you still looking to go in the direction of actual capacity, or is it sort of downstream value added?

Are you focusing on any one area right now?

I would say our focus would be downstream value add more than anything.

Okay.

And maybe just another housekeeping one, can you give any guidance on go-forward levels of SG&A?

There is really nothing in particular that we think will change dramatically.

We tend to look at it on a percentage of sales basis and it tends to be pretty steady, and with the addition of Columbus, we would expect it to still stay in that range as a percentage of sales.

Okay.

That's great.

Thanks.

And then maybe just one on Minnesota ops.

So outside of the iron recovery, how do you feel about the process?

You commented last quarter that you expected some significant improvement.

Is this still something where you could see it profitable in 2015, or what is the outlook?

Well, I think we are pretty excited with what we've seen, at least from our perspective.

The guys had a step function improvement across the board, not the least being a positive financial impact to us, albeit still a loss, which is still a lot less loss than we have had in years past.

We are pretty confident.

Again it depends where transferred pricing takes us.

It is somewhat market dependent.

But we'll certainly be, we believe, cash positive going in early 2015, and we will see where the markets take us from there.

Okay.

Thanks a lot.

The next question is from Phil Gibbs of Keybanc.

Please go ahead.

Thanks.

Good morning.

Good morning, Phil.

Theresa, I had a question on the sheet mix, if you had that available.

Certainly.

So I have the flat roll, the Butler flat roll mill mix.

For the third quarter, they had shipments of hot roll of 299,000 tons, P&O of 92,000 tons, cold rolled of 60,000 tons, hot roll galvanized was 120,000 tons, cold roll galvanized was 43,000 tons, painted products were 114,000 tons, and Galvalume was 10,000 tons for a total of 738,000.

Okay.

And should we assume that Columbus was mostly HRC?

Yes.

Okay.

And you had talked about the D&A being $58 million going to $75 million.

In your release, you had $66 million.

And I realize some of that probably had purchase price accounting.

I'm just trying to bridge that into the fourth quarter.

Well, $66 million actually is reported in the cash flow, Phil, as both amortization and depreciation.

So the number that I gave you earlier was just the depreciation amount.

Okay.

And again, it is still early on the purchase accounting side, but we are thinking that depreciation is going to be closer to probably $75 million per quarter.

So out of that $14.5 million that you gave for the purchase price accounting this quarter, was there a lot of that D&A?

No.

Or step up there?

That was just all inventory?

It was very little D&A.

It was almost all inventory.

Okay.

And then as far as the other expenses, was that about $20 million in there that you had for the acquisition?

It was slightly more than that.

Again, the total adjustments were about $40 million.

So if you had $14.5 million going through COGS, you had about $25.5 million going through other expense.

Terrific.

And then just one quick one.

As far as your non-residential construction exposure overall, in the steel business, any way, Mark, to categorize how much your steel shipments is either going into the non-res market or infrastructure markets?

Or how you think about that?

What is going in today or what the --

Yes, I mean --

Leverage going forward?

I'm just trying to think of how much of your steel business is tied in non-res right now, just on the finished steel side, not on fabrication?

I don't have that off the top of my head.

So much of that goes to the service centers that we don't track.

Flat rolled goes into culverts and galvanized goes into ductwork.

I guess the simple answer is we just would be guessing.

Okay.

Thanks so much.

The next question is from Andrew Lane of Morningstar.

Please go ahead.

Hi, congratulations on a great quarter.

Thank you.

So we view the use of hot liquid pig iron charge at Butler as a real differentiator for your flat roll division.

How does the Columbus mill currently obtain iron units, and do you plan on making any changes as to how you will supply iron units to that operation?

Would you be shipping HBI there from Butler, or maybe just any details you could provide on that?

Historically, Columbus has consumed roughly in the 20% to 25% range for pig iron and HBI, principally pig iron imported in.

Obviously, they have a relationship with Russia, so I'm sure they had some Russia coming in and some Brazilian.

With line dynamics and with the Minnesota operation and without Columbus, we actually became pig iron long, and now obviously the Columbus operation would become on a consolidated basis pig iron short.

So there is no doubt I'm sure that some of that -- the nuggets will find its way down to Columbus.

Okay.

So freight costs wouldn't be prohibitive across that distance?

Not really, no.

Okay.

Thank you.

The next question is from Brian Yu of Citi.

Please go ahead.

Great.

Thanks.

Good quarter.

Mark, I've got a markets-related question, and this ties in a little bit with what Tony asked earlier.

And that is, if I look at where the scrap markets are, heavy melt and shredded, it is about the same as where we were last year, hot rolled prices have come down and they're about the same.

But in the international markets you've got iron ore that's down about $50, and nat coal that's down about $40, so that means blast furnace input costs.

Again, the international markets are down about $100.

And I'm just trying to figure out why is it that scrap prices are still resilient here?

Do you see enough of a move in the scrap price that the US mini mills can regain some of this cost differential that we have seen basically flare out?

Well, we believe so.

I think we have seen it the last month or so, and quite likely November, given the -- where the export market pricing is today.

There is a likelihood that scrap is going to move down for sure, December, who knows maybe -- we don't have a crystal ball that clear or that far ahead.

But we do feel that -- and as you say, scrap has been very, very sticky compared to iron ore here.

And iron ore arena has some incredibly week fundamentals given the Chinese use growth, so it has come off a lot stronger than scrap.

But I think longer term, we'll see scrap move toward that historical basis.

What would you attribute the strength in scrap to?

And then more specifically I guess for November, any guess on what you think prices could go down by?

I think we have refrained from putting numbers other than directionality.

As you know, it's an incredibly tough market, and I'm not sure Russ or I are any better than anyone else.

Got it, alright.

Next question, just on Magnetation, Des mentioned that you are going to bring in some equipment to try to fix some of the finer finds.

Is this some minor, like you're putting an additional screen?

And then also, can you give us a sense of where Magnetation -- not Magnetation, but just Mesabi Nuggets costs are today relative to that $340, $350 target?

Well, firstly, the equipment that we are putting in, and just to add color, as we mine the basin, it went from a coarse tailing to a very fine tailing, and our equipment just doesn't get the yield recovery of the finer material.

The actual amount of material flowing through is far greater than the rated capacity of the line, it is just that we're not recovering that finer stuff.

And the equipment going in again, it has already been operational.

I do believe on an ongoing basis at Magnetation, we should retrieve that recovery and get the cost back down.

That is the intent and expectation.

Relative to the current costs, again, we have refrained from sharing that.

We are still confident in the $340, $350 cash number going forward, which would allow us, given the current market to be -- transfer price -- to be cash positive in 2015, early 2015.

Okay.

Great.

Thank you.

The next question is from Aldo Mazzaferro of Macquarie.

Please go ahead.

Good morning.

And congratulations on the acquisition.

I just wanted to ask a question on the pricing, Theresa, for the quarter, came in at around $840, can you comment whether there was an impact of mix from the Severstal material in that number?

Out of -- they only had 175,000 tons of our total 1.9 million tons shipped, so any influence they would have had would have really been minimal.

And the drivers of the average price improvement really were at, as I mentioned, from the Flat Rolled Division, and from the Structural and Rail Division.

Right.

So going forward, Theresa, if you did about say 800,000 tons a quarter, that would be a bigger chunk, about 30%, 35% of your mix.

I mean am I far off base if I were to assume something like about $100 a ton differential in pricing versus your average versus the Columbus mill?

I probably am not going to go there, Aldo.

Okay.

All right.

Well I would note that the productivity of that place seems amazingly good at something like 0.4 man hours, so congratulations on a great deal.

And Dick, can I ask you one quick question on the suspension agreement with the Russians?

About three quarters of what they import to the US is in the form of semi-finished, slabs and stuff.

Would you say that this -- large tariffs they're talking about, are those going to cover the slabs, or is that just on the flat rolled or hot rolled coil you think?

No, it actually only covers hot band and plate and coil, so it is only those two products.

Great.

So there is no tariffs or quotas on slab, right?

As far as I know?

No, you're correct.

One final thing.

Did you say you lost some tonnage in the quarter at Butler due to an outage?

Can you say what that was about?

We just had a regular scheduled outage of four days.

Four day maintenance outage.

Just four days.

Great.

Thanks very much.

Take care.

Thanks.

The next question, Nick Jarmoszuk of Royal Bank of Canada.

Please go ahead.

Hi, I had a question on Columbus given the production figures that you have seen this past month.

How are you guys thinking about debottlenecking opportunities, and what would the capital be involved to expand the capacity there?

Well, I think it is already demonstrating an incredible capability through the hot mill.

3.4 is -- I think that is the rated capacity.

Well, that is the desired capacity, it's rated only by our own wishes.

And likely, if the team does what the Butler team did, there may be some, a little upside on the hot band production.

Obviously, our intent is to increase the value add output there, so that the actual shipping volume may actually come off a little bit, because of the [U] lost through pickling and the cold reduction.

There is not a huge amount of capital, at least as I see it, to unbottleneck.

It is more a market opportunity getting in the right markets, and just fully utilizing the capabilities that they have today.

Okay.

That's great.

Thank you.

The next question is from Sam Dubinsky of Wells Fargo.

Please go ahead.

Thanks for taking my questions.

A couple quick ones.

Can you discuss what percent of your business next year will be contract-based?

Or will you still mostly be a spot selling in the market?

The latter.

We will be principally spot-based.

Any contractual business that we do is just on a volume commitment basis with some form of index pricing.

We don't have any contracted fixed price long-term deals.

Okay.

Great.

And then another housekeeping one, just the last one, steel fabrications, did the quarter include any benefit or synergies from Columbus, or is that really just a clean quarter on improved construction demand?

That is just an absolute clean phenomenal team job.

Okay.

And given how high the business is running and given your commentary on improved fundamentals, do you think this division can buck typical seasonality?

Or should we model profitably down in coming quarters due to weather?

Well, it has bucked seasonality to some extent as it has recovered from the 400,000-ton annualized rate in the market to over 800,000 tons or 900,000 tons this year.

As you get up to closer to the historical norms, we would expect seasonality to rear its head again to some degree.

But our backlogs are still at historically high numbers going into the fourth quarter.

Great.

Congratulations on the phenomenal quarter.

Good luck.

Thank you.

The next question is from Charles Bradford of Bradford Research.

Please go ahead.

Good morning.

Good morning.

In looking at the purchase price of Columbus, have you made any kind of calculation of what the replacement cost would be for the asset?

Chuck, that is part of the many-pronged methods of which you look at valuation, so that is something that is contemplated.

I'm not sure that is something that we would want --

Well, the question really gets down to Big River, which is likely to be -- it looks likely to be built.

Where would be the differences be?

Because they're talking about electrical steels and a few other things.

Yet it has the same parent as Columbus.

Any idea where the differences could be?

Well, what we found interesting is during our due diligence, that there were quite a few items at Columbus that were off-balance sheet, let's say, from an asset perspective.

So I can't tell you what -- how they are going to do their accounting there, so when they announce how much the cost is, that is a question for them.

I would tell you, replacement cost is higher than what we paid for it.

We got I think a very fair deal for it.

Because they had two galvanizing lines, two pickle lines there, they have a reinspect line, and so forth; they also spend quite a bit of money in building that line up.

They put a lot of concrete into it.

They used different type of construction techniques than we would have utilized, and so we got a good value, a very good value for the assets.

And then they were also in a very high seismic zone area, so they are going to spend even more money building a steel mill in that location than others have traditionally built.

So, whatever.

So, good luck.

So there was some talk, when you were looking at Columbus that the location wasn't ideal because it is not exactly on the river.

Is there some kind of a transportation cost penalty?

Chuck, there is, but not to the extent that we presumed or assumed over the years.

And there are other benefits that offset that.

Well, thank you very much.

And good luck.

And Chuck, going back to the commentary on Big River, I was out at the picnic, Columbus, as I said, and I was starting to get a little insulted by any connotation that those folks are going to compete with us.

You have got two of the best most efficient steel making, sheet steel making teams in the damn world between Butler and Columbus, and you saw the same team is building Big River, and the financial results were not necessarily phenomenal in the early stages of Severstal, and to use the steel making vernacular, the Columbus guys are ready to kick ass.

Terrific.

Thank you.

The next question is from Nathan Littlewood of Credit Suisse.

Please go ahead.

Thanks for the opportunity.

Just had a question on the Fabrication business capacity.

You mentioned that it was quite possible to add additional shifts there and increase the throughput.

Could you just clarify how many shifts are there now?

How many could you conceptually add if you were to go, whatever, double or triple time?

And how should we think about the potential for that business on a volume basis, if the demand were to exist for it?

Well, there is a minimum arrangement that most of us have found in the industry that you need to hit to a certain point to be able to make fair returns in this world, and much times that is a three line configuration that gives you the ability to cover most products required in an efficient manner in any given project.

We are basically at that configuration.

And beyond that, it is simply just adjusting to the market conditions.

It is very hard to explain, you have to make a minimal investment to build joists in the first place, and that typically enables you to satisfy the market and huge surge opportunities at times with more folks on the team.

So I'm at a loss to really explain it any better, other than we have a lot of latent capacity that doesn't cost us a lot in the big picture, because we have to build what we have to build to build a minimum amount of joists.

So, I would hate to promise that we could do -- run around the clock because we have never seen a market call for that.

Theresa?

Is it fair to say Chris that our market share today is between around 35% to 40%, and it is hard to see a market for joists and deck where we would not be able to increase our volume to match that market share.

The way we are positioned today, and there has never been a market in the history if we look back, that would tax our ability to service at those levels or maybe somewhat higher.

Okay.

So we could look at the historic maximum size of the market, keep the market share relatively constant, and say that is potentially the blue sky scenario then, is that fair?

That's fair.

I wish I would have said that.

(Laughter)

The other question I have for you and apologies if this is a little naive.

My US geography is perhaps not as good as perhaps some of the other people on this call, but the imports that you are competing with in this sort of Indiana region, where would they be physically coming from?

Would they be coming from down in Texas or somewhere further up the coast?

Well, there is a couple of points of entry, but it is not necessarily competing with the physical ton.

It is competing with the, sort of the pricing pressure that collective imports are putting on the market.

Okay.

I guess where I was wanting to go with the question is I am trying to understand the sort of freight differential between the coast and inland at the moment.

You are very more focused in the inland parts of the country, as I understand it.

And as previously, someone else was asking you about, we have obviously seen rail and trucking rates go up a lot.

So I just want to understand, if we could, what is that sort of freight barrier at the moment, maybe in dollars per ton, and where do you see it as having been historically?

If you are coming up obviously, a massive amount comes into the Houston area.

And to bring material up to the midwest, is probably today, and this will be a combination barge, and it depends where you are, if you're on the river, it is going to be less, but to a land band midwest arena, such as Butler, it is probably $50 plus per ton.

Okay.

And where do you suppose that might have been say a year ago?

Not much different.

Probably a $10 off that.

Okay.

That's not too bad.

Cool.

The final question I had was just on Minnesota.

We did some math on this a little while ago, and based on the longer-term targets that you have talked about in the reaching the 360 kiloton per annum.

It seems to me that if everything goes as planned the potential earnings opportunity here is about $16 million per annum.

Obviously that has come down over the last couple of years, as the project targets are not quite as ambitious as they once were.

But when I think about a $16 million opportunity in the context of earnings losses which have been $5 million or $10 million a quarter, it is going to take a lot of years to recover in earnings the losses that you have been making.

Is there something that might not be apparent to us in terms of exit costs for this business?

I am just a little confused that your apparent commitment and dedication to the thing, when, with all due respect, it seems like a relatively small earnings opportunity at this point, a relatively small upside in the context of other things, which potentially are much bigger earnings that seem to be taking up equal amounts of your time.

Well, I think it is easy to be the Monday morning quarterback.

And it wasn't too long ago, I think 2012, that people thought that pig iron was going to be $500 a ton or more.

And that was the original investment premise.

To your point, obviously raw material commodities are off.

And today, with pig iron in that $400, $410 range on a [number] basis, the project can be cash breakeven and eventually make a little bit of money.

It certainly gives us a hedge, though, against the scrap markets, and a very secure supply of a very, very high quality material that can facilitate the greater productivity in the electric arc furnace.

There is a lot of sunk capital there, and I think we are looking at perhaps more on an incremental basis than looking at the project in full scope.

Okay.

And if we were to get to a point where for whatever reason, things don't work out, and you said you know what, we had enough, we're going to walk away from here, what sort of closure and exit and rehab costs might be associated with that decision?

We have not even studied that.

Okay.

Fair enough.

Thank you very much.

Appreciate it.

The next question is from Sal Tharani of Goldman Sachs.

Please go ahead.

Thank you for taking my question.

Mark, in one of the remarks you mentioned that after 175,000 ton shipments from Columbus, there was something which belonged to Severstal Russia I think you said?

Well, the Severstal were using the American organization to bring coil in and resell on an brokerage basis.

And as we acquired, in the transition, we obviously took ownership of the remaining coils, en route, and that was about 30,000, 31,000 tons of that Russian coil that we acquired and it was already pre-sold, so there was no risk there to it, but that just went through the volume.

Got you.

Was that on the balance sheet of Severstal of Columbus, or was it on the balance sheet, prior to your purchase, was it on Columbus balance sheet, or on the Severstal Russia balance sheet?

It was on the Columbus balance sheet.

Okay.

I was just wondering, the Columbus profitability, was it before you purchased, was it augmented by this Russian steel coming in?

Sal, they took a flat $20 a ton fee for the handling of that, they did that so they -- they basically then didn't have somebody else out marketing the Severstal Russian steel.

They wanted to know what was going on in the marketplace, so there wasn't any other wild pricing going on.

They wanted to have some control of it.

So they took a fee for the handling of those transactions.

As soon as we purchased it, we said no more sales, we didn't want any more transactions going down, and then when we closed it, those ships were already en route, and those hit the docks and cleared through all of the sales, and they were behind us.

Okay.

And that's it.

I mean they are all behind us.

Okay.

Great.

I understand.

And also, one more thing, on the content you mentioned of pig iron/HBI you put in your Butler facility, 25% to 30%, is that going to remain so?

Because there has been a lot of talk with this DRI coming up in a couple of other places that people are using as much as 70%, 80%, or 60% DRI.

I was just wondering in your experience, what is the limit you can go, because pig iron apparently is even better than DRI in terms of melting capability and so forth, and I think Mesabi project product is also supposed to be very good content of fine.

I was just wondering what is your view how far you want to go with this thing in terms of how much you want to use as a percentage of total input mix?

Okay.

Firstly Sal, the percentage I mentioned, the 20%, 25%, was at Columbus, not Butler.

Butler has historically been, I think, around 12%, and that's in a combination of the liquid plus the nuggets.

If you look at -- and in all honesty, it is a value proposition, in the most part.

It is just, what is the cheapest balance of raw material at the end of the day, in your ladle of molten steel.

DRI, you can -- there are people out there selling almost 100% DRI.

You've got to have a melt shop fully equipped to do it.

And obviously on the pig iron side, you tend to be limited, because pig iron has -- is a higher carbon content, and you get to a point where you get much more than about 25%, 30%, you slow down the operation because yet you've melted it, but you have to remove and decarborize the material.

So there is a practical limit of right around 25%, 30% in the most part for pig iron.

Okay.

Understood.

Thank you very much.

Thank you.

That concludes our question and answer session.

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

Thanks Manny.

Quite briefly, if you look at SDI as a Company today, I do believe our sole headwind is just the import pressure.

Besides that, I'm extremely optimistic for our industry, and again, really optimistic for SDI as a Company.

We continue to see solid US GDP momentum, particularly on the non-service steel-consuming sector.

Residential construction, we believe, albeit choppy and noisy, it is upward.

Non-res construction is truly growing and is a positive trend.

Energy markets are growing.

And those will constrain hot band coil availability, I think in America, in the next couple of years, so I think that will bode very well for us.

Automotive stays strong.

And there has been some very positive structural changes in our domestic steel industry in the last year or two.

Scrap pricing, as we suggested, we feel is in a downward trend, and I'm not so sure the historic ratio will be totally established, but it certainly is headed toward that level.

And I think that gives us margin expansion opportunities for the electric arc furnace producer.

And I think it sets the stage, an incredible stage for the SD iron.

We can leverage our latent steel capacity even before Columbus.

We still have got a lot of volume related to residential and non-residential construction that we can exploit.

We are starting to capitalize now on our organic growth projects, premium rail, and also for Engineered Bar.

And we are going to gain incredible value combining the teams at Butler and Columbus, and truly optimizing the margin, the value we can get from that.

And as we discussed, Chris and the team have done a phenomenal job on the clarification side.

So we've got all engine, or all cylinders are pumping out.

You combine that, you get an incredibly strong cash flow.

Great balance sheet allows us to consider future growth opportunities.

We truly have terrific customers.

And most importantly, we've got a phenomenal team.

So, I think everyone around this table, we get up every day, we are in the steel industry, but we get pretty damn excited to come to work and work with all our employees.

And so to each and every one of them, I would say, hey, thank you, and work safely each and every day.

Thank you for your support, folks.

Bye-bye.

Thank you.

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

Thank you for your participation.

And have a great day.