Steel Dynamics Inc (STLD) 2015 Q1 法說會逐字稿

Good day, and welcome to the Steel Dynamics first-quarter 2015 earnings conference call.

(Operator Instructions)

Please be advised this call is being recorded today, April 21, 2015, 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 Ms. Marlene Owen, Director of Investor Relations.

Please go ahead, Ms. Owen.

Thank you, Manny.

Good morning, everyone, and welcome to Steel Dynamics' first-quarter 2015 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 from 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, April 21, 2015, 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 can be found at the investor center advisory information tab on our Steel Dynamics website, and our Form 10-K annual report under the captions forward-looking statements and risk factors, or as applicable or 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, everyone.

Thank you for joining us today.

It's certainly been an interesting first quarter of 2015.

Some significant industry shifts have taken place that were fundamental to the domestic steel community.

I believe others are still occurring.

But I'll turn the call over to Theresa for a few comments before providing thoughts on these industry and market dynamics, and how Steel Dynamics is positioned for both near and longer-term opportunities within the landscape.

Thank you, Mark.

Good morning, everyone.

To begin just a quick note regarding the format of our supplemental data this quarter, based on questions concerning the reconciliation of operating income and the calculation of adjusted EBITDA, we've modified the format for clarification and additional transparency.

You should be able to still find all of the data previously provided.

Our first-quarter results were negatively impacted by the continuing challenges related to excessive steel import and significant scrap price volatility, which led to meaningful decreases in domestic steel pricing and shipments.

Excluding $17 million, or $0.04 per diluted share of call premium and other finance expenses associated with the March senior notes repayment, our first-quarter 2015 adjusted net income was $40 million or $0.17 per diluted share, which is above our adjusted guidance of between $0.12 and $0.16.

This compares to sequential adjusted fourth-quarter 2014 net income of $97 million or $0.40 per diluted share.

Including the finance charges, first-quarter reported GAAP net income was $31 million or $0.13 per diluted share.

First-quarter 2015 consolidated revenues were $2 billion, 19% lower than the sequential fourth quarter, as a result, operating income was $100 million compared to adjusted fourth-quarter results of $179 million, a decline of 44%.

Decreased steel volume and pricing drove the decrease in operating income.

Most impactful within our flat roll group.

Steel imports and scrap price volatility created a challenging operating environment.

For the first quarter, steel shipments decreased 381,000 tons to 1.9 million tons, a 16% decrease compared to the fourth quarter.

Metal spread also contracted, as the cost of scrap used in the first quarter declined $34 per ton, while our average steel sales price fell $43 per ton.

The full benefit of lower scrap prices was not fully realized in the first quarter, as we first use the higher priced scrap in inventory because of our FIFO accounting.

Additionally, with lower production rates, the timeframe to use existing raw material inventory was longer than our typical one-month lag.

We will realize the benefit of lower-priced scrap in the upcoming second quarter.

For our metals recycling platform, fair shipments decreased 7% in the first quarter as domestic steel mill utilization declined.

And metal spread also contracted as selling prices decreased between 25% and 30%.

Non-fair shipments also declined about 10%.

As a result, our metals recycling operations recorded a slight loss in the first quarter, as operating income decreased $3 million sequentially.

A much different story for our fabrication operations.

The positive momentum continued into the first quarter.

Despite the expected seasonal decrease in volume, operating income improved to $189 per ton, compared to $159 per ton in the fourth quarter, a $30 improvement.

As a result, first-quarter 2015 operating income from our fabrication platform was $21.4 million, slightly below the record $21.7 million achieved last quarter.

We continue to see improvements in underlying nonresidential construction demand, good news all around, as the construction sector is also the largest domestic steel consumer.

During the first quarter of 2015, we generated strong cash flow from operations of $235 million.

Operational working capital provided $93 million, as inventory and customer account values declined.

First-quarter capital investments totaled $33 million.

We still estimate annual 2015 capital expenditures to be between $150 million and $175 million.

The number could increase as we proceed through the year and evaluate new growth projects.

As mentioned earlier, in March we repaid our $350 million, 7 5/8% senior notes, which were due in 2020.

They were our highest coupon debt.

We incurred $17 million of finance costs, which are reflected in other expenses on the other income statement.

This debt reduction resulted in annual interest savings of $27 million.

We also increased our cash dividends to shareholders by 20% in the first quarter.

This follows increases of 5% in the first quarter of 2014, and 10% in the first quarter of 2013, demonstrating evidence of the continued confidence of our Board of Directors in the strength of our cash generation capabilities, financial position, and optimism concerning our future.

Throughout market cycles, our operating performance generated strong cash flow, based on the low, highly variable cost structure of our operations.

Combined with our strong cash flow performance, even after deleveraging our balance sheet and increasing shareholder dividends, our resulting liquidity at March 31, 2015 was more than $1.3 billion.

Total debt decreased 12% to $2.65 billion, while net debt decreased 6% to $2.5 billion.

Coupled with pro forma trailing 12-month adjusted EBITDA of just over $1 billion, net leverage decreased to 2.4 times.

Our credit profile is already aligned with our preferred 3-cycle net leverage of less than three times, a testament to our disciplined approach to growth, creating shareholder value through sound capital allocation and an efficient balance sheet.

Additionally, our debt maturity outlook is inherently flexible.

We don't have any near-term meaningful maturities, and those in the longer-term are well laddered and have call flexibility.

Looking forward, we believe that our capital structure and credit profile has the flexibility to not only sustain current operations, but to support additional growth investments.

Super.

Thanks, Theresa.

Nothing is more important than creating and maintaining a safe work environment.

Safety as at the forefront of Steel Dynamics, it's integral to everything that we do, so it's also where we will start our conversation today.

While our safety performance continues to be better than industry averages, our goal remains squarely a zero safety incident work environment.

Our Company-wide recordable incident rate improved in the first quarter, with over 70% of our locations having no recordable incidents.

I have congratulated all those that work in those divisions.

We continue implementing new initiatives, and reinforcing others to drive toward our goal.

In that regard, we are excited about the creation of a Company-wide core safety group to enhance our grand philosophy to set expectations and ensure best practices have been implemented across all our work groups.

We have high expeditions for a positive impact from an even greater collaborative safety effort.

Operationally, the team has performed well, with a very challenging environment.

As predicted in January, steel import levels remained high, by lower scrap and raw material prices allowed steel product pricing to decline to globally competitive levels, which we believe will result in decreased steel import activity in the coming months.

Sustained first-quarter 2015 steel import levels, combined with an existing customer inventory overhang, drove domestic steel mill utilization to less than 70%.

Our steel operations operated at 50% of utilization, still ahead of the industry, as shipments declined 16%.

Flat roll was definitely the hardest hit, and our flat roll shipments declined 20% in the quarter.

While our Company-wide exposure to the energy sector approximates only 8%, it is higher at our recently acquired Columbus flat roll steel mill, which is particularly impacted by both imports and reduced energy sector steel consumption.

In 2014, approximately 40% of Columbus's product mix related to the steel tubular business, of which about half was tied to the energy sector.

In 2014, imports represented almost 60% of domestic steel tubular consumption, and during the first quarter 2015, imports of tubular goods increased again almost 50%.

As you may recall, our first order of business upon closing the Columbus purchase was to further market and product diversification, moving toward a greater number of customer relationships, and a broader mix of value added product lines, serving more industries.

Unfortunately, it would have been nice to have the strong energy market last a little longer, within which to accomplish this task.

With that being said, teams are making tremendous progress in automotive and construction related products, as well as utilizing the benefit of existing SDI customer relationships.

We are also making good progress with potential Mexican export opportunities, but as we had previously stated, these market shifts do take time.

In the interim, we continue to improve Columbus' operating costs and product breadth and quality capabilities.

We will further diversify the product mix of Columbus through 2015 and into 2016, to provide the commercial flexibility existing at our other steel mills, in order to mute the market volatility and optimize financial returns.

It is still abundantly clear to us that acquiring the Columbus mill was an incredible opportunity for Steel Dynamics.

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

In addition, creating a single flat roll group provides us a platform to totally utilize our core competencies, allowing us to develop stronger customer relationships, maximizing logistical efficiencies and savings, broaden our product capabilities through the wit gauge and strength diversity, and diversify geographically into the southern US and Mexican regions, to further increase exposures to high growth markets.

Overall, while external challenges create a turbulent environment, all of our employees performed well in the first quarter, driving operational and financial metrics that are again above our peer group.

Our more significant recent organic projects are a great examples of SDI employee performance.

The addition of premium rail to our product portfolio allows us to become the preeminent rail supplier in North America.

Both the domestic class one railroads have qualified our premium rail, and we are setting shipping records for welded rail.

We are receiving great quality reviews.

The capability to weld 320-foot rail length, versus the conventional 80-foot rail, gives us a strong competitive advantage.

It provides our customers with a high-quality product that is 75% fewer welds.

This improves safety by significantly reducing the number of potential failure points, and the longer rails also save our customers money by reducing maintenance cost and installation time.

We believe domestic rail consumption will increase during the next three to five years, based on railroad investment forecasts, which we believe are still substantively intact, despite the energy decline.

Additionally, the growth in other sectors will also demand both new rail investment and replacement rail.

We are committed to this market, and are still targeting 300,000 to 350,000 tons annually.

First quarter 2015 total rail shipments were slightly higher than the fourth quarter, while the portion of premium rail increased over 20%.

We expect to see further improvements in both volume and a higher proportion of premium rail through the year.

The product and capacity expansion within our engineered special bar quality operations also continues to ramp up, and show good benefit.

The SBQ markets have been less robust in the larger diameter sizes for the last several months, and our ability to now produce smaller diameter bars has provided product diversification and an important support to mill utilization.

The annual domestic SBQ market has typically consumed about 8 million to 10 million tons of which smaller diameter bars have historically represented about 50% or 55% of that market, so we don't believe our market share expectation of an additional 325,000 tons is unreasonable.

The first quarter was particularly challenging for our metals recycling business.

As we suggested in January, lower steel mill utilization, combined with ample scrap flow and subdued export activity resulted in a dramatic drop in scrap pricing during the first quarter.

Prime scrap fell approximately $110 per gross ton in the quarter, while obsolete grades dropped approximately $85.

Interestingly, strong prime scrap generation provided excess availability, reversing the typical $10 to $15 per ton premium generally garnered for this grade.

Export scrap levels have fallen in the past two consecutive years to volumes significantly lower than recent historical norms.

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

We recorded a slight operating loss as rapidly decreasing ferrous and non-ferrous prices, contracted metal spread, and shipments declined.

We expect both scrap volume and margins to improve in the second quarter, as domestic steel mill utilization is expected to improve, and scrap price volatility to abate.

Nonetheless, the symbiotic relationship between our recycling operations and steel mills allows us to have a lower average input cost, as compared to our peers.

Regarding our Minnesota operations, as discussed on our January conference call, the nugget facility was idle in February to reduce Company-wide iron nuggets inventory, and to install equipment in the iron concentrate facility, in order to reestablish product yield.

As planned, the iron concentrate equipment was installed, and product yield has shown significant improvement.

When operating at full capacity, the concentrate cost would return to $750 per metric ton delivered to the nugget plant.

Current broader raw material view, imported pig iron pricing has decreased significantly in the past several weeks, sourced mostly from Russia.

And is currently at levels below our expected iron nugget cash cost at $340 to $350 per metric ton.

Given the unexpected severe decline and nontraditional source of the imported material, which is typically sourced from Brazil, we are assessing the longevity of this price inversion, and in the meantime, the Nugget facility will remain in an idle state, at least until a review with our Board of Directors in May.

The fabrication platform continues to achieve strong operational financial performance.

Chris and the team did a phenomenal job.

Our first-quarter financial performance is only $342,000 less than our fourth-quarter record results, and that's during the first quarter, which is seasonally the lowest construction quarter of the year, due to the impact of winter weather.

According to the steel [SOU], year-over-year domestic drill shipments increased over 20% in 2014, as we gained market share and our shipments increased over 38%.

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

It is a credit to the foresight and positioning work of the team over the past several years.

Based on sustainable increased demand and market share gain, we have added production shifts at several of our plants, creating more jobs in our local communities.

The strength of this business provides a key window into the strength of the non-residential construction activity.

The steel market is at an interesting point.

The US has strong demand dynamics in place.

Consumer confidence and spending continued to improve, boosted by significantly lower prices at the gas pump, and bullish equity markets.

Consumer goods and construction investment continue to grow, both key measures of US steel consumption.

Forecasts for the two largest domestic steel consuming sectors, automotive and construction, remain intact.

Automotive is forecasted to grow to almost 18 million units over the next few years.

Overall, construction spending and domestic manufacturing continue to trend favorably.

Most importantly, our customers are affirming positive market fundamentals.

However the excessive levels of steel imports and lower seasonal demand dynamics, combined with high inventory levels and scrap price volatility, has caused uncertainty for the consumer.

So they are waiting.

As the inventory overhang subsides in the coming months, the underlying market demand should give support to steel product pricing.

Scrap flow remains good, and the strength of the dollar will continue to impede the export market, so there are no strong drivers for scrap price appreciation.

We therefore expect raw material pricing to remain somewhat stable at current levels.

In short, the second-quarter 2015 may continue to be challenging, as the market finds themselves, but we believe the fundamentals that support it for stronger economic growth this year.

We believe the current global growth expectations, combined with global production over capacity, will certainly be an industry headwind to steel pricing.

As raw material prices remain at lower levels, there is margin expansion opportunity later in the year.

Additionally, in order to insulate ourselves from imports, part of our strategy is not only to develop strong customer relationships, but to also manufacture products that are more able to compete with on a global basis.

Such as our painted flat steel, highly engineered SBQ steel, and longer length rail.

As such, we are able to mitigate some of the import impact, and maintain higher steel mill utilization rates, when compared to our peer group.

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

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

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

As we look ahead, we continue to be optimistic regarding our future.

Yes, Columbus is one aspect of the story, and our organic growth projects' another.

Yet we believe we are also fully prepared to take advantage of the opportunities that lay ahead.

The strong character and determination of our employees are unmatched.

The dedication to customers and passion for excellence compels us as a management team to the high standards of performance.

I thank each one of them, and remind them, safety is always the top priority, and again, thank you, everyone for your time today.

Manny, we would love to receive calls from our audience.

(Operator Instructions)

Luke Folta, Jefferies.

Nice work this quarter.

First question, I was hoping to discuss Mesabi a bit.

You had talked about the cost structure being in the $340 million, $350 million range, as you have said previously.

If we operate under the assumption that iron ore prices stay where they are for a while, and pig iron prices stay below $300 a ton, and ultimately the project becomes uneconomical, I mean, from a longer-term perspective, I guess, how important is it to have a scrap substitute source?

To the extent there's likely things you could do maybe to improve Mesabi, but if we just assume for a second there wasn't, should we expect later on that you might be making an investment perhaps in DRI, or in something that could bring you an internal source?

I think Luke, our perspective on DRI in particular is one that still would have problem returning or having a good return through the cycle.

There will be good times, perhaps, but it's not a technology that we want to invest in.

It may give you iron units at the current market price, but it's not, I don't believe, going to return you a great deal of money on your investment.

Regarding Mesabi nugget, certainly with the recent drop in iron ore cost, along with the strengthening dollar, pig iron pricing decreased significantly recently.

It certainly pierced the level of price support for the last several years, $360, currently $380 has been a floor for pig iron, and certainly has pierced that and currently is around about $260, $270, $275 in the Netherlands, but certainly below our cash cost per nugget.

The sourcing has changed a little.

Brazil has been our principal importing partner, so to speak.

But that has changed.

Russia seems to be the predominant supplier today, and I'm not so sure how long that will last.

Obviously, the devaluation of the ruble and their iron ore cost makes it very attractive for them to bring it in today, but we're just accessing the longevity of the current pricing environment.

And as I said, we continue to review, discuss it at our Board meeting in May, and I'm sure we'll make the prudent decision as we go forward.

Luke, I would add that I wouldn't want you to forget that we do have Iron Dynamics which has been producing around 250,000 metric tons of pig iron for the flat roll division in Butler, which is very important to their productivity; so we do have an additional iron source, as well.

If you wanted to keep Mesabi on long-term idle, just maybe on a couple year idle, if that's the way it turned out, and perhaps turn that on a little point if needed, is that something you could do?

Certainly.

Obviously, there is a spectrum options, and we're evaluating them all.

Okay.

Great.

Thank you.

Tony Rizzuto, Cowen and Company.

Got a couple questions here first.

On the service center side, would service centers support a price like right now in your opinion?

I believe that there's opportunity for upward price movement, as inventories subside.

Obviously, you've got a period of excess inventory overhang today.

I do believe pricing has overcorrected, as mills have struggled to retain an adequate backlog.

The import discount today is significantly below the $100 to $150 per ton that it has taken for customers to take the specter of risk for import volume.

So I think naturally, as the inventory level does subside, and I think it is, if you look at our ore profile, people are coming to us with larger orders today, and they're prompt orders.

Those are signs we've seen in the past that inventories are getting holes, and becoming more in balance.

As that inventory level subsides, I think naturally, the market can absorb a price increase.

Okay.

So just to confirm, you are seeing improving orders.

So inquiries clearly picking up, orders picking up.

Where would you say your lead times -- have they begun to extend then at this point?

Well, they're extending from some pretty horrific levels, I'll tell you, Tony.

But nonetheless, the order input rate in both Butler and Columbus have picked up quite significantly.

We had, Columbus we had the two best weeks since September, and we see it continuing, we believe.

Yes.

Obviously pricing still is under pressure, but it's the first sign.

Okay.

Good.

And just a quick follow-up on Mesabi, and then one other question.

On Mesabi, is it totally written down now at this stage?

So we value the Minnesota operations, Tony, together.

And at the end of December, we felt like we had it down to the fair value, and I would suggest that the nugget facility itself has been written down substantively.

Okay.

All right.

Great.

And just too, on Columbus, so the recent uptick in oil prices, has that benefited you there?

And if you could bring us up-to-date with the mix shift in synergies, if you could provide some granularity, perhaps percentage improvement, based on what you're targeting in terms of goals there for the mix shift and synergies?

Yes.

I think the recent uptick in oil prices certainly directionally is the right thing to happen for us.

Again, in that space, you've got a massive inventory overhang that needs to dissipate, and you also have a considerable import volume.

But with time, that will turn that market around.

And I think later in the year, it's going to take some time, Dick, don't you think, for that inventory to dissipate down?

Very much so.

You're right on.

Again, to try to give you a little granularity, it's difficult to do, because we've really been pushing new products.

We've been pushing expansion into automotive and into other applications, which are new for SDI, but we've begun under the Severstal reign and now being developed in a more fully fashioned.

So it's pretty much across the board.

We're very pleased with the acceptance.

We've improved the pickling performance, as well as cold rolling and galvanizing, and those in turn are giving us opportunities to go back to customers that we may have failed in the past, and so those aren't necessarily new products, but they are headway into a market that we've been absent from for a little while.

Could you guys give us any sense of where you were operating Columbus at during the quarter?

Yes.

So from a utilization perspective, Columbus was just under 70%.

Okay.

All right, Theresa, thanks very much.

That's all my questions.

Thank you.

Tony, you did ask about the synergy update.

Yes.

Yes, please.

Thank you.

I would suggest that they're working quite well on cost compression.

Certainly just recently.

I think Dick and his team renegotiated the power contract down there, that will bring savings.

And on the customer front, diversifying the product mix, our new steel team, I think, has done an incredibly good job penetrating BMW, VW, and Ford, of late, to pick up potential opportunity there.

And I guess all I'd say is that I think we've turned the corner in the beginning of reestablishing relationships with our customers that are down in the region, but that have been customers of Butler, and not being fully utilized from a Columbus perspective, and those relationships are being warmed up and hopefully bearing fruit.

We still have incredible excitement there.

Again as I said earlier, it's a little unfortunate that energy market [did that this year], but hey, we've been challenged before, and we'll survive this one too.

Sounds like good progress is being made.

Thank you very much.

Evan Kurtz, Morgan Stanley.

Question on metal spreads.

You mentioned that in February we had this big scrap move down, but you're not really going to see any of the benefit of that until we get into the second quarter here, just given the inventories and the FIFO accounting.

So how should we think about the second quarter?

Steel prices have also edged down a bit over the past couple of months obviously.

So would you actually expect at this point to see FIFO metal margin expansion in the second quarter, or flat, or how should we think about that?

I think Evan, it's a little too early to tell because again, lead times or backlogs aren't stretched out into May or June as yet.

We're certainly seeing on the sheet side, the benefit of a scrap move, as that inventory, the higher-priced inventory got consumed in March and April, and lower-priced stuff gets consumed later in the quarter.

I would suggest that our selling values, particularly at Butler, as they have been historically, have been above the general market.

And again, that pricing has come off as we come close to the market, maintain a backlog.

So we anticipate some margin expansion.

It's difficult to quantify right this moment.

Okay.

That's helpful.

Thanks.

And then I know you don't drive the bus on these things, but any thoughts on the potential trade case that we keep reading about?

Potential timing there?

Dick?

Okay.

I guess I'd say that everyone recognizes, and hence why the conversation is there that I think between 2013 and 2014, imports increased just under 40%, and year over year in the first quarter, many products increased another 30% or more.

Hence that's why the focus has been on it.

But the industry, including at SDI continues research on trade cases.

And we'll file the cases when the industry's legal counsel believes the timing is right, when their unfair trade in the form of both dumping and/or subsidies can be demonstrated.

And so we are we're working on things.

We have our counsels communicating amongst interested parties of participation.

And we're focused on it.

Okay.

And maybe just one last one, you hinted -- or didn't hint, you mentioned that you got a new power contract on Columbus.

Just given the weak energy markets out there, could you maybe try to quantify a little bit what benefit you might see this year from not just Columbus, but your power costs across the spectrum?

Well, I guess that would be a tough one to quantify.

The contract that Mark was referring to is really a follow-up to the original contract that Columbus had under prior owners, and some of the programs were coming to a completion here this spring.

And so what we negotiated was not an extension, a new power contract, but with slightly better performance, but it's slightly; it's not going to make a huge impact.

But we look for every bit of opportunity to be executed on.

As far as other energies, being natural gas that we consume around the Company, we have hedges in place just about everywhere.

Again, varying levels, based on the strength of their backlogs and order books.

One or two locations that do not have hedging opportunities, based on their tariff and the contract arrangements, but we're comfortable at each of those, that they're constantly looking at energy efficiency opportunities.

So, I think it would be very hard to quantify.

And just as a reminder, natural gas is about 3% to 4% of our manufacturing costs.

And then electricity tends to be closer to 6% to 7%.

Great.

That's helpful.

Okay.

I'll hand it over.

Thanks so much.

Gordon Johnson, Wolfe Research.

Just wanted to piggyback on the trade case comment.

We've had some recent discussions with people in Washington, and they've told us that there's two different dynamics being discussed now.

One is overall legislation, with respect to getting -- the way that the ITC and the DOC looks at the trade case, and then there's the official trade case.

And what we've heard is that attacking both of those things at the same time could be somewhat tough.

So the different legal entities looking at this are looking to wait to increase the strength of the trade case.

Could you comment on that?

And then I have another follow-up.

I guess all I'll say is that needless to say, current legislation as it moves through Congress is being watched, whether it be TPA or TPP.

I guess we are independently pursuing lobbying, in a manner that is responsible to our elected officials on those issues.

We're also supportive of potential legislation, whether it be through an independent move, or an addendum to another bill that's there, for the modifications of the injury calculations.

Again, tragically, it takes a catastrophic collapse on industry's part, whether it be steel or any, to really do determinations.

So we're looking for different definitions to be used from an injury calculation standpoint.

But I can assure you that we are not resting on our laurels looking at filing trade cases on many of the different products that are being under siege in the steel community.

Okay.

That's helpful.

Lastly, just again on the trade case, we've heard that from some industry specialists that steel companies, certain steel companies need to report two quarters of losses.

This doesn't seem to be a static rule, but have you heard these same comments, and do you think that's accurate, or do you think now, a trade case could be filed?

And thanks again for the questions.

Well, as I said, no timetable has been determined.

I don't know that there's a written rule that talks about two quarters of losses.

It has to do with performance.

Needless to say, negative performance is what is looked at, and the magnitude of that.

And so, sometimes it occurs in a longer period, and sometimes it's very quick and dynamic.

So each and every one is looked at independently.

Thanks again.

Matt Murphy, UBS.

Theresa, you mentioned the potential that some growth opportunities could be considered, that push up your CapEx this year.

Just wondering if you can provide some thoughts on what some of the considerations are?

Well, there's several different projects that we have, that we're looking at internally.

And we'll announce those and talk about those when we get to a point and place where we are ready to execute.

But I think it could possibly push up the CapEx later this year, as those projects get approved.

Okay.

I guess on the fabrication segment, it's good to see such a strong result in Q1.

I was a bit surprised how much, how well you did on pricing.

Just wondering how sustainable that price is, and if that's something that moves up as steel prices recover, or it will be determined more, just based on demand within fabrication?

Thanks for the question.

I think that the demand capacity relationship is such that there's no floor that's going to fall out from under us.

If steel prices increase, I believe that we'll be able to move those along through the supply chain.

Things are just very well-positioned at the moment in our industry, and we should be able to react to whichever direction things head.

Okay.

Thanks a lot.

Jorge Beristain, Deutsche Bank.

I just wanted to get back to the cost, input costs.

And just again are you currently profitable at your other raw materials supply, in terms of iron ore?

Well, I guess the only other iron facility we have is Iron Dynamics.

Yes.

Iron Dynamics.

Are you currently profitable there?

I'm just trying to understand, Theresa had mentioned that you're still getting supply there of few hundred thousand tons a year, so is that an independent profit-making unit right now, or is that indirectly also being subsidized?

It's certainly not being subsidized.

The transport pricing is based on pig iron pricing essentially.

You also have to remember that it's pig iron going to the electric op center which has substantial both cost and productivity advantage.

So iron demand is integral into the productivity and the cost structure of Butler, but unto itself, it's still a profitable entity.

Okay.

And then at Mesabi, could you comment if -- you said you're going to have a Board review decision there, but roughly, assuming current iron ore prices hold flat, and you're able to import, you said, from Russia it sounds like at below that operating cost; if you were to idle that facility for a longer time or do a full shutdown there, what kind of EBITDA cost savings would that generate, versus the current market environment?

On an annual basis?

I'd prefer to wait until we have that review in May, and make a final decision, and we'll let you know the details.

Okay.

Thanks.

Timna Tanners, Bank of America.

Both Theresa and Mark talked about the capacity on the balance sheet to pursue opportunities ahead, and so I just wanted to get your latest thinking on M&A opportunities in the space.

So I know it's probably a broad question, but to be a little more specific, there's a lot of financially stressed scrap companies or shredders, and maybe some fabricators and service centers.

So just wanted to get your broad comments on what end markets, or what products, what type of opportunities you might start to look at?

Okay.

Well, as we discussed, and I think as you look into our results, we had an incredible quarter, even as challenging as it was, our current cash generation was quite dramatic.

And again, as testament to our operating model, our low cost structure.

Highly variable costs.

The team's just doing a phenomenal job.

And we expect that strong cash generation to continue in any event in any market.

You saw that we increased our dividend 20% in the first quarter.

Again, I think that's a testament to where we see the future of that cash generation.

Certainly the confidence, our Board's confidence, in our performance and continued performance there.

So far as cash allocation beyond that, we do feel that there is some smaller organic projects that we can still leverage.

And then also, as you indicated, there are going to be acquisitional opportunities I think going forward.

Our focus, I would suggest, is not in scrap in any great way.

Obviously, that industry as we projected for the last 12 months is about to go into a shakeout, and I think we are on the doorstep of that.

There is a lot of financial stress throughout scrap organizations, everywhere we look.

We don't believe that we will be in, or part of that shakeout in any large way.

I think our focus continues to be downstream on the steel-making side of our business, for sure, where we can get value add opportunity and increase the quality of our margin.

And now, New Millennium has executed on its growth path, done an incredible job.

I think it was a couple years ago, Chris, after we've bought CMC we repositioned that business, had a lot of management change to fill that out.

His charge, his team's charge was to go execute.

They've done so.

And I believe there might be opportunities that we can bolster and give them support.

Okay.

That's helpful.

I just wanted to also ask a little bit of a general question about it's been the best of times, the worst of times, in terms of flat roll pricing over the last 12 months, where we had a really steady price level, about $200 a ton higher in current spot market, and now we're at the steps that you say, and I would agree probably overcorrected.

But do you think as prices recover, do you think the mills are going to be more mindful of the import offers, given the strong dollar going forward?

Or do you think they're just going to look at the domestic market and their lead times independent of the import environment?

Well, an idealist would say, yes.

They would be mindful of the relative pricing between domestic and global markets.

But human nature and capitalism tends to get away from you, from time to time.

I don't believe we will see pricing spreads get up to -- I think it was $230 a ton there back in the fall of last year.

I think there's every opportunity to expand margin, though.

Again, I do believe pricing has overcorrected.

As mills have chased the backlog, the spread between domestic global pricing has dissipated dramatically.

Today, it's certainly way below the $100, $150 premium that -- or discount that attracts an import ton.

And I also think that with the lower utilization, obviously, there's been less fixed cost absorption at the mills.

So as we go forward, as pricing rebalances, as you pick up more volume, the fixed costs per ton will decrease, and so there's certainly margin expansion opportunity, with a stable scrap market.

Okay.

Thanks for the answer.

Matthew Korn, Barclays.

Looks like we're all waiting for the same inflection point right now, but beyond this turn in the cycle, should we be worried?

Should we expect to return to this challenging quarter regularly, until we see substantial capacity, largely in China taken off-line?

With scrap lower, iron ore lower, coking coal taking a look down, do you have concern that another turn of lower input costs spins the wheel again until we reach the point where there's been enough pain to bring the global supply-demand into better balance?

Maybe that's happening now.

I don't know.

I'm looking for your thoughts there.

Well, it's difficult to see that raw material costs could go much lower.

With ore pricing, and it's come up a little bit here the last week or two, but $50, $55 a ton, I would suggest is certainly a flaw.

And scrap pricing, we believe, has reached a floor and a level of stability.

As Russ indicated in the last call, the reset button has certainly been pushed.

And I believe the scrap arena, the recycling world, is realizing that we are at a new level now.

Flow, absolute flow is starting to come back as brokers and dealers recognize that it's not just a four-week blip.

It's here to stay.

So I think there's opportunity, as previously discussed, for the market to pick up, pricing to pick up, and margin to pick up, through the end of the year.

We are a cyclical business.

Those undulations will continue to be there for the rest of our lives, more than likely.

We endeavor to try and mitigate or mute those cycles, to a small degree.

Again, our focus is in a very broad product diversification.

We see that the advantage there at Butler, and our other mills.

We certainly see the Achilles heel, when you don't have that, at Columbus right now.

I'm confident that Dick and the team over the next 12 months will diversify that mill, such that we'll never see such a -- sort of [V] inversion again going forward.

So I think, yes, we see those undulations.

I do believe you will, but they will probably be more like those in 2012, 2013 and not as precipitous as the one that we've seen.

All right.

I appreciate the answer.

Let me ask more particularly about the domestic market end-use demand.

When you're thinking about the big buckets, construction, auto, energy, manufacturing, how would you say your read has changed, relative to when you reported at the end of last year?

Is auto looking worse, is construction looking better?

Is there an overall maybe slight contraction for the US in total demand for steel?

Is that a fair forecast today?

I believe that underlying demand, our picture of underlying demand remains relatively intact.

With the exception of our thoughts in energy, depends on when you say the end of the year, but you go back to September, October, our energy thoughts were perhaps a little different, and it's softer today.

Automotive remains incredibly strong.

Manufacturing appears solid to us.

And we do believe construction continues to recover.

The performance at New Millennium is just outstanding.

I think it gives us a window into that recovery.

Unfortunately, the beam market isn't necessarily seeing that same shift, as we're fighting the same issues of the sheet world.

Inventory overhang there, you've got a pretty large amount of import steel that came in at the end of last year and the last couple of months.

And that needs to dissipate.

As the weather changes, that inventory dissipates down, I think our structural business will pick back up.

Thank you.

I don't see a massive change in underlying demand.

Our major headwind as an industry, certainly, I think one of the only ones that concerns me at SDI, is the import pressure.

Appreciate it.

Best of luck for the rest of the season.

Michael Gambardella, JPMorgan.

Question, Mark.

If you could talk a little bit about the timing lags that you see, that impact your metal spreads, particularly in the sheet market, your sheet market business.

And you had scrap prices usually lead steel prices down, and you had the reverse this time, scrap held up, and now you've seen scrap come down.

Can you talk about how you see the timing lag on both your steel price realizations, and particularly on the sheet business, and the scrap costs going down?

How that's going to impact the second and third quarters going forward?

I think on the scrap raw materials side, it's not much different than we reported previously.

We carry about four weeks, five weeks typically of a typical production month at steel mills.

So you've got two issues.

One, the inventory flow-through, which would typically suggest that you're going to see lower raw material level hit in April, certainly May timeframe.

Does extend a little bit, because of production levels have been down in April.

So we should see some time in May, June, raw material costs come down.

On a timing of pricing, product pricing, on the sheet side of our business, we tend to lag CRU index or the market, I would say by about four weeks, also.

Mike, just to be clear, so the drop that you would have seen, in what I would call spot scrap pricing in February, so for the February buy, we typically would have seen most of that in March.

Where we are not able to see that in March, we're going to see that more in the April-ish timeframe, because there's lower production.

And so then as Mark talked, about going further forward that would still reduce scrap pricing in March, so we're still going to -- we'll receive some of that benefit earlier in the second quarter.

How do you balance these lower scrap costs filtering in, because you have a higher variable cost?

Say, versus about two-thirds of your competitors domestically are more fixed cost, with iron ore or integrated producers?

How do you balance your new lower cost structure with taking share, and the ability to take share from two-thirds of the market domestically, and putting more pressure on pricing?

I don't think we will -- there's a need to put more pressure, when you say pressure on pricing, I assume downward pressure.

I don't believe that there's any need for further downward price pressure.

I think we're going to see that we've hit a bottom.

We'll continue to see things pick up.

Again you've got a couple things happening out there, like as you know, inventories no doubt coming down.

We're seeing it, as I said in the order profile, that our customers are giving us.

You also have some blast furnaces that are out.

So demand is demand.

Capacity generally has ebbed a little bit.

So I don't see a need for downward pricing pressure.

I think we've bottomed.

The spread between domestic pricing and global pricing has eroded to a point where at least if I was a customer or consumer, I've got no idea why you would take any of the speculative risk, the quality risk, the claim risk, and everything else associated with an import ton today.

So import levels should naturally start ebbing.

And take any pressure from us.

Do you feel you're currently gaining share in the sheet market?

We're certainly seeing a significant increase in our order rate.

Yes.

Needless to say, as you just mentioned about blast furnace outages, as they run through their slab inventories and so forth, and there's a maintenance outages, we advantageously took our maintenance outages early and have those behind us.

And are prepared to take advantage of the opportunities going forward.

And that would, needless to say, translate into a slightly higher share.

May not be sustainable in the real long-term, when blast furnaces come back and the market improves, but our mission will be to hold onto it, and fight for more.

Okay.

Thank you very much.

Justine Fisher, Goldman Sachs.

I just have one other question about the steel price environment.

Sorry to kick the dead horse here, but the question to you is, can steel prices increase meaningfully, if the dollar doesn't weaken, or if the dollar even strengthens?

I think the price -- the dollar does two things.

I guess, it creates the import pressure, which puts pricing pressure into our market.

And it reduces the operating costs of our foreign competition, which gives them a greater ability to reduce costs.

I think the principal headwind, as I said, to both utilization and to product pricing, is the level of imports.

Okay.

So basically, I think, if you look at where steel prices have gone, you can bifurcate it into the raw materials question and the dollar question.

So on the raw materials side, it definitely seems as though the consensus is that they can't go much lower, but on the currency side, could that continue to be a headwind to prices going meaningfully higher, as a lot in the market seem to expect in 2Q and 3Q?

Well, it depends on where you see the dollar go.

Is it going to strengthen significantly more than we see today?

I think our perspective is that it's going to be pretty stable.

Certainly not going to weaken in the near term, for sure.

It certainly will create that import down, by allowing our foreign competition to bring material in.

The price of hot band or import hot band today I think is $400-ish per ton.

By the time you get that to a Midwest location, it's probably around $450, $460, and lo and behold, that's where the market price is today.

Okay.

Thanks for that.

Another question I have is just on the high level view of what the endgame is for the scrap industry.

I know someone asked if you guys were interested in acquisitions in scrap, and you said no, but how does it end?

Assume the dollar just stays even stable so the export market's not great, so the US scrap industry remains under pressure.

Does, if we think about liquidations of smaller scrap yards, does that put significant pressure on the scrap reservoir, and then prices go up, or does it just mean that the remaining yards collect the same amount of scrap, so we shouldn't expect the scrap pricing to necessarily go up because of a shortage?

It's just a matter of who is collecting it, as opposed to how much scrap there is?

Should we think about there being like a much tighter scrap market in the next two years if there is a meaningful shake out in the industry, or is it just a game of shuffling the cards, in terms of ownership?

I think it's the latter and I'll let Russ expand on it, but it's more of a shuffling of the cards.

The scrap reservoir actually is good.

The prime generation is phenomenal right now, again because of automotive being so strong.

That's why you're seeing the inversion of the prime obsolete premium.

I think as the industry goes through a shakeout, the impact is not necessarily on the price of scrap, the market price of scrap to the mill.

It's a matter of what the scrap industry pays for its obsolete scrap.

Obviously, today there's fierce competition between all the players, and there's a lot of them.

As that changes, so will the relative competition for those units.

Russ?

I would agree wholeheartedly, Mark.

I think again, the amount of scrap that's generated in the US is not going to move down significantly.

Not going to change significantly, I don't think, in the even long-term.

So I think what you're going to have is fewer players collecting the same amount of scrap.

Okay.

Thanks so much.

Andrew Lane, Morningstar.

Really just one big picture question for me.

We've always appreciated Steel Dynamics' low cost position in the market, but just take to a step back and look at the bigger picture.

Given local cost deflation in major steel producing countries like Brazil and Russia, and significantly lower sea-borne raw material costs for previously high-cost operators in China, has Steel Dynamics' positioning on the global cost curve changed at all, over the last couple quarters?

Well, our cost structure, given the price of scrap coming down, has obviously dropped.

I would suggest that relatively, as others come down, yes, we've changed our relative position.

But they've come down closer to us.

And we remain as effective and as efficient as anyone.

I think the recent scrap move has certainly reestablished the industry in the States to be somewhat on a hot metal cost basis, attractive, where the integrated mill has an advantage there, for a few months.

The other thing that I would ask you to remember is that between 85% and 90% of all of our costs are actually variable in nature, which is something that most of these other operations can't really approach that level, which is a big benefit on the competitive side, as well.

Great.

Thanks and congratulations on a resilient quarter.

Brian Yu, Citi.

Mark, the flat roll market does get a lot of attention, and rightfully so, but the long products market, merchant bar, rebar, tends to fly under the radar a bit.

And if I'm looking at the numbers correctly, you have got metal margins that are actually expanding, premium versus import seem to be remaining high.

There something fundamentally different here versus flat roll in terms of how imports can respond to some of these pricing dynamics?

I think there tends to be more established trade routes or relationships on the sheet side of the business.

And just the physical nature of the 20-ton coil versus the structural tends to make it more amenable to import.

Structural, quarter-over-quarter has seen a slow but continuing increase in import level, for sure.

I think that may have dissipated a little bit here recently, because the industry readjusted its pricing.

What was that?

About a month ago?

And again, that adjusted the domestic global spread again.

Okay.

Second question I'm not sure if I missed this, Mesabi nugget, what's the ongoing idling costs associated with it?

You didn't miss it, Brian.

We didn't state it.

Okay.

Is that something you can tell us?

I don't mean to be facetious, but after our May Board meeting or review, I think we'll have clarity for you all, as to what that might be.

All right.

Maybe I can try a different one.

The fabrication backlog and your shipments in the core, I think, were up about 19% year on year.

Is there anything you can glean from your backlog in terms of your -- how the fabrication volumes might unfold for the year?

Is it so strong that we'd be looking at double-digit growth rates for your fab business?

Well, the indicators we watch, if you look at a typical order lifecycle for us, Brian, is about 12, 13 weeks, so you're about at a quarter.

Quota activities, remain strong.

So we believe that's indicative of, at least through the next quarter, we see continued strength in the architectural billings index.

We see bookings year over year as an industry still in double digits.

So we don't have any cold water to pour on it at the moment.

We only have that to go by, and right now, our customers are fairly bullish.

The one thing we don't face quite to the extent of our other product lines is the import pressures.

Most of our imports that we compete with come from -- are limited in North America.

And so we are really sensitive to what the domestic market's doing, and how our industry is aligned to serve that market, and both remain healthy at the moment.

Bryan, from what we can see right now, I don't think it's unreasonable.

We think that double-digit growth is possible, based on project expectations and our current market share.

Okay.

Great.

Thanks.

Helpful.

Appreciate it.

Phil Gibbs, KeyBanc.

Just had a question on the supply-demand dynamics in the long products markets, and how that might be a bit different, relative to what you're seeing on the flat rolled side.

Have imports been as big an issue there for you?

Needless to say, with our product diversification by mill, we don't have as large of a concentration as some of our domestic competitors do in the long products arena.

But rebar remains under attack, even with the successful or partially successful trade case that was resolved on rebar.

I would tell you that we've tried to remove ourselves from the rebar market, as much as possible, serving our longtime loyal customers and so forth, but just reducing the amount of exposure that we are attempting to turn from an inventory cycles perspective.

On our other long products side, I would tell you that we are doing extremely well.

Steel West Virginia is running flat out, basically 100% utilization of their time.

They've brought on 12 new sections of bulb flats, and so that's product differentiation.

There was no other domestic competitor.

Those are used in shipbuilding and marine applications, and we're getting tremendous reception from the marine architects and fabricators, and so forth.

So we're excited about that, but it is a different dynamic than the flat rolled.

Product by product, again, we developed a new product in Pittsboro, a threaded rod, we're going to trial three-inch threaded rod this quarter, and that just stands to again be another success to us.

So we have a little bit greater opportunity to push out and into other arenas in long products.

They're all demanding, but I'm very proud of the efforts that have been made to date.

Okay.

Terrific.

And then a question on Columbus if I could, any update you could provide us on the synergies there, and maybe some progress moving more toward utilizing the downstream assets?

Well, I'll just say that we continue to explore our synergies on a weekly basis.

We have employees going in both directions in all the arenas, whether it melting and casting or hot rolling.

And then finishing, as you pointed out, we have a great opportunity.

We just put a manager in galvanizing.

He comes out of the Butler operations.

We deployed the existing galvanizing manager into the engineering arena.

And so there's been a management shift, to try to bring maybe faster acceleration of the integration and the synergy recognition between them.

But I don't have a dollar, I can't dollarize it for you, but I would tell you that both teams are serious about it.

Butler is gaining knowledge from the way Columbus has done things in the past, and Columbus is, I think, reaping the benefits and will continue to, of the integration process, and the realization of those synergies, as we go forward here.

I think to put a number on it, we're probably around $12 million to $15 million by the end of the year.

Outside of any product mix shift et cetera, so more administrative things we talked about.

At one point again, we've introduced different ways of thinking about stuff, and I think, actually their headcount is down by 45 people.

And again, not because they're put in any distressed mode, so forth.

It's actually just a different methodology.

We have different programs.

We're still going to implement order entry systems that we've developed over the years, and that will help them streamline opportunities.

And we're not done.

Thanks so much.

Charles Bradford, Bradford Research.

As we all know, US Steel has announced that they're going to put an electric furnace into Fairfield, Alabama.

It would seem like that furnace isn't enough for them to continue their current mix, and they may very well be going at flat rolled steel.

Are you seeing any of their customers beginning to gravitate towards you, and Columbus?

Because that would be like the natural progression of things.

I don't think we have, Chuck.

Not yet.

It's probably a little premature.

But certainly, if that does happen, I think it would certainly help Columbus in a great way.

I think they've got a doubling line down there.

Cutting lines which would help dramatically.

But I think, needless to say, they have options.

They have other facilities at which to supply slabs, and so it would be, I think, a little bit premature for us to determine what US Steel's thinking is going to be as far as total asset utilizations.

I think their customers are beginning to think about supply.

I'm sure they are thinking it.

Needless to say, we're thinking about a customer from a scrap side.

And so it cuts both ways there.

Thank you very much.

Nathan Littlewood, Credit Suisse.

I just had a couple of questions on trade cases.

I guess if we distill this situation down, there is fundamentally two parts.

One is the demonstration or proving, if you will, of material injury.

Then there is the existence or otherwise of anti-dumping or dumping and the countervailing duties or subsidies.

So I guess, if we think about it in the context of those two parts, are you able to confirm, or tell us whether, in your opinion, you believe that the material injury hurdle has already been met?

And if so, does the absence of a trade case to date imply that given things like currency and fuel prices and freight rates and whatnot, that it's actually pretty hard to prove that there is dumping actually taking place at the moment?

Well, I think I can tell you that again, each of us in the steel industry look at who we believe the targets of our cases should be.

We divide up those, and work on them independently.

Everyone who's participating in a possible trade case will bear a share of the responsibilities to go into the home markets of those countries, determine what the home market prices are for the products in question.

We also then do research on subsidy potential.

Because as you pointed out, the countervailing duties are really to address the subsidy issue.

And the anti-dumping of course, is the unfair trade practices of selling in our market at a number that's lower than their own market or other markets that they serve.

And so I can tell you that there's some tremendously large percentages of damages, potential damages, that we believe are being exploited improperly, illegally, and those will be the subject of any case.

But even a question earlier about the strengthening dollar, and whether that would influence from a pricing, the dollar is moving in single-digit percentages.

I'm talking double and triple digit damage being done here, in some cases, on some products.

And so it could be, we're not worried about the changing dollar to really affect the trade case issues.

Okay.

But I guess that's certainly useful background, but as it stands today, do you feel like you've proven the material injury, and that hurdle has been passed, and that therefore we're at the point now where it's a debate about whether or not there is or isn't countervailing and dumping going on?

Again, I cannot speak for -- I only deal with my trade council.

And I can't talk about, as I don't know, about any of our competitors and their material injury.

Needless to say, their products were as an industry, were under attack and yet SDI still makes a profit.

So therefore, we had to wait until all the trade councils communicate on those issues.

And then, that of course, would affect the timing.

Okay.

Got it.

Thanks very much, guys.

I appreciate the information there.

Curt Woodworth, Nomura.

Just want to get back to the metal spread question.

Mark, obviously since the last mid-quarter update you've seen a fair amount of incremental pressure there, with hot roll down $30 to $35 a ton in scrap.

Seems to be bouncing somewhat in the US, but a lot more in Europe.

So I just want to get your take on how that should flow through to you, given it seems like you're talking about four to five week lag mechanisms.

Because thus far, metal spreads have been pretty resilient for you.

Your only down slightly year over year and about $16 this quarter relative to your average.

Yet, if I look at total numbers for this year, on a spot basis, spreads are about $190, versus last year they seem to be averaging on hot roll about $270.

So is there some offsets on one side or is this a lagged issue that we need to think about?

A little convoluted there.

I would suggest, and I've not looked in detail, not just recently, anyway, quantifying the difference between this year, last year and any other year.

But sequentially, again, as we suggested earlier, on the hot side of our business, we should see the benefit of the scrap raw material in the second quarter flowing in.

As Theresa alluded to and I alluded to, she thinks it's a little sooner than I, but six weeks, six to eight weeks after February, we hit the full benefit there.

Obviously, the market pricing on sheet is under pressure, right this second.

But as that inventory dissipates, we truly believe we'll see an uptick in pricing, because of the -- I wouldn't say parity, but erosion of domestic global pricing.

So generally, we should see margin expansion to some degree, not massively in second quarter.

Certainly we'll see it through the second half of the year.

Got it.

Okay.

Thanks.

Aldo Mazzaferro, Macquarie.

I wanted to congratulate you on the earnings you reported, and the balance sheet improvement in the free cash flow and dividend in such a tough quarter.

I'm wondering, do you see further scope for the reduction in working capital going forward, or do you think we saw most of it in the first quarter?

Aldo, I think we still have an opportunity for some working capital reduction.

The working capital reduction that you witnessed in the first quarter was largely related to values, versus there is still opportunity on the volume side.

So I still think there's some opportunity for some working capital funding in the second quarter.

Great.

My next question on the scrap business, I was amazed at how you minimized the damage from the volume and pricing.

I'm just wondering Russ, could you tell us how you did it?

Was it early in the quarter you just clamped down on the scale pricing, and sold your inventory early?

I don't know.

I just wondered if you could explain a little bit of how you managed to avoid such a -- how you managed to come out with such a minimal loss on such a bad quarter for scrap?

It's just magic, Aldo.

It's just magic.

It's a tribute to our team and the depth, and the talent level of our scrap team.

They again managed their business very well.

They did a good job of controlling their inflows, and maximizing their outflows.

It's just as simple as that, knowing that we saw this coming, and sensed it coming, that we managed our business accordingly and it's a credit to the team.

So if you saw prices flat for the second quarter, do you think you'd have any change in your metal spread or roughly stable?

If we see prices flat from here through the quarter, I would say it's still a battle out there, although there's still an awful lot of competition out there, as we talked about earlier.

So again, we've got to fill our orders, and we've got to participate at whatever level.

So ideally, when the scrap selling price goes down the buying price ought to go down in accordance, or more.

And that's always what we try to do.

Whether we are successful at it, I guess we'll have to wait to see in June or in July.

Great.

And then finally, a similar question on the steel side, I think the pricing ended the quarter at the low point, from what I gathered.

So going forward, if we stay at flat pricing, we're probably going to see lower average pricing in the second quarter.

And yet you are picking up some benefits on a cycle basis on the scrap price declining.

Theresa, would you say your metal spreads in second quarter would be improved from here?

Assuming flat pricing?

I mean, assuming flat pricing from the end of the quarter?

I think we stated, Aldo, that it's a little too soon to know where we're going to get the scrap benefit.

Order backlogs out are not substantial, so you don't know really where the May, June pricing will end up.

We do feel that there will be slight margin expansion.

Great.

Thanks, Mark.

Congratulations.

Phil Gibbs, KeyBanc.

Just a quick follow-up here.

You said your utilization in Q1, I think, was around 73%.

Any range that you could provide us for the second quarter?

Again, Phil, without transparency into May and June, it would be hypothetical at this moment in time.

I would say though, that it's up.

Again, Butler and Columbus in particular have had strong bookings.

And there's no reason to think that as inventory dissipates, that should change.

Thank you.

Thank you.

That concludes our question-and-answer session.

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

Well, thank you, everyone.

I don't know if anyone's still on the call after we beat that dead horse a million times on spread and market.

But I just would like to emphasize the differentiation of our team, and of our Company, and our business model.

I think we continue to be well-positioned.

Our low, highly variable cost structure, our low fixed costs, coupled with the highly diversified product mix, will continue to generate a very strong cash flow through the cycle.

As things pick up, it should pick up also.

We certainly clearly differentiated ourselves, I think.

Consistently outperformed our peer group, and we've got a passionate team, and a wonderful customer base to support that.

Our organic initiatives at engineered bar and rail are proving -- continue to prove our abilities there.

New mailing and billing systems continues to shine.

And so, I think we're well-positioned going forward.

So appreciate your continued support of our Company.

And to our customers, thank you for your support also.

To our employees, sincere thanks.

Your passion for excellence, hard work and dedication is the backbone of our Company.

And just as we always say each and every day, each and every minute, be safe.

Thank you all.

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

Thank you for your participation, and have a great and safe day.