Steel Dynamics Inc (STLD) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

At this time, I'd 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' third 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 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 today may involved forward-looking statements that, by their nature, are predictive.

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

Such statements, however, speak only as of this date, today, October 20, 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 may be found at the investor center advisory information tab on our Steel Dynamics website, and our form 10-K annual report, under the captions forward-looking statements and risk factors, or as applicable in subsequently filed forms 10-Q filed with the Securities and Exchange Commission.

And now, I am pleased to turn the call over to Mark

Thank you Marlene, and good morning everyone.

Thank you for joining our call today.

2015 continues to be an interesting challenge.

But as is often said, in adversity, there is opportunity, and I think at least for those that have prepared for it.

Significant industry shifts have taken place in both the global steel community, in raw material and product pricing, as well as recent preliminary trade case advancements.

But before exploring our thoughts regarding the domestic steel landscape, and how Steel Dynamics is uniquely positioned for growth, I ask Theresa to comment on the third-quarter financial results.

Good morning everyone.

Before I begin, one quick note.

Consistent with how we're now managing the business, we've made a change to our reporting segments.

The segment that we previously referred to as metals recycling and ferrous resources has been changed to just metals recycling.

The previous segment included not only our metals recycling or OmniSource operations, but also our two iron-making initiatives, and another small 55% owned joint venture.

Beginning with our third-quarter report, our metals recycling will now only include OmniSource results.

Iron Dynamics has been moved to our steel segment, as 100% of its output is used at our Butler Flat Ross division.

And the impact of Minnesota and the JV have been moved to other.

The supplemental quarterly information reflects this change for all periods presented.

For your convenience, we'd also posted the quarterly 2013 and 2014 historical data in this format on our website, under investor supplemental financial information.

Now regarding our third quarter 2015 financial results, net income was $61 million, or $0.25 per diluted share, just above our guidance of between $0.20 and $0.24.

These results compare to sequential adjusted second quarter 2015 net income of $53 million, or $0.22 diluted share, and reported GAAP results of $32 million or $0.13 per diluted share.

Third quarter 2015 consolidated revenues were $2 billion, approximately 3% less than second quarter 2015 results, based on lower pricing and a 12% decline in external ferrous shipments from our metals recycling operations, as well as lower steel shipments from our Flat Roll group.

Operating income was $131 million, compared to adjusted second-quarter results of $120 million, representing a 9% improvement, based on improved steel margins and record-setting fabrication performance.

For the third-quarter 2015, steel shipments remained relatively unchanged, at 2.2 million tons, as a 4% decrease in our Flat Roll group shipments were basically offset by a slight improvement in our long product operations.

Despite slightly lower shipments, operating income increased, as both average steel pricing and scrap cost improved in the quarter.

Our average sales price increase $3 per ton, while our average cost of scrap used declined $3 per ton.

As we indicated during our second-quarter conference call, we expected steel imports to moderate in the third quarter, and they did decline.

However, higher customer inventories, combined with continued high, albeit decreased imports, continued to cause downward pressure in steel prices, especially in the Flat Roll arena.

For our metals recycling platform, total third-quarter 2015 ferrous shipments were relatively unchanged from the second quarter.

However, internal shipments increased 10%, representing 59% of the total ferrous volume.

Ferrous metals spread contracted 14% of the cost of procuring unprocessed material increased, while selling values decreased.

Additionally, although our non-ferrous shipments increased, non-ferrous metal spread declined 20%, as both copper and aluminum index prices fell in the quarter.

As a result, our metals recycling operations' third-quarter operating income decreased meaningfully, to a profit of $463,000, compare to $12.3 million in the second quarter of 2015.

Our fabrication operations continue to provide terrific results.

The positive momentum at underlying nonresidential construction demand, combined with our national presence and stellar customer service, resulted in another quarter of record performance metrics.

Third quarter 2015 record operating income from our fabrication platform was $37 million, 30% higher than their previous record achieved just last quarter.

Record operating income per ton was $285, over 13% higher than the second-quarter performance.

I'd also like to congratulate the fabrication team on the acquisition of additional steel decking facilities from Consolidated Systems, which closed on September 14.

The purchase price was $45 million, including net working capital of approximately $30 million, resulting in what we believe a transaction price below fixed asset replacement value.

Great job to the team.

We incurred approximately $1.3 million of costs associated with the acquisition in the third quarter, most of which is included in non-segment operations within the supplemental quarterly financial table, and within other expense on the consolidated income statement.

We continue to see improvement in underlying nonresidential construction demand, good news for all of our businesses, as the construction sector historically is almost the largest domestic steel consumer.

During the third quarter of 2015, we continued to generate significant cash flow from operations of $164 million.

Operational working capital was essentially unchanged, and required $7 million in funding.

Third-quarter capital investments totaled $30 million.

We estimate annual 2015 capital expenditures to be in the range of $120 million.

Our preliminary estimates for full-year 2016 capital investment is in the range of $250 million to $300 million, which includes the $100 million paint line addition at our Columbus Flat Roll division that is expected to start operations in first quarter 2017.

Year-to-date 2015, we've generated $708 million of cash flow from operations, and after CapEx, $622 million of free cash flow.

We've maintained our quarterly cash dividends to shareholders, which increased by 20% in the first quarter of this year.

Our history of increased quarterly dividends continues to demonstrate evidence of the confidence our Board of Directors has in the strength of our cash generation capability, financial position, and optimism concerning our future.

As demonstrated during the first nine months of 2015, throughout market cycles, our business model generates strong cash flow, based on the low highly-variable cost structure of our operations.

Even after deleveraging our balance sheet and increasing cash dividends to shareholders, beginning with the first quarter this year, we have record liquidity of $1.7 billion at September 30, 2015.

Total debt declined slightly, to $2.6 billion, and net debt of $2.2 billion decreased $61 million, due to our free cash flow performance.

The adjusted EBITDA in our press release schedule denotes the number we use for financial covenant purposes.

Our third-quarter adjusted EBITDA was $214 million, and trailing 12 month adjusted EBITDA $850 million, resulting in net leverage of 2.6 times.

Our credit profile remains aligned with our preferred through-cycle net leverage of less than 3 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 incredibly flexible.

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

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

Thank you, Mark.

Super.

Thanks, Theresa.

The safety and wealth of our employees is always top of mind, and nothing is more important to us than creating and maintaining a safe work environment.

Safety is at the forefront, integral to everything that we do.

I would like to thank all our employees for their continues diligence to work safely.

Our safety performance is better than the industry average, but our goal remains squarely at zero safety incident work environment throughout all our locations.

The team is doing a great job.

Over half our locations achieved zero recordable injuries so far this year.

We will continue to implement new initiatives, and reinforce others, to drive toward our ultimate goal of no injuries.

Operationally, the team has performed well in the challenging environment.

The ongoing flood of steel imports and elevated customer inventory levels continued to pressure steel product pricing and domestic steel producer volumes, most notably in commodity-grade flat roll steel.

Although commodity grade CIU average hot roll coil pricing fell in the quarter, our overall third-quarter average steel selling price increased by $3 a ton compared to the second.

Our value-added diversified product mix allowed better-than-industry performance.

Somewhat improved average pricing, coupled with lower average scrap costs, allowed our metal spreads and profitability to expand in the third quarter, despite lower steel shipments of approximately 2%.

Our third-quarter steel production utilization rate was 82%, compared to 87% in what was a fairly robust second quarter.

The production decline was driven by lower commodity grade hot roll coil shipments from our Butler division.

However, our overall performance remains well above average domestic metal utilization.

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

As you may recall, our first order of business after buying Columbus was to significantly expand market and product diversification, moving toward a greater number of customer relationships and a broader mix of value-added products, serving more industries.

The teams are making tremendous progress in automotive- and construction-related products.

We're also making good progress in potential export opportunities into Mexico.

94 new customers have been added.

Market shifts take time, but our planned paint line and [galvan] addition on the Columbus campus will be a significant catalyst.

The $100 million investment will provide approximately 250,000 tons of annual coating capability, and further diversification into higher-margin products for Columbus.

We already have two paint lines and a Galvalume capability in Indiana, but this project allows for a higher product quality, double-wide steel, and access to the southern markets, including Mexico.

We plan to sell service-critical, appliance-grade steel, as well as construction-related products.

Operations are expected to begin during the first quarter of 2017.

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

During the third quarter 2015, Columbus sold 46% more value-added galvanized steel compared to the first quarter this year, and achieved record production results on those lines.

Just less than 50% of Columbus's shipments were hot roll coils, almost a 10% shift from the beginning of the year.

We continue to see the benefit of collaboration between our Columbus and Butler flat roll steel mills.

Along with production and project successes since the acquisition, Columbus has focused on implementing significant cost reduction initiatives, with many more in the works.

We've realized at least $15 million in sustainable annualized cost savings so far in 2015, with identified plans for at least another $15 million in 2016.

In addition, we anticipate continued benefit from the progressing product mix shift.

Additionally, our steel platform continues to benefit from our organic growth of investments, including the addition of premium rail capability, our expanded engineer special [bought] quality capacity, which was provided product diversification and aided mill utilization in this tough market environment for the structural mill.

The plan to increase in flat roll pickling capacity through the new push-pull pickle line being installed at Butler will increase their downstream value add volume capability in 2016.

Metal recycling platform profitability meaningfully deteriorated in the third quarter.

Compared to a $12 million operating profit in the second quarter, we were just above breakeven for the third quarter, the erosion driven by significantly lower metal margins.

Not what we would like to see, but a solid performance by the team against a tough market backdrop.

Our ferrous model margins declined approximately 14%, while non-ferrous margin declined 20%.

Non-ferrous market indices have fallen over 10% in the third quarter, and spreads have contracted substantially.

The recycling environment remains challenging.

The continued significant over-capacity of shredders, particularly in the Southeast in the US, continues to constrain margin, as processors are all competing for the same material.

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

With the expectation of a continued strong US dollar reducing scrap exports, and the resulting ample scrap supply, we don't see likely drivers for significant increases in ferrous scrap prices in the near-term, and believe the market is essentially bottomed.

The fabrication platform continues to achieve record operational and financial performance.

Third quarter 2015 operating results of $37 million surpassed the previous record by 33%, which was achieved during this year's second quarter.

Through the third quarter of 2015, the team has generated $86 million of operating income, 184% more than last year's year-to-date $30 million record.

The team is executing on all fronts, doing a phenomenal job.

Our September acquisition of additional decking assets further supports our growth strategy by enhancing New Millennium's position as a leading North American provider of steel joists and deck.

It will accelerate our growth and diversification into new steel deck products.

By increasing our deck production capability and sales, we plan to better match our joist market share of approximately 34%.

In 2014, our deck market share was only 24%, so there is definitely an opportunity for growth, and this should supply the catalyst.

Additionally, the acquisition provides an opportunity for an increased utilization at our Columbus flat roll division.

Over the last three years, the acquired operations averaged over 60,000 tons of annual steel purchases, predominantly flat rolled galvanized steel, most of which from other suppliers.

This volume can be substantially sourced internally, which would help shift Columbus's product mix, boost utilization and compress conversion costs.

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

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

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

The strength of this business provides positive insight into the continued growth in nonresidential construction activity.

Relative to the macro environment, the US has steady demand dynamics in place.

Forecasts for the two largest domestic steel-consuming sectors, automotive, which historically represents about 25% of total US steel consumption, and construction, which is represented by 40% of total US steel consumption in the past, both remain good.

Automotive has continued forecasted strength, and overall construction spending continues to trend favorably.

SDI has growing exposure to both of these sectors through our Columbus flat roll division, additional long products production capability, and our growing fabrication operations.

Annualized apparent domestic demand is reasonably strong, at about 120 million to 125 million tons.

It is not demand that is our industry's challenge; it is squarely the excess levels of unfairly traded imports.

Other countries were exporting their own financial problems to America.

Excessive steel import volume, combined by high customer inventory levels, has limited US steel mill utilization and pressured domestic steel pricing.

While SDI's production utilization remains well above our peers and the industry in general, there is certainly more to be done.

The continued decline in scrap prices has resulted in a stalled customer order activity, as everyone waits on the sidelines until the scrap market stabilizes.

But scrap flow remains good, and the strength of the US dollar should continue to impede the export market.

Consequently, there doesn't appear to be any strong driver for ferrous scrap price appreciation, which is certainly good for Steel Dynamics.

Again, we expect a relatively flat scrap market in the months ahead.

We believe the fundamentals are supportive of a continued positive trend in economic growth in the US.

In contrast, the current unimpressive global growth, combined with a severe worldwide excess in steel capacity, will promote imports and continue to be an industry headwind to steel pricing and utilization.

However, we've seen import levels have consistently receded year-to-date, and the trade cases under review will likely reduce them further.

Reduced imports, idling of domestic capacity, along with upward-trending demand, should create a positive pricing environment that should allow some room for price appreciation going into 2016.

As raw material prices remain at lower levels, and production utilization improves, there's margin expansion opportunity.

Importantly, as we typically do, we're not waiting around.

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

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

As such, we were able to mitigate some of the import impact, and with our broad portfolio of value-added products, maintain higher steel mill utilization rates when compared to our peers.

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

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

In these challenging times, our low highly variable cost structure, coupled with a highly diversified value-added product portfolio, will continue to generate significant cash flow.

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

Columbus is one aspect of the story, and our organic growth progress another.

We have a solid financial foundation, and an outstanding liquidity profile, providing a unique position for growth as opportunity arise.

We will concentrate on opportunities that will improve the quality of our margins, with a particular focus on downstream value-added growth to mitigate imports and inevitable cyclicality of our business.

The strong character and determination of our employees are unmatched.

They are a phenomenal group, and I am proud to stand with them in these challenging times, and look forward to creating new opportunities with them in the months and years ahead.

I thank each one, and remind them that safety is always the top priority.

Again, thank you for your time today.

And Manny will please open the call for questions.

(Operator Instructions)

Tony Rizzuto, Cowen and Company.

Thank you very much.

I have got a couple questions here.

First of all, good results in a very challenging environment.

My first question is, how should we think about your fourth-quarter metal margins, with all of the moving parts?

Scrap has plummeted again, and there's been more broad-based selling price weakness.

How should we think about that?

There certainly continues to be import pressure, Tony.

And as I said, imports are continuing to recede, that they have almost month over month, through the year.

I think with the one exception, July popped up a little bit.

We do believe the trade cases will further improve that situation, although the timing of that is a little bit uncertain.

The -- I think Dick can speak to the trade cases in a second.

But the timing is extended out to the end of the timeframe.

And so when the impact of that occurs is, I guess, anyone's guess.

I do think margin expansion in the fourth quarter is tough, but I think there is certainly a positive pricing environment going into 2016.

And with a flat scrap arena, I think there's margin expansion, certainly in 2016.

Whether it occurs in the fourth quarter is doubtful.

That's very helpful.

Dick, did you have -- did you want to add something there that Mark indicated?

Or --

All I could add is that, looking at the licensed data for August and September, there is a couple of bad actors that are, I think, thrusting a few of their extra tons this way.

But quite a few of the countries have been moderating their tons.

So the slope of the imports have been decreasing through the second and the third quarters.

And so I think the trade cases are getting the traders' attention, even though preliminary determination have been pushed off into the December timeframe, I do believe that, overall, things are improving in the marketplace.

So they will begin to make some difference, not necessarily a whole lot in the fourth quarter, but rolling into 2016.

Okay, that's very helpful, both of you.

Thank you.

My second question is, I was surprised to see the magnitude of sequential decline in shipments at Butler.

I think they were down about 11.5% sequentially.

And then in rail, which was down about 14%, and obviously the imports affecting HRC shipments.

Was there anything else going on at Butler during the quarter?

I just wanted to check on that.

And then rail shipments have been improving quite nicely over the past three, four quarters, and was a little bit surprised that they were down.

But just wanted to get your view of that?

And how we should think about going forward here?

Let me first -- I'll address the rail.

Actually, from a rail perspective, I think railroads adjusted their orders a little bit.

October is usually when they start placing orders for the next calendar year.

So I think that they were really looking forward to what was going to happen in 2016.

I could tell you that we already surpassed the production of our continuous welder rail in the third quarter, or that we did in the total year of 2014.

And that we expect to ship a 265,000 tons of rail in all of 2015, which would be a record for us.

And so I think things are going well there, and we'll also look at shipping 150,000 tons of welder rail.

So again, extremely well.

So I think the rails, everything is healthy and fine there.

At Butler, again, things turned down, as basically, the spot market on hot band, there's not a lot -- there wasn't that much out there.

And the stuff that was out there was at prices that we just weren't interested in it.

There's a line that you draw, and with our variable costs at such a high level, we said before that 80% of our costs are variable.

And so I think some companies need cash.

We're not a Company that is on survival mode, and so cash isn't what we require.

And so we don't chase them.

And so we pull maintenance, and do a few other things, but we didn't need the market share, personally.

So Theresa, you want to --

Yes, Tony, I would just add, if you -- where the weakness was -- I don't want to [reiterate] what Dick said.

It was really in the hot band.

If you look at the value-added line, they operate at basically the same levels that they operated the second quarter.

And the second quarter, actually, Butler operated at over 100% capacity.

A little difficult to compare.

Yes, we're -- we have a bottleneck.

We're back-logged through our pickle line.

We're looking forward to the start-up of our second pickle line in the first -- at the beginning of 2016.

And so therefore, we couldn't put anything through.

We're running at over 98% full utilization through our complete cold mill complex at Butler.

And so therefore, the only thing that was not running full was the hot mill.

Thank you.

(Operator Instructions)

Matthew Korn, Barclays.

Good morning, everybody.

Thanks for taking my call.

So may I ask, Mark, with imports and shipments both falling, apparently, how much of the incremental softness is really coming from imports taking additional market share?

If that's actually happening for certain products and certain regions?

And how much of it is this -- these lower global prices that are causing the deflationary expectations really setting in among buyers?

It is truly difficult to discern whether the issue is underlying demand, or whether it's just total excess inventory levels.

From our perspective, the underlying demand still remains in many areas.

And I wouldn't say it is robust and phenomenal, but it certainly hasn't deteriorated by any great degree.

There is significant inventory out there.

You see that in the recent MSCI data.

And unfortunately, that data doesn't reflect material that is at the ports.

Obviously, a lot of the material is hot roll coil, and that's where we're seeing the principal softness.

The customer base, I think as I said earlier, is just stalled.

They were expecting a price decline here this month.

Obviously, scrap came off $50 or so.

And they are essentially awaiting sort of stabilization, or at least transparency, as to whether that level ends up.

And again, as I said earlier, we believe the scrap market is somewhat bottomed, and should be essentially flattish in the weeks again.

Certainly not going up, but a soft sideways.

Okay.

Let me follow up with that, on the fabrication division.

Of course, very good result for the quarter.

Now at your recent analyst event, you mentioned a region to region, you're seeing some fluctuations of the demand levels.

Good in the South, out West, maybe some less good out in the East.

But you're seeing overall order rates in line with normal seasonality.

This quarter, I saw year-over-year volumes did end up falling pretty substantially.

Is that a slowdown in project [stunt] activity?

Is that competitive pressures?

Or are the downstream customers, are they showing the same type of stalled-out expectations on price?

Chris?

The -- that's more of competitive pressure on a regional basis.

We see the overall joist market still has grown.

We've had one or two plants, in the Midwest and East, where there is more of a concentration of producers.

To your point, Texas and California still remain far and away the most robust markets that we are participating in.

The Midwest and the Northeast weren't -- did not grow at the rates that the West did, and the Southwest.

And hence, we seem to feel a little more competitive pressure in these areas this year than historically we've experienced.

Thank you.

Evan Kurtz, Morgan Stanley.

Please go ahead.

Good morning, everyone.

First question is on SBQ.

It looks like your engineered bar shipments are up, which I thought was a pleasant surprise, given that the pure play SBQ producer in the industry gutted for some severe demand shipment weakness in the third quarter.

Could you give us a little bit of color on what might've happened there?

Were you able to take share, was it end market exposure?

What caused that?

I think obviously that that arena has seen some softness recently.

For us, we've seen a little deterioration in our book, energy-related, heavy equipment, agriculture.

But that has been largely offset by the expansion into the lower diameter SBQ.

It would have been nice for that expansion to be increasing volume over last year, but in this tough environment, it's replacing that, and keeping things relatively flat.

Great.

That's helpful.

And then maybe a question for Russ.

What are you seeing, as far as scrap collection behavior, at these sorts of price levels, particularly after this last October drop?

Is there money to pay peddlers to go out and collect, or are they exiting the business?

How are smaller feeder yards faring in this environment?

As we look at the world we live in, certainly, these lower price drops have created some problems, particularly for the obsolete grades of scrap.

And we are seeing some reduced flows in some areas of the obsolete scrap collection.

Again, the -- if you just put it in perspective, a year ago -- one year ago, the price that we were able to get for scrap out in the marketplace was double what it is today.

And so over a year's time, we've -- our market price has been cut in half.

So certainly, that has put financial duress on many of the dealers and collectors out there.

And it has also made it, in some cases, un-affordable for people to collect scrap and bring it in.

So there has been some impact, particularly on the obsolete grades.

And we have seen some instances where, if you look at the American metal market over the last six months or so, you have got some folks that have exited the business.

And we also are seeing the phenomenon of some areas where people are walking away from accounts because they're under water.

So again, this reinforces the bottoming out of the scrap market.

And again, as Mark said, I think we're looking relatively flat, from my perspective, going forward for the next several months.

Thank you.

Brian Yu, Citi.

Thanks.

Good morning.

On the fabrication business, I know the results there have been doing quite well.

And you've got a 21% operating margin there.

And in the press release, it talked about benefits from lower steel costs.

Is there a way to try to quantify what the benefit is of lower steel costs?

Or maybe another way, is there a longer-term sustainable operating margin percentage that we can think about for the fab business?

So Brian, as we've said, I guess probably the last three quarters in a row -- because each quarter has been a record quarter -- we are trying to help you with rationalizing that number.

Because to your point, we're actually operating at what we would consider record spreads today.

And that has been -- fabrication has been the beneficiary of rapidly decreasing scrap -- or steel prices.

As that moderates, they're actually now bidding on jobs that will have real steel prices with real product pricing, as well, which they're starting to get some pressure on that side of the equation.

So yes, the third quarter probably shouldn't be what you use for a through-cycle margin for fabrication.

I believe the operating income per ton for them, which is how we looked at it, in the third quarter was $285.

EBITDA per ton was actually, I think, like $308 per ton.

So I would suggest that's very much on the high side of the equation, and numbers that we've not seen heretofore.

But for that to be in the $200 range, probably, on an operating income per ton, isn't something that is unfathomable for a through-cycle type number.

And I think it should be pointed out that, again, through-cycle, the future is certainly not like it would be if you look on a historical basis.

That industry has consolidated dramatically.

We have a national footprint now, having restarted three of the CMC assets, we're up 34%, 35% market share in joist.

Essentially, only three principal players there.

And so that will bode well, in a future through-cycle, and if we're going to be selling it much, much better than the past.

On the decking side, market share has been lower.

And typically, you sell a ton of deck for a ton of joist, it would take a little bit.

But we've been around that 24% market share in deck.

Obviously, the acquisition of the CSI assets will act as a catalyst to boost that up, and we'll get parity, we do believe, quite quickly, between joist and deck.

So it is an exciting business.

Again, my hat's off to the team.

They made some decisions several years ago, and they've built upon that, and it's a good platform for us.

Okay, great.

And then the follow-up question, separately, is just on your utilization rates.

As you mentioned, it was quite high, probably close to 90% in the third quarter.

With some of your competitors looking to idle some of their blast furnaces, does this open up some opportunities for you guys to maybe grab a little bit more market share?

And keep that utilization rate at high levels, in what is typically a seasonally soft fourth quarter?

I would say, absolutely.

I think that there's potential -- again, we've got a phenomenally low-cost, highly variable cost structure that we can take advantage of.

The rationalization should allow greater utilization of other assets that are operating.

And also, we still expect imports to continue to come down.

So it should be a good market environment for us.

Timna Tanners, Bank of America.

Hello good morning.

Good morning, Timna.

Just wanted to dig in a little bit more -- and I know you said on the call, in your commentary, that this isn't a demand problem, it is a problem of imports.

But there have been some recent reports from other companies in the industrial sector, in particular, and some construction, highlighting potential weakness.

So I just wanted to see if you could give us a little bit more color of what you are hearing from your customers?

A little more granularity, please?

If you look at the principal markets, Timna, obviously, a couple of them they are pretty stagnant and weak.

Energy remains [at the core], as is mining, off-road and agriculture.

But in other areas, we're not necessarily seeing any great weakness or deterioration.

Automotive continues to be strong.

I think we have intelligence there, through our scrap management programs and relationships, that the stampers are still stamping, and cars are still being produced.

So we don't see anything to get overly concerned about there.

Truck trailer material handling is -- it's a peak year for us, but it's no near-term change, over the next quarter.

Manufacturing, for us, is okay.

That would be perhaps one area that could be under pressure, given the strong dollar.

But we're not necessarily seeing that yet ourselves.

And we still remain incredibly optimistic on the nonresidential construction side of our business.

It's -- we see it through New Millennium building systems, for sure.

The beam markets are okay.

A little under pressure, but again, imports have been picking up there.

But from the standpoint of our customers, I spent some time on Metal Con last week, which are principally value-add coated and pre-paint customers.

The building products folks are suggesting that 2015, that they're up 12%, year-over-year, over 2014, and they see continued strength through 2016.

So I wouldn't say I'm doing cartwheels down the hallway, but we're optimistic that things are -- they're certainly not deteriorating.

Okay.

That is helpful.

I guess I also just wanted to ask, in light of that downstream strength that you've been highlighting, is that still a preferred use of cash?

Cash generation has been quite strong.

Any updated thoughts on the opportunities there?

I think, just at a high level, from a cash allocation perspective, we've positioned ourselves, over the past year, to make sure that we've got some dry powder, and a strong leverage profile, to take advantage of, I think, core strength opportunities that are going to befall us over the next 12 months.

We expect to maintain the positive dividend profile that we've seen in the past.

Obviously, we boosted that 20% earlier in the year, as a reflection of the step-up cash flow generation from Columbus.

But we would hope to see that being positive going forward.

And we'll continue to repay debt, as appropriate, to comfortably stay within our 3 times net leverage.

Phil Gibbs, KeyBanc Capital Markets.

Good morning, Mark, Theresa, Dick.

Good morning.

And Russ and Chris.

You're all there.

They are all here.

I saw that about 60% of the ferrous scrap that you sold was to your own steel mills.

I think historically, that's been around 50%.

Saw a pickup here in the quarter.

Should we expect that to continue right now?

Is that more of an imperative for you to get that percentage up in this market?

Or was it just a bit of a -- just one quarter, and we shouldn't read too much into it?

Phil, I would tell you that as, again, the one thing that you've got to keep in mind is whether the scrap is at the steel mills or it's in our scrap yards, as SDI owns the scrap.

So it is certainly in our best interest to make sure we utilize the working capital we've got already in place to do that.

So again, I think the function of what we supply internally versus externally is really market-related, and again, demand-related, based on what the demand of not only our internal mills are, but the external mills.

And so it naturally will flow depending upon where that demand is.

Okay.

I appreciate that.

And then on the energy side, are your major sheet-buying customers, particularly in the South, giving you any indication when things may pick up for them, in terms of their buys?

I know they're probably a couple of quarters away.

But what are they telling you, in terms of timing, when they may look to procure a bit more steel?

Dick, you may have a different impression, but I would suggest that it's quite a ways out.

There's some business in larger, transmission-type projects out there.

But from the standpoint of just basic energy pipe -- ERW-type line pipe, it's going to be quite a while.

The rig count has to come up, and the inventory has to dissipate, before anything meaningful happens.

That's right.

Again, the Columbus mill, as you pointed out, we ran the hot mill at about 83%, 84% utilization.

So the tonnage isn't bad.

The -- needless to say, the sales price isn't where we want it.

But the tonnage has been okay.

A lot of that has to do with the increased number of customers you pointed out, the 90 plus new customers.

Most of them were trying to direct towards -- through the coal mill, and the galvanizing lines, and so forth.

We're doing quite well with new automotive inquiries, and so forth.

We've gotten some new platform work already for 2016.

We received another automotive company platform work last week.

Very pleased with that.

That doesn't necessarily translate to shipment for the fourth quarter of this year, but we continue to be awarded work for next year.

But we're continuing to try to move work through the galvanizing lines through value-added and so forth.

But as you pointed out, there's not a rebound in the energy sector yet, and those hot band tons that we are producing, what we really want to do is increase the value.

We made shipments of X70.

So I think we the first mini-mill to successfully supply X70 grade line pipe substrate to the market.

And we're extremely pleased with the efforts by the whole team, down at Columbus, on that success.

And we look for their continued supply of that, and development of additional grade.

So we're working hard down there.

Yes.

And not to be redundant, but I think that the team needs to be congratulated.

We knew we had to diversify that product portfolio when we purchased Columbus just a year and a week ago, a year and two weeks.

But they've done a phenomenal job in a tough market.

It would've been nice for the energy market to have been sustainable for a year-and-a-half once we did it, but it is what it is.

But to boost our customer base by 94 customers or so, and work incredibly well with our existing customer base, to expand exposure there.

And to Dick's point, I'm amazed at our automotive team.

As we may have mentioned in the past, we've changed our supply chain there, and going direct.

We've got seven or eight very capable young men and women there, and their penetration of that market is -- in such a short time is -- it's phenomenal.

And also, the production team, and the -- we challenge them to push the equipment to go lighter, to go wider on the high-strength, low-alloy grades, get into the X70 type pipe grades, and they responded incredibly well.

And it's all reflecting in the utilization of that mill, and a very tough environment.

It's a reflection of the record coated shipments production activity that they been able to accomplish there.

So seriously, my hat's off to the folks there.

Thank you.

Our next question is from Aldo Mazzaferro, Macquarie.

Hello, can you hear me?

We can hear you, Aldo.

Great.

So this might be a question for Theresa.

Your average selling price actually went up a few bucks sequentially.

And I would bet there's the shift between the flat roll being a little softer and the bars being stronger, and the rails stronger had a mixed effect.

Can you break out, a little bit, what the mix affect was in the quarter, on a per ton basis?

Aldo, we purposely try not to get into that granularity by product, for obvious reasons, on the average selling price perspective.

I will tell you that it is mix-related.

As you will notice, we talked about it for Butler is a great example, as their hot band actually decreased, the mix shifted much higher to the value-add side, which actually impacted their average selling price very positively.

You just saw that shift throughout the product chain for us in the seal perspective.

It's just, we feel that is pretty sensitive commercial information, so it is hard for us to share that.

I apologize.

I get it.

That is okay.

So a follow-up question, then.

On the -- Mark, on your comments about margins being tough to improve in the fourth quarter, if scrap goes sideways from here, on an index basis, wouldn't there be some -- at least a little bit of lag effect, where you'd see a declining usage cost in the fourth quarter?

And if that is true, would that imply that you are thinking selling prices might go down in the fourth quarter for you?

Yes, I guess my comment is just, margin in general, there is certainly a flow-through of scrap.

Not quite as steep as we would like to see it, because operating rates are maxed out there.

But I guess my concern is, what is the relative rate of decline of our scrap input cost, relative to product pricing?

And the product price environment is a little cloudy right now.

Thank you.

Jorge Beristain, Deutsche Bank.

Good morning Mark, and everybody.

Mark, could you provide any insight, through your legal team, as to why we saw this delay in the determination of the countervailing duties on hot rolled sheet by Commerce Department?

That is my first question.

I'm going to pass that over to my legal Washington expert, Mr. Teets.

(laughter)

I think really all of the delays are due to the fact that I think there's about 135 cases, between countervailing and dumping, that have been filed since June.

And it's just a massive amount of data that's being collected from everybody, and it is an overload situation.

So everything has been pushed back to the -- basically to the latest dates available to them for making their preliminary determination.

So they had -- when they had -- we had filed, we knew the earliest dates, and we knew the final dates.

And I think just about everything pointed towards the later dates being the time frames in which to expect results.

So I don't think anyone is really surprised.

And I do believe mostly, the traders expected it too, and hence, why in some of the higher levels of imports coming in from some of the countries are still being maintained, because they expect it not to be caught, at this time, with shipments coming, because they knew that trade cases determinations wouldn't occur until the later dates.

Or they were quite sure of that.

Right, (multiple speakers) but those duties are retroactive to the point of filing, are they not?

No.

Only if there was a -- only critical circumstances would be determined, and that hasn't been determined in any cases.

So they only are as of the point of the determination, normally.

Thank you.

My other question is Mark.

And maybe he could just comment as to what you are hearing maybe in Washington, or just at an industry-level feeling.

But is the ball back in the court of the US steel companies?

Is Washington or industry being forced to look to itself and say, what can they do to fix the issue?

And it comes back to consolidation.

I guess my question is, can the industry, in your opinion, support another round of large-scale consolidation?

Or are we at technically at the point where electric guard furnaces -- most end clients have two or three option within a certain radius in imports.

Same thing on integrated.

And I'm just wondering if you could just talk about, can the current issue in the steel industry be fixed by for the consolidation?

Firstly going into your comment about Washington, I think that generally, there's political support for our industry.

I think there's definite support, and you see that in the new language going through the TTP and the customs bill.

Is that right, Dick?

Right, in the TPA.

TPA.

Sorry.

So there is a positive stamp there.

Some of the margins or the duties that we've seen, particularly on pipe, perhaps a little disappointing to some.

But given the cost structure, the strength of the dollar, the devaluation of the yuan, devaluation of the ruble, lower oil price, they're starting off at a very low basis.

But generally, our impression, or our thought -- belief is that trade cases are going to be positive, varying duties to varying countries.

But nonetheless, a positive for our industry, and imports will recede.

And we've already seen that.

I think the corrosion-resistant import licenses were down -- actually, imports were down, and then the licenses are down quite dramatically.

So they will have an effect.

Will that affect be substantial enough to change the market strength to a degree that some of the challenge players can sustain themselves?

I think that is an open question.

Obviously, folks are looking inwardly to survive and get through this.

You are seeing that AK US is certainly doing some strong things to resolve their woes, and that will bring some rationalization, at least near-term, for the next -- these plans are not likely to go away.

But certainly, the volumes are going to come out of the market.

And generally, utilization of our industry will pick up from that.

So a combination of lower imports, some rationalization.

I think that will reflect in a more positive environment.

Will that get us up to utilization, near-term, to 85% or 82% or low 80%s, that you really need for material margin expansion?

Don't know.

Certainly take us in the right direction, though.

Thank you.

Evan Kurtz, Morgan Stanley.

Thanks for taking my follow-up.

Just another quick one on trade cases.

Just thinking, with all of these delays, have you been able to amend the initial filing with some of the incremental data?

[Sieman] prices have really fallen off a cliff since you initially filed a lot of these cases.

Is there any way to incorporate that into the process, so that the DOC comes up with maybe a stronger margin?

No, that -- there is no mechanism to allow that to occur.

It's the window in which the case was originally filed upon is the data that is submitted, and that's the data you live with.

Hindsight is always 20/20, Evan.

Great.

That is helpful.

Thanks, guys.

John Tumazos, Very Independent Research.

Thank you.

Do you believe the scrap market will recover enough for you to earn a good return on your recycling assets?

Or should we expect that you consolidate, carry less inventory, and otherwise reduce the assets employed?

John, I would tell you, I think if you look back in history, with the exception of the 2000's, we are pretty much back to the levels where scrap prices were created and historically going back in the 1900's -- last century.

Dick was looking at me like I am crazy.

Sorry, 1901.

(laughter)

But again, I think the scrap business was a viable business, at those levels, in the not too distant past.

It's -- the business itself has just got to readjust itself to the levels that the market is going to allow.

Does that mean further consolidation, or people dropping out of business?

It could.

But again, the flow, and the amount of scrap generated in the United States, is relatively stable.

And so that flow, whether it comes through OmniSource or it comes through somebody else, is likely to be there.

So again, I think we've just got to look at a new reality in our business, and deal with it.

Thank you.

But Russ, wouldn't you say, though, that the recycling industry in general is under extreme financial stress?

All you have to do is look at the American market and see the guys were dropping out weekly.

So it certainly doesn't happen overnight, but certainly, material rationalization is going to happen over the next 2 years to 3 years.

I think so, yes.

Justine Fisher, Goldman Sachs.

Good morning.

Good morning.

So it seems that the service centers are a big problem, in terms of demand, at the moment, because demand from some of the end markets are still pretty good, but new inventories are pretty high.

We just don't have the buying that it seems that we need to have, in order to get things going again.

And so what do you guys think the service centers need to see, in order to get them buying again?

Is it just the working down of inventories, and that's it?

Or do service centers need to get much more bullish on overall demand themselves?

Or do they need to see international prices stabilizing before they say, okay, we will buy domestically instead of looking for those imports?

What do you think the service centers are looking for?

Because it seems as though that is one of the big demand problems.

Because everyone talks about end market.

End markets seem to be generally fine.

I think I can almost start saying yes, yes, yes and yes to a whole lot of those items.

But I think there had been, of course, a general shift from all of the end markets.

Everybody has, I think, taken a breath from levels of inventories that they intended to carry, until they have this assurance that there is not going to be another drop.

And so all of the end-users, the people that the service centers sell to, have all decided that there is no concern that they can get what they need, in a relatively short period of time.

And I don't believe -- very few would be concerned about the just in time deliveries.

So therefore, the end users, the OEMs and so fort, believe that they have confidence in their service center suppliers.

Service centers believe that they have confidence in their mill supplies, and so forth.

And even sometimes, the service centers, if they are concerned, they will buy between themselves, and to try to pull their inventories down.

And so it is a matter of all of those inventories at the OEM, and sometimes there is inventories being held, like with our SBQ, at forgers.

There's middle people in the supply chain that all have to be rationalized, and it is just a matter of a little bit of time.

And so once all of those become, I would call, the new normalized, the service centers will be buying.

I don't think that the spreads, the spreads will become, I think, more palatable between imports and the domestic mills.

And things will get back to ordering, once people are somewhat assured that the scrap price is flattened, as we believe it is going to be, and it becomes more palatable to take a position.

And so then the service centers will step up a little more.

But nobody is going to, until the supply chain -- the complete supply chain has pulled down their inventories a little bit more

Thanks for that.

That is great color.

And just to follow on, can you guys give us some color as to what your lead times are, maybe across different products?

Like everybody, it is not real long.

We are a couple of weeks on our hot band.

We're a month and a half to two months -- again, we are even longer than that on some of our finished product.

As we're sold out, we have a backlog sitting in front of our pickle line in Butler.

We are shorter than that down in Columbus, because we do have openings there.

We're fully sold out.

Our hot mill at -- our number one mill at Columbia City is running at 100% utilization, but our medium section mill there, of smaller products, is about probably a three week to a month, but we sell probably about 40% of our total sales there come out of inventory.

Roanoke sells probably 50%, 40% out of rollings, and the rest out of inventory.

Our barter and merchants, I think that's pretty traditional within the industry for merchant bar, and so forth.

But -- and SBQ is basically all rolled to order.

And so I would tell you there, it depends on how much bar finishing goes through, and bar finishing is sold solid.

So I would tell you there, it's six weeks to two months.

So I think we're fine where we are, and steel at West Virginia is basically full.

It has a little bit of time on the one mill, but real full.

Melt shop is running full.

David Lipschtiz, CLSA.

David, your line is live.

Sorry, I had the mute on.

So I guess my question is, the thesis over the summer, when all the trade cases were coming, was prices are going to rally as soon as those things come, because people are going to get nervous about prices rallying.

In the meantime, prices have fallen pretty precipitously.

When they trade cases or the duties do come, whatever they are, how quickly do you think people are going to react to it?

Because obviously, people didn't react right away when the duties were announced to begin with.

Or the trade cases were filed.

I think it is difficult to quantify.

I would suggest that, given the pricing environment or the cost structure environment out there today, of the employing countries, the -- we're not going to see the precipitous drop in imports and an exponential hockey stick improvement in pricing.

I think our belief is that it is going to be a slow erosion of imports, and a slowly increasing margin expansion pricing environment.

But to quantify it, as to -- to put dollars on it, I don't think we are that good.

Thank you.

Matt Murphy, UBS.

Thanks for taking the question, and apologies if I missed it.

Just wondering, on the CapEx budget, you've got around $110 million on your investment at Columbus, let's say $120 million sustaining.

I'm just wondering if the rest, and particularly if you're going to hit the top range of guidance, is that more maintenance?

Or is it actually investments in the business?

Maintenance perspective over all of our business, we tend to look at it as about $120 million per year, and with the paint line addition, which is $100 million, that gets you to about $220 million.

So the bottom range is $250 million, so that would be like $30 million worth of additional-type items.

Top range is $300 million

If we were to get to that top range of $300 million, that's going to be margin enhancing, productivity enhancing, efficiency enhancing.

In other words, it will be higher return type investments.

It will not be additional maintenance expense -- expenditures, sorry.

And is a decision on that basically predicated on market conditions?

Or are you whittling down some ideas?

Just wondering if you see any areas that you think are attractive, even in the soft markets?

Actually, the finalization of our capital plan doesn't take place until November.

So that was just a real high-level preliminary number, because I know everyone wants to see that going into trying to model 2016.

As we get to the first-quarter call, we will have that refined.

But yes, there are numerous projects that are on the table, and everyone is vying for theirs to be able to be approved.

At this time, I'd like to turn the conference back over to Mr. Millet for any closing comments.

Just for those that are remaining on the call, thank you for your support.

We diligently try and do our best each and every day.

Many of us are shareholders.

In fact, all our employees are shareholders in one way or another, and we strive to create value each and every day.

And to any customers on the call, we certainly appreciate your support, and we will continue to act diligently for you.

And to all of our employees, thank you to each and every one of you for a phenomenal job this past quarter, this past year.

And we all emphasize, be safe and each and every minute that you're out there.

Thanks, folks.

Have a great day.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time, and thank you for your participation.