Steel Dynamics, Inc. (STLD) Q2 2008 Earnings Report, Transcript and Summary

Good day, everyone. And welcome to today's Steel Dynamics Second Quarter 2008 Earnings Call. Joining us today are Keith Busse, Chairman and Chief Executive Officer, Mark D. Millett, President and Chief Operating Officer, Flat Rolled Steels and Ferrous Resources, Richard Teets Jr., President and Chief Operating Officer, Steel Shapes and Building Products, Theresa Lagler, Chief Financial Officer, Gary Heasley, Strategic Planning and Business Development. And for opening remarks and introductions, I'd like to turn the conference over to Theresa Wagler. Please go ahead.

Thank you, Audrey. Good morning, everyone. Welcome to Steel Dynamics Second Quarter Earnings Conference Call being held today, July 22, 2008. A replay of this call can be heard and downloaded as a podcast from our website at steeldynamics.com. Today's management discussion includes forward-looking statements. We caution that actual results and events may differ materially from statements or projections that are made today. You may obtain additional information concerning a variety of factors and risks that could cause actual results to differ materially from today's forward-looking statements by referring to the section on Risk Factors and our most recent Annual Reports on Form 10-K and 10-Q, as filed with the Securities and Exchange Commission, as well as in other reports we file from time to time with the Commission. These reports are publicly available on the Steel Dynamics website as well as the SEC website at sec.gov. After today's management discussion, we will open the call for questions. Today's call will begin with remarks by our Chairman and Chief Executive Officer, Keith Busse. Keith?

Thank you, Theresa. Good morning, ladies and Gentlemen. It's a nice sunshiney day here in Fort Wayne, Indiana and we had some nice sunshiney earnings to report to all of you. Although I would note with a degree of levity that last week, when one of our favorite competitors had sunshine earnings to report, that the market had kind of a rainy day. We should hope that won't happen two times in a row. But with that being said, as you can see from our press release, our earnings were $1.05 per diluted share, up significantly over our revised forecast for the quarter. And I might tell you that our performance in June was extraordinarily strong in the Recycling and in the Steel segments of our business, giving us this nice pleasant surprise, if you will. But earnings were up sequentially 48%, quarter-over-quarter from the $.72 that we reported in the first quarter. As you look at comparing our sales for the second quarter against traditional comparisons of the second quarter of the previous year, net sales had increased to 164% from 911 million to 2.4 billion and net income increased 124% from 94 to 210 million. I think one of the more interesting things we noted was that the results for the first half of '08 were net sales of 4.3 billion and net income of 353 million, nearly matching full year 2007 sales and income results. The first half obviously benefited from the acquisitions of The Techs which performed very well during the quarter, OmniSource and Recycle South. We had excellent earnings from our Steel Operations. Second quarter net shipments were 1.5 million tons, and were, even without The Techs, were up 10% over where they were in the second quarter of '07. A lot of that growth coming in the Flat Rolled segment, Flat Rolled was a little weak throughout '07. I don't have to remind all of you of that. And it was up nicely this year throughout the year. As with regard to steel scrap and scrap substitutes, we just had excellent results from the Omni organization compared with the first quarter. Second quarter ferrous shipments of 1.5 million tons were up 8% and non-ferrous shipments of 254 million pounds were up 6%. OmniSource, as I said, reported higher than expected earnings in the quarter. I would also like to report that the Recycle South unit is functioning very well. Had they been a member for our family for the entire quarter, we would have had rather strong, very positive results as well. Some of that activity, as it's reported in other income, is in Page 2 of our release under scrap and scrap substitute operations, where we note that $14 million, which was Omni's 25% ownership share, was reported in other income, not in operating income. That will obviously change on a go-forward basis and will reflect 100% of those results. So the Recycle South earnings from 100% perspective were only in our platform for really just a couple weeks. They're in there for almost three weeks but given the nature of shipping in that industry where it's done on an FOB delivery basis, we had to really exclude on a one-time basis the results, you might say for the last week of the quarter, from our reported activity. So we continue to see very, very positive -- we believe we'll continue to see very positive results from our recycling operations on a go forward basis. Iron Dynamics ran very, very well during the quarter, providing 51,000 metric tons of pig iron, most of which was liquid I might report, and the progress is I'm sure Mark Millett will deliver to you -- was very good at Mesabi Nugget as well. For those of you to keep track of scrap also on the second page, we also noted scrap was up approximately $144 in the quarter. Quarter-over-quarter for those of you that track statistics against competitors, one might ask the question why were your results little higher than the other fell as on a change basis or others in the industry, and that's because a greater proportion of our melt mix is in Flat Rolled products where the differential between the obsolete grades which used to be 20, 30, $40 a ton is now $300 a ton and there for, that we saw -- and that happened, that spread basically happened during the quarter which elevated our input costs into our furnaces at Butler, Indiana. So, not to worry, our scrap costs are in very good shape versus our competitors. I still think we have the very strongest position as regard to the input cost to our furnaces throughout the company. We also noted that the Steel Dynamics foundation was created during the quarter. Our Board had authorized this activity some time ago and that activity began in this quarter and we made a $15 million contribution to that foundation. That foundation will support local communities served by the company, not just of course in the Fort Wayne area. We also went out to talk about in our press release the fact that our results were going to be in the $1.05-$1.15 range in the third quarter. All I can tell you about that is that I would steer you towards the center of the road there, as I usually do. It would be certainly our best guess at this point in time. We probably are going to see a slight decline in Steel and scrap shipments during the quarter, even though the results in recycling are going to be very, very strong during the quarter and a lot of that is due to mill outages that we have that others have and consumer provider industrial outages in July and August. As regard, recycling on a go forward basis, I suspect our scrap cost could be up another $100 a ton based on recent activity in the recycling community or in the purchase of ferrous goods, and -- but then again, I would also tell you that I think the market right now for obsolete grades of scrap is going to decline. And they're at historic highs and the spread as I noted between obsolete and prime is at record levels, but the flows are very, very good and absent, there's sort of a lull in activity on the export front, if you will, and that's probably going to cause the obsolete grades where the flows are very, very good to decline somewhat. I think it's anybody's guess as to how much, there are people saying sideways there are -- I've heard some people venture a guess could be at $100 a ton, 50, 25, I don't really know. The market certainly will tell us that answer on a go forward basis but I would guess the obsolete grades are going to be off somewhat as we look at material to be laid down during the August time frame. Prop grades remain rather tight although I will note with the American axle strike having ended and the outages in the automotive sector and other sectors over with for the Summer , I think we'll start to see more flow in the prop grades and I can't pre-predict where prices are going to go, but I think they certainly are plateau at the level where they are at and could back up somewhat. I think if -- it should be noted if obsolete scrap backs up at all, it's really not going to impact margins as most of that is on a surcharge type basis. I would also tell you that it wouldn't affect margins dramatically in recycling, as scale prices for OmniSource and others would probably be adjusted to reflect any changes in the market. So I'm really not concerned about margin impacts at all of obsolete scrap. Obviously flat wears is not tied to the surcharge mechanism to any great degree, at least it's not in our house and therefore, if the prop grades were to regress somewhat, it might actually offer an opportunity to see margins improve on a go forward basis. As we look throughout the year, again, we see a really good third quarter, pretty darn good fourth quarter, although it's just way too early to have clarity relative to market conditions later in the year, but I don't really see them changing. The import activity is muted and I don't know of anyone that sees an enormous change in that area. The economy is perhaps steering on the edge of a recession and I can't pre-predict recovery, but with the lack of export activity especially from a Flat Rolled perspective even with the weaker economy, I really don't see prices changing a heck of a lot on a go-forward basis and they may actually go up. So it's too early to tell relative to the fourth quarter but all of collectively caused us to change our outlook, if you will, for the full year, to a range of $3.80 to $3.90. I think industry fundamentals are just -- are very, very strong and I know that so often commodities has impacted the steel community. I've never really regarded the products reproduced as a true commodity and I think demand remains very, very strong in most every segment of our business. In the Flat Rolled arena, our backlogs are not out all that far, but that's the way it's been all year long. It's kind of -- inventories are low, with prices being high, I think service centers are not carrying huge amounts of inventory with prices being high. Credit exposure is stressed and some people don't have the credit to carry higher levels of inventories. So I think there's a lot of comfort with ordering month in and month out or week in and week out and we see the flow of order activity is very good. I think we're going to see growth in steel making in the second half of the year, as our new steel mill at Columbia City comes online and Dick will speak to that a little later in time. We're certainly experiencing greater output at Butler. Things are -- that mill is running very, very well these days, as is Columbia City, and as is Roanoke, as is Engineered Bar Products. We have very strong backlogs in shapes and Dick will speak to that issue in just a few minutes. So I think the US steel industry is well positioned, certainly from a domestic perspective and is globally competitive. I think conditions are going to continue or persist. And I think SDI is excellently positioned from a recycling perspective and from mill activity perspective to have not only a strong second half of the year but a very strong '09, as I think the industry will. From a Steel Operations perspective, as we look at Page 2 of our earnings release, we did -- there's some things to note in there, that our operating income was $206 per ton. I believe that's an all-time company record showing that margins did truly expand during the quarter. And would also note that the second quarter's average selling price was $1,011, fairly high by comparison to the first quarter of 08, and I think far -- perhaps a little stronger than some of our competition. But again, that's a tie directly to our scrap costs went up a little more because the inputs to Butler are mainly prompt industrial material. Likewise, our selling prices for that very same reason are likely to be a little higher. So very strong steel results, expect them to continue. Very strong scrap results as you can see and we expect those to continue. The operating income for the segment was $86 million. We think that will grow sharply during Q3 and as I said earlier, Recycle South will -- they're doing just a great job down there. And that activity will continue. We did purchase the assets of Sturgis Iron and Metal during the quarter. And they have seven operations that will be reopened. And hopefully, we'll see some activity and some positive results in Q3 from the reopening of those facilities. The steel fabricating margins were -- continue to be under some stress. Although we're about finished with all of our repositioning of that business platform, and our new Lake City operation is running extremely well as is Butler and we're sort of just getting under way at -- in the South at Florence and Salem. But we think second quarter or third quarter results could actually improve somewhat over second quarter, even though the market for products of that [inaudible] nature are still fairly flat, reflecting the economic conditions that exist in the marketplace. So that's really what I have to report this morning. I think it's a very good report. Mr. Millett is on vacation in Wyoming. But he is on the air and we're going to turn the call over to Mark and let him give you an update on our Flat Rolled Steel making activities, Iron Dynamics, Mesabi Nugget, etcetera. Mark, are you there?

Yeah, I'm here. Good morning, everyone. Thank you, Keith. I just have a few brief comments, I guess, to emphasize some of Keith's thoughts. Certainly clear that the Flat Rolled division had an absolutely outstanding quarter. Steel shipments were up 22% over the second quarter of last year. Facilitated in part by a strong order book, which in light of efficient scheduling, perhaps more significantly , and some design issues that related to a prior cast and modifications are now fully resolved allowing the fill to mill to fully exploit the new production capability. Record production rates have clearly demonstrated our ability to achieve the expected 3 million ton annualized operating rate that we have previously advertised. I think it should be emphasized this record operating performance was achieved accident free. The Butler mill was also successful in attaining OSHA VPP status which is a partnership with OSHA to actually partner and have OSHA come into the facility. I believe we're the only steel mill, Steel making operation in Indiana to achieve this status and I think only one of three steel mills in the country, so, the team has done an outstanding job from a safety perspective. As Keith mentioned The Techs continue to execute superbly through the quarter. They benefited from record operating rates and a very strong order book, particularly in the next light gauge product line. The team has done a phenomenal job there. From a market perspective, I think we remained confident that a combination of the strong global pricing environment, high global steel making costs, cost of the ocean freight and the weak dollar will limit steel imports and continue to promote steel exports, thereby keeping the domestic market steel short. Our customers steel procurement is kind of become somewhat hand them out as their credit positions and desire to speculate have diminished given the high transactional values right there, but nonetheless order entry rates remain very firm and steady allowing us to maintain our strategy for a 30- 40 day backlog. Iron Dynamics, again, superb quarter. The folks there have made substantial progress towards consistent operation and have controlled costs by substituting iron concentrate with mill scale for iron concentrate. They produced as Keith suggested I think about 51 thousand metric tons of liquid iron, which substantially reduced our dependence on imported pig iron. With imported pig iron now delivering to NOLA for roughly $900 -- $920 a gross ton, and a product or production cost for the liquid iron at $400 to $450 a ton, Iron Dynamics obviously made a significant contribution to our quarter. Finally, Mesabi Nugget as Keith mentioned, construction is under way, equipment procurement is proceeding well and we should be able to maintain our start up target for Q3 of 2009. Keith?

Mark, thank you. Thank you for noting the excellent performance in Iron Dynamics. I think that's the first time in history we've had a significant return on asset dollars deployed that's a notable event. Dick, I'd like to turn it over to you.

Thank you, Keith. Good morning, everyone. Again, I think the shapes mills would like to congratulate Butler on their accident free performance in the prior quarter and we strive to, I know Pittsboro has also done extremely well there and the rest of us are attempting gain the same performance. At Columbia City, congratulations go out to the melting and casting departments as both of the quarter, both June as well as May were records and so it was about a record quarter so it was tremendous performance over there. I think as Keith noted the most important news is that the second mill is ready to get started over at Columbia City, the medium section mill. We did have a mechanical failure on a component during cold commissioning, and we do have both the supplier as well as ourselves pursuing repairs and we have contracted with the machine shops and heat treatment facilities and we'll have those parts I believe by the end of this week and so we are looking to roll our first beams before the end of this month. So it's a much awaited activity. And lastly, about Columbia City, I do get questions usually about the backlog and I told Keith this morning that our backlog, I looked at to a versus a year ago and it's within a few thousand tons of the performance it was then, so there's no concern from a structural perspective. Pittsboro, also congratulations go out to the rolling mill as they have set production records for both quarter's so far in 2008. There will be an outage in the rolling mill scheduled for August this quarter to install the foundations from the two new mill stands as well as begin construction in a critical path for the furnace upgrade, but all components are in order, or delivered and we're working towards that upgrade in capacity. I do think it's noteworthy to mention that we recently set a record in percentages of SVQ shipments to total shipments. I think this reflects the confidence of our customers, the experience of our team to produce quality products and our willingness of both customers and SDI to strike equitable partnerships in light of the unprecedented scrap and alloy Markets. As far as Roanoke gets, we would handout our maintenance outage there in late April and early May and installed the new Oxy-fuel burners in the EAF and did other production enhancing and cost reducing equipment installations and we are realizing improved melting production on a daily basis. It's really doing well. We did achieve a finished Steel shipment record this quarter and continue to look to the third quarter for good bar as well as Billett shipments. As far as Steel of West Virginia is, they performed well in spite of cyclically weak transportation sector or the truck/trail -- market remains in a trough but the Steel West Virginia team has shifted its production to serve other Markets producing I-beam, Channels, wide flange beams and the RV market. This performance has been really noteworthy that in spite of the product mix adjustments we've set great performances in the rolling mills include number one mill has been rolling at a record pace. And lastly, as Keith mentioned our New Millennium Building Systems continues to see a weak market due to the downturn in residential construction. And while we've rationalized our production in response to that market, we have seen production records set at a couple of our facilities. So there is good things happening at our manufacturing and fabricating group. Keith?

Thanks, Dick. We've already reported on the scrap segment but -- and I would tell you that for those of you who noted the fact, we had departures on the part of certain members of the upper management team at OmniSource. We have a very, very strong team at Omni. The -- some very fine young assets there that were doing all of the heavy lifting have stepped right up to the plate. We've got our new org chart about worked out and there are going to be promotional opportunities for people that have performed well. So we're very pleased with the results over there. They received excellent guidance from their former management team. And I think the new regime that will be responsible for results going forward is just going to be brilliant. So we're excited about the future in recycling. We would also like to report that Recycle South has a very strong management team. We've gotten to know them. We're really very happy they're part of our family and look forward to long and prosperous relationship. That's really all I have to report there. I'd like to now turn it over to Theresa Wagler for her comments.

Thank you. Also in just a few minutes, I'll highlight some additional financial assets for the quarter. Beginning with working capital, not a surprised to anyone, our working capital did grow this quarter. Accounts receivable increased $211 million excluding the acquisition of Recycle South. I'm happy to report though that we still have, consistent with the first quarter, approximately 95% of those receivables are less than 60 days outstanding. We are watching our customer's credit very closely, as most companies are, and we're very confident with where we see them today. From an inventory perspective, we increased 227 million, excluding the acquisition of Recycle South. We actually increased in value but our volumes in raw materials and in finished goods decreased. It was just the increase in the value of the inventories themselves. We're still currently turning at most of our facilities inventories about once a month, which is very good. So, from a capital expenditure standpoint, we spent $101 million during the quarter and $195 million for year-to-date. About 60% to 65% of that has been spent on growth projects at our steel operations. For the second half of 2008, we're expecting about 200 million of additional capital expenditures. That relates to the completion of our second rolling mill at the structural and rail division. That includes about 90 million to be spent on the Mesabi Nugget project yet this year, approximately 45 million on some projects at our scrap resource arena and approximately $10 million at IDI. From a depreciation and amortization standpoint, for the quarter, we had had 48 million. For the remainder of 2008, we expect to have between 50 and 55 million of depreciation and amortization a quarter. We also had an increase in goodwill and intangibles of just over 400 million in the quarter. That's related specifically to our very preliminary estimates for Recycle South. That will be further refined during the quarter and we'll be able to report more definitively on the third quarter earnings call and where the results end up. From a tax rate perspective we have 38% effective tax rate in the quarter. That seems to be a good rate for the remainder of 2008 as well. From a liquidity standpoint, after issuing approximately 500 million of senior notes in April, which are due 2016, and we have approximately 201 million outstanding on a revolver, our leverage is currently just over two times or about 54% on a long -- net long term capitalization ratio basis. Gross interest expense for the quarter was 41 million, capital -- capitalized interest was 5.5 million. I would model approximately 40 million a quarter for the remainder of 2008 on a growth interest basis. Our share data, we have 190 million shares outstanding at June 30 and we have remaining converts of approximately 3.8 million shares. During the quarter, we had about 5 million shares issued through the turn-in of some of our converts. We also issued 3.9 million for the acquisition of Recycle South. I would use 204 to 205 million outstanding shares on a diluted basis for estimates for Q3 and Q4. On an export basis, we actually have approximately $122 million of product in the quarter. That's about 5% of our total sales. About 45-50% of that was actually in the scrap arena and that was non-ferrous export to Asia. And finally, in conclusion, for some specifics related to our Flat Rolled shipments. For Q2, we shipped 337,000 tons of hot rolled, 43,000 tons of pickle and oil, 49,000 tons of cold rolled, 101,000 tons of hot rolled galvanized, 78,0000 tons of cold rolled galvanized, 72,000 tons of painted products and 26,000 tons of Galvalume for a total of 706,000 tons. With that Keith I'll pass it back to you.

Thank you, Theresa. I don't really have anything to add. Audrey it's probably time to open this up to the Q&A component of the conference call. Question and Answer

Thank you. [Operator Instructions]. And our first question will come from Mark Parr with KeyBanc.

Oh, hi, hey, Keith?

Hi, Mark. Good morning.

How you doing?

I'm doing quite well, yourself?

Well, I'm hanging in there, but congratulations. It's a great quarter, great results. I missed. Could you go over the scrap outlook again as you're seeing it right now? I mean, we've got this very unusual diversion between prompt and industrial material and can you talk a little bit about how you see those two coming backing together or if you see them coming back together?

I think that obsolete grades almost traded in sympathy with the move in industrial grades last month. Flows were awfully strong. They still remain strong, in light of the fact that some of the export buyers are sitting on the sidelines at these prices, I can understand that. We may have some overhang there and obsolete prices may back up whether or not the prop grades which are still very tight back up in sympathy so to speak, or because the flows increase, so, I think that's greater likelihood in time that as we work our way through the summer outages and the American Axle strike ending, even though we have a rather weak economy, flows should improve somewhat and maybe take a little pressure off of that. I'm just, -- Mark, I don't know how we could have predicted $300 spread, and therefore I can't really tell you to what degree it's going to narrow, but I think it will narrow over the course of time, but I don't have a crystal ball that big.

Okay, is it fair for us to think about the spread as something, especially because of your -- now what over what, 55% of your mix is Flat Rolled? I mean, you've got a lot of prop material, maybe a little higher mix than some of your other competitor's in the electrical furnace arena. And is that something that probably is hitting you to a greater extent or constraining your margins or is that something that's actually been a positive because of surcharge pass throughs? I am trying to understand how to think about that?

On obsolete, it is surchargeable, the margins don't change a lot whether it's going up or down and Flat Rolled there is not quite to tie to the surcharge arena which opens up opportunities or it can hit you over the head with a broom so to speak on the other side, but I really think that pricing is a reflection of market conditions and the lack of imports and resource costs and alloy costs and energy costs and there is less connectivity there, if you will.

Okay.

I think that the good news is as I noted, if you look at our average selling values, they were very high, which again is driven by the very thing you talked about, 55% of it is -- of our Steel making mix is Flat Rolled. So it has a little bit of a negative quarter-over-quarter change impact on scrap, but an awfully positive quarter-over-quarter impact on margins. So I think the market is going to remain fairly firm going forward and as I said, if prop scrap were to decline, it's a margin improvement opportunity actually.

And that's because there is not so much direct connectivity in the global environment is very important determinant of pricing. Is that the way to look at it?

Yeah, I think it probably is a way to look at it. I think the other thing that I would like to note is that we're now a year or so away from Mesabi Nugget and we will have certainly a greater preponderance of our inputs going into our furnaces in the Flat Rolled side that are virgin materials as opposed to where we are today. So with the effective cost structure of Nugget, I mean, Nugget is going to make a lot of money simply said, but at the same time, the input costs I think at Butler could well improve. We wouldn't be quite as dependent on the wild swings of the industrial goods marketplace from a recycling perspective. Then again, I'd tell you Mark, the margins don't change a lot from recycling perspective on industrial goods. They tend to remain in the same arena no matter what the shipping level is, but I think -- so if the index goes down, they buy cheaper and obviously allows them to sell cheaper and to the client community. And we're a client, so I hope that helped clarify all of it.

No, that's good. Do you have an update on the concentrate supply for Mesabi and is there anything new as far as the permitting process for the mining side of that operation?

I think Mark is still on the air. We'll let him comment on that.

Yeah, Mark.

Hi, Mark.

Good morning. Mark, the State of Minnesota has appointed a very, very, very good project engineer to the monitoring process for the mine. So we're very confident that the permits should be received probably December of next year, allowing the start of the mine probably end of 2010, early 2011.

Okay.

So that's -- and again, given the normal caveats that, it's an environmental permit and there could be public opinion come into that. But we're very, very confident. The State of Minnesota is behind the project. The mine is a Greenfield site -- Greenfield facility. So we're confident in that. Concentrate for the interim period between Q3 of next year to end of 2010, we're negotiating that with several parties as we speak.

Okay, terrific. Thanks for the update and congratulations on the great results.

Super, thanks.

Thanks Mark.

And next we'll hear from Wayne Atwell with Pontis Capital Management.

Thank you, and congratulations on a great quarter.

Thanks, Wayne, been a while since we've talked.

Yeah, it's been awhile. A couple of quick questions. My understanding is Russia and Kazakhstan, or maybe it's Russia and one of the other former Soviet Union countries are limiting exports of scrap. Is that right? Is anybody else limiting scrap exports and is that impacting the market at all?

I think it's mostly, what we refer to as the old Soviet Block and mainly Russia.

I think it's the Ukraine possibly, but is -- anyone else there might.

Well, I think it's both, Russia proper and the Ukraine. I think they are -- I don't want to say they're hoarding scrap. I think they see a brighter future for electric art furnace steel making and they are now -- they're blocking free market activity on that commodity at this point in time, which is one of the things I think the new -- there's a new group that's been formed that's a little incensed by all that kind of activity and lobbying for change in that regard. They aren't lobbying to constrict scrap exports out of this country, but rather to operate on a level playing field globally.

And if we could look at exports of your product, I assume you didn't export very much and could you explain how much exported, in sort of the tone of the market and why you are or not exporting?

The -- on the recycling side, Recycle South does export some material. They have a port at Wilmington. And I really don't know the exact activity level in that regard, but our recycling exports are not huge. The export activity on the steel making side is -- we just don't do a lot from our Flat Rolled facility in Butler. As you know, we're kind of landlocked. I think there are certainly opportunities for other steel makers out there to export which helps the domestic cause, if you will, in light of a weakened economy. The -- but from an STQ perspective, we are exporting.

Both ours and global, Keith.

Go ahead, Dick.

Just because, they both ours [inaudible] and as we export to and mostly to Europe, and Scandinavia and so we do a bit of our business, single digit percentage wise but it continues to grow. And I know that Columbia City is looking at opportunities as well as Salem, West Virginia currently.

Great. Thank you.

Okay, Wayne. Thank you.

And we'll hear from Eric Glover with Canaccord Adams.

Good morning.

Good morning.

You had mentioned that obsolete scrap prices might decline in the near term. I'm just wondering whether you think this is typical normal seasonality, at this point?

Well, obviously, as you come off of a -- specially in the northern hemisphere, if you will, of this country, you come off of a strong winter. The flows do start to pick up throughout the spring. And at these kind of prices, it's still gaining momentum. So there's a lot of activity out there. Very, very strong market for obsolete grades. I don't have to tell anyone that. So the flows are very, very good but if the export opportunities -- if the traders or brokers are sitting on the sideline or buyers are sitting on the sideline and having a temporary hiatus, it could strain that market a little bit, in terms what do we -- take back and stack it all up in the yard. So I would expect to see softening in the obsolete grades for August delivery. As I said earlier, I don't have a Crystal ball that can tell you to what degree. It could be anywhere from very little to a little bit more. But I don't think it's going to be a major transition in pricing but I don't think it's going to be up and up and up, if you understand.

Sure. So if we look toward the end of the year, when supply of scrap might start getting tighter because of weather, do you think that obsolete could see another leg up at that point? Or do you think that the prices have pretty much peaked for now?

Well, I don't have a Crystal ball that goes out to the first of the year. We all know that wintertime activity is somewhat constricted. And you might see obsolete make some gains during the winter months. I think during the summer months here and early fall, with good weather and the pricing being where it's at, you're going to see very good flow.

Okay, thank you very much.

Uh-huh.

We'll move on to Evan Kurtz with Morgan Stanley.

Hi, good morning, gentlemen, a great quarter.

Thank you.

Just going back a couple of quarters, you had mentioned that you had high inventories of pig iron and if you actually got some good performance out of Iron Dynamics you might be able to make it all the way to the start up of Mesabi Nugget without having to purchase any significant amounts of pig iron. Just wondering if you can give us an update on where you stand with pig iron inventories and if you still think you can possibly make it all the way to 3Q '09?

We believe for the most part we can make it. We're going to have to buy a little pig iron and the markets recently have come off $30 - $40 I believe from their recent highs at NOLA. There may be a buying opportunity, but we are not going to need to buy a lot of pig.

Good to hear. And just one other question. In your press release you talked in your outlook about expecting a strong global Steel demand picture next year. I was wondering if you could just kind of talk about that a little bit, maybe give some rationale behind your outlook?

Well, I think one of our Directors is a former Executive on the European continent, and indicates to us that our business conditions are fairly strong over there yet, while I think, we think they're rather robust in Asia and given selling opportunities being by comparison better than sales exports to the U.S. I think you're going to see a limited amount of import activity continue here in the states and I think that's probably welcome news, given the economic conditions that prevail in the country with demand being off somewhat, but awfully strong match at this point in time. We still even with the announced expansions out there probably are only going to as I said earlier produce 107 million tons or thereabouts of material this year for shipment and a fair chunk of that is going to go offshore with excellent export opportunities for domestic producers and when you net that off the 107, pick a figure, and then add back the import activity that's still out there today, I think you come up with a picture that supply may be a bit short as the demand -- as weak as demand is, so I think the market conditions are going to be strong on a go forward basis for Flat Rolled products which is the main imported component of steals that are imported into this country. And I think as you heard Dick report, we have very strong backlogs in shapes. We have a strong backlog at Roanoke, we have a strong backlog in SBQ bars and a strong backlog remains in wide flange beams. So I don't think that's going to be threatened by import activity any time soon. So I think we're going to really see some pretty strong results on a go forward basis. Obviously if imports were to surge dramatically, if the dollar strengthened dramatically and imports surged dramatically because of overseas market conditions or better opportunities, then that could change the picture somewhat. But I just don't see that, right now I don't see the dollar strengthening other than perhaps trading opportunities in the near term. I think giving us a pretty positive outlook for North America.

Thank you.

And now we'll hear from Timna Tanners with UBS.

Hi, good morning.

Hi, good morning, Timna.

Just a couple of questions. One is I just wanted to ask you what you're seeing on the September price increase, apparently announced by some people between $40 and $60 a ton, how successful is that? Is that you think solid demand or just tight supply conditions, and is that to fill some holes in the order book we're seeing near term?

I'll let Mark answer that. I think we're not out to September yet. We're most of the way through August, and Mark you want to address that question?

Yeah, well, to your point, Keith, our strategy, Timna, for probably the last year and a half is to keep a very, very tight hold on our backlogs. So, we're currently just filling out August currently. So we would anticipate going out in September at an up value. What that will be right the second, we shall see.

Are you hearing major holes in order books or are you seeing decent demand continuing or activity?

As I suggested earlier, we're seeing just steady, consistent order rates. The credit position's of our customers is certainly under pressure given the transactional values. No one at these values want to speculate on a position. So literally, the tandem that people have shift, literally converting an order because they are getting an order before they are placing the order with us.

Sure.

I think the thing is consistent activity. We make 50,000 - 55,000 tons a week, whatever and we have order entry at that level and it just continues to flow and go forward.

Okay. You have a great chart on your website showing shipments by market in 2006. But I was wondering how much of that might be service centers versus some of the OEMs and direct end market demand?

On the sheet side of our business, probably 85% of our Butler output goes into service center or distributors and at The Techs are probably more like 60% to OEMs, 40% service centers.

And only in the shapes, probably 85% of our Butler output goes into service center distributors and The Techs are probably more like 60% to OEMs, 40% to service centers.

And only in the shapes divisions, out of those only Pittsburgh has a higher OEM rate than that because both the Structural mill as well as Roanoke are highly dependent upon the service center market, Steel of West Virginia also has a OEM position, but mostly service center in the volumes.

Okay, great. And then the final question is, certainly in your release, you talked about the outlook and further expansion in growth and you've had had a good track record there. But wondering if you could give us a little bit more detail on the hint here that you have of continued growth that's contemplated going forward, if you can give us an idea of what kind of things you're looking at whether it be scrap or whether it be more capacity, Greenfield acquisitions, kind of where your head is right now?

We are looking at other recycling opportunities. We're going to see growth in steel making from the capital expenditures that have been deployed and/or announced for some time. We are currently in the early engineering stages at looking at a new Flat Rolled opportunity.

Great. Thank you very much.

And now we'll hear from Bob Richard with Longbow Research.

Good morning, and thanks for taking our call.

Good morning.

Keith, how come your scrap output is pretty much going to trade? Can you remind us on what the mix is of your scrap sales to trade are? Is it maybe a break down between prime and non-prime or obsolete scrap?

Well I don't have that figure, but I will say this. The consumption which was in the 40% area, internal consumption of recycled materials will probably drop back into the 30s and with the impact of Recycle South could go even south of that. So we won't -- we always thought we would be in the 25 to 33 or 35% arena. I think the reason our percentage of consumption in-house was up this quarter is reflective of the tight market for prompt resources which given the opportunities in the Flat Rolled market caused us to take a little greater percentage of the industrial output that the Omni organization generates each and every month. But I see that -- I see that percentage of internally consumed scrap going down slightly as we move forward quarter-to-quarter.

And what you sell right now to trades are -- is that roughly half prime, half obsolete or?

I don't know the answer to that, Bob. That's not a question I've been asked and I'll be better prepared next time. But I would guess it's probably just as you said. Probably about half and half. But I don't have a firm grip on that.

Okay, appreciate that and one follow-up. Your comment, Keith, on June being outstanding. Was that driven more by mill performance or market base?

It was both. The mill performance, the operating activity at Butler was very, very strong in the month of June. Good market -- good commercial activity, but strong output as well, and higher than contemplated shipments and the recycling divisions just continued at a very, very strong pace. One of the strongest they've had in quite a while. So we're pleased by the results of June.

Okay, thanks for that color and great quarter.

Thank you.

And now we'll hear from Brett Levy with Jeffries & Company.

Hi, guys. You said you're in the engineering phases. I know that you talked about once you got Iron Dynamics and Mesabi Nugget up and running. You were potentially considering going to the West Coast. Is that something still very much in the mix for you guys?

I'd probably think more East of the Mississippi River, than I would, west of it at this point in time yet.

And considering in the sheet market?

Yes.

Got it. Given the tightness in the beam market now and foreseeable in the plate market as well. Any thoughts in either of those zip codes?

We have not looked at plate opportunities. Not to say we won't. It's been discussed but we haven't seriously looked at it. We could look at that market segment in time. We are growing our capacity at Pittsburgh and SBQ bars. And we're about ready to have perhaps another million tons of wide flange capability coming online. So even though the market is tight, we're going to be in the throws of start up of new activity there. It won't be all that impact full in '08 because the ramp up curve will be a typical ramp up curve.

Got it. And then in terms of additional future investments obviously we've heard about new core's plan continue to ramp up pig iron capacity. Is that something that you guys would consider as well?

Well I think if Nugget works out, as well as we believe it will, from the pilot facility activity. We would see an immediate expansion of number of batteries up on the iron range, given the market climate, the demand for low residual resources. I'd tell you if the number one battery works as well as expected, I wouldn't expect just one more battery, I would expect perhaps two and three more batteries to be launched, putting us I think in a very, very favorable position versus our competition in the virgin iron arena if you will.

Thanks very much, guys, great quarter.

We'll now hear from Charles Bradford with Bradford Research.

Good morning.

Hi, Chuck.

Hi. I'd like to talk a bit about the Mesabi Nugget. Because you had, or somebody in your shop had talked about, maybe having cost of product of about 250, I'm assuming that was at the plant and I'd really like to get a little bit better information as to the cost delivered to Butler per ton of the product and whether you have an updated capital cost.

Well, I'll let Mark answer that question. I think obvious -- it's obvious that production costs, given the market per concentrate and what not and cost of natural gas, might have moved forward just a little bit, or higher, but not significantly. Mark?

Yeah. Good morning, Chuck. I think the -- given the natural gas and more importantly coal, that 250 number is probably drifted up to 300, or thereabouts. And that assumes the use of our own concentrate coming out of our mine. Capital costs still remains in -- the total project cost is about $235 million. That maybe impacted a little bit by construction cost but I don't see at this moment in time anyway, that being too far off the line.

How bad does the need to buy concentrate affect your cost structure?

On a fully loaded basis, we'll probably be producing or supplying concentrate to Mesabi Nugget in the order of about $45. The actual operating cost of the concentrate will be roughly $22. So obviously if you would have to purchase concentrate in the open market, there's a appreciateable difference there.

And the freight cost to Butler?

We're negotiating that right now, Chuck. We would envision somewhere between -- well I don't want to give you the cost really because we're negotiating it. But let's just say it's between $30 to $35 a ton.

Of course with pig iron, even down only maybe $30, you're still north of 900 delivered to Butler.

Well, currently, transaction prices, NOLA, let's just say they're in the 900 region. Freight currently from NOLA to Butler is $45, so you're right.

But you compare costs of delivery even if it's 350, I mean this thing is going to be making back at capital costs in less than a year. Would that be a fair statement?

At these levels that would be a fair statement.

Suffice it to say we're pretty excited about it.

By comparing this technology to glass furnace technology, how much of them advantage do you think you have especially if the glass furnace guy has to bring in pellets at over 150 a ton?

That is something I haven't studied since we put the initial product performance together about a year and a half ago. I think it all depends on where that integrated mill is getting its Coke, whether they're self-sufficient or whatever, but I do believe Mesabi Nugget should be $50 to $100 better off.

That's what I was trying to get. Well thank you very much.

Thank you, Chuck.

Before we move on, [Operator Instructions]. And now we'll hear from Aldo Mazzaferro with Goldman Sachs.

Hi, Keith, how are you?

I'm fine Aldo, yourself?

I am fine. Following along with Chuck's question, I know the Mesabi Nugget looks extremely exciting and a question along the same lines regarding Iron Dynamics. I am wondering the 51,000 tons that you delivered to the Butler shop during the quarter, is that anywhere close to the capacity of Iron Dynamics or what would you rate the capacity to be of Iron Dynamics?

Aldo, we would hope to get a consistent 20,000 metric tons of liquid pig iron over to the furnace at Butler, at that moment in time, we're probably peeking at.

That's monthly, right?

That's monthly, yeah. 20,000 a month.

And then Mark, I you look at the -- I mean, you did really two things in the quarter. You got the --

Aldo, you should note that that's liquid. I mean if you were to produce bricks, it would be more than that. We used to produce a lot of HBI, and very little liquid, but the liquid is desirable. And 20,000 tons of liquid is probably as Mark said getting close to capacity. At one point in time we had hoped to do 25 but we haven't gotten there yet.

Right, but it's the liquid that really boosts the output from the furnace, right? From the Butler furnace?

Correct.

And I am wondering, if you were to break down what you did, you had the Caster modification which I am sure helped the throughput and now assuming you can get the 20,000 liquid from IDI, what do you think the output of Butler could be if you assume excluding the outage you are talking about coming up, I mean, if you had a full run rate and a full quarter with full Iron Dynamics, what do you think you could do in Butler?

Well, we certainly can do the 3 million ton annualized rate.

Hey Aldo, you got to remember, this is Teets . But you have remember that Butler is completely coupled together between the Caster and the hot mill and so just if they had an opportunity to even do better in the melt shop area, you still have your constraints based on size going through all the way to the rolling mill whereas the shapes Mills all have a disconnect there.

Our product portfolio out as you know, we try and focus on the value add.

Right.

And on the hot end side we want to get into the high strength, low alloy very light gauge products and as such, as Dick said, the rolling mill itself is probably going to peg out in the 3.1 million ton range.

I mean, just roughly, Aldo, if it's 60,000 tons a week or will be in that arena times 50 weeks, I mean it's a pretty good way to just think about it.

Right. Well, thanks, Keith. Tremendous quarter. Really tremendous. Thanks.

Thank you.

And with that, that does conclude today's question and answer session. At this time I would like to turn the conference over back to the presenters for any additional or closing remarks.

Audrey, thank you. We don't have any additional remarks. We'll continue to work diligently on behalf of the shareholder, and want to thank all of our employees for just an incredible quarter. Excellent performance. What a great team we have. 600 members strong now and hard to believe that we've grown that big that fast. But there are more growth opportunities ahead of us and look forward to sharing news on them in the future, thank you.

That does conclude today's conference call. Thank you for your participation. Have a wonderful day