Steel Dynamics, Inc. (STLD) Q3 2008 Earnings Report, Transcript and Summary

Welcome to today's Steel Dynamics Third Quarter 2008 Earnings Call. Today's conference is being recorded. Joining us today are Keith Busse, Chairman and Chief Executive Officer; Richard Teets, President and Chief Operating Officer, Steel Operations; Mark Millett, President and Chief Operating Officer, OmniSource Corporation; Gary Heasley, Executive Vice President, Strategic Planning and Business Development; New Millennium Building Systems, Theresa Wagler, Chief Financial Officer; and Fred Warner, Manager of Investor Relations. For opening remarks, I would now like to turn the conference over to Mr. Fred Warner.

Welcome to today's Steel Dynamics conference call being webcast today, October 16, 2008, from Fort Wayne, Indiana. A replay of this call can be heard and downloaded as a podcast from our website, www.steeldynamics.com. Today's management discussion includes forward-looking statements. We caution that actual future 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 our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission, and in other reports we file from time to time with the Commission. Specifically, please refer to those sections in our Form 10-K and Form 10-Q reports entitled, forward-looking statements and risk factors. These reports that we file from time to time with the Commission are publicly available on the SEC website, www.sec.gov, and on our website, www.steeldynamics.com. After today's management discussions, we will open the call for questions from participants who have informed us they may wish to ask questions. Today's call will begin with remarks by our Chairman and Chief Executive Officer, Keith Busse.

It is our pleasure to be with you this morning, and to highlight the operating results that Steel Dynamics had during the third quarter of 2008. I guess you saw in the announcement that our earnings per share, which as one of the key focuses was $0.98 per share, which was down about 8% sequentially from the $210 million or $1.05 per share that we reported in the second quarter. I think somewhere in the early morning press, I read in one of the research reports that was reported, it's a soft quarter. I would hardly say that it was a soft quarter, and that this was the second best quarter that Steel Dynamics has ever reported in its history. So it was not the quarter we had hoped for, and I think in the body of this report we went on to offer as much information about the quarter and the uncertainties that face the steel community on a go-forward basis as we possibly could, as this press release was a little more detailed than many of the releases we've had. One of the things we wanted to emphasize was the fact that our cost structure -- and I noticed that our friends in Nucor emphasized the same thing, and they are probably the only other company in this space that has a variable cost structure similar to Steel Dynamics. And they had excellent earnings results in the third quarter; and kudos to Nucor for that. But our quarter could have been in my opinion a record quarter for the company. The principal miss, if you will, was really related to our scrap operating unit. In our prognostications of July of this year, we, as you could see from the operating segment data; OmniSource had a record third quarter, and that's in spite of a very nasty September. No one that I know of, could have ever forecasted that scrap was going to take the sharp drop that it did in the late August/early September timeframe. I think people thought the market was going to come down somewhat, but I don't think anyone saw a $300 crash in the pricing of prime grades, it's just unanticipated. So the earnings that we had forecast for September of this year were at the same pace of July and August. And obviously when you are buying material throughout the month of August that you are going to deliver to your clients in the month of September, and the price falls $300, there's going to be trauma during that period, and there was. As we reported, that had about a net of profit and net of tax is about a $0.12 effect on our earnings. Of course, if you do the math there and add that back to $0.98, you end up with $1.10 or right about in the middle of the range. But I would remind many of you who are listening, who attended many of the fall conferences that we guided to the very, very low end of our announced July range. We generally don't correct those numbers even if we have visibility into them, if the miss is as narrow as this. So, I think we had a really good quarter. When you look at the impact on the steel operating units, we missed our shipment a little bit in September in the structural division for a wide variety of reasons, couldn't get railcars, etcetera. Really wasn't that big of a deal, but obviously in the flat-rolled universe, we missed our shipment forecast in September considerably. There was some net effect of that probably on the order of magnitude of $0.05, $0.10 a share I would tell you. When you look at all these things collectively, had September been as advertised or as forecast and scrap not come down in this period, we might well have had a record quarter. That's the past, and we've tried to talk a little bit more about what's going to go on in the future, because I think that's what everyone is really concerned with today. You can read all the data about where our steel shipments were. They were 12% lower than the second quarter and that weakness is primarily flat-rolled and primarily September related. With regards to shipments in the merchant bar structural arena, they were either up to sideways kind of activity, and probably will remain fairly strong as we march forward through the fourth quarter, maybe off a little bit in the fourth quarter, but probably not materially from a long products perspective. OmniSource ferrous shipments were 1.8 million tons, which is up about 17% compared to the second quarter of '08, but of course, shipments are one thing and results are another. And as I said earlier, September was a difficult month for the recycling community in general, not just OmniSource. Iron Dynamics continued to operate well during the quarter and reported a very nice profit during the quarter. It should remain profitable, although the price it receives for its output does vary with market circumstances, so profitability may well [repressible]? Than the Iron Dynamics arena, but that's really not all that material to our results in the end. Wanted to point out that scrap yard inventories typically are three weeks maybe four weeks, sometimes two weeks, they're all over the map. So we had an impact in September and obviously with scrap prices falling substantially now in the month of October, there's going to be another sort of upside down effect or another tough, difficult month for recycling in the month of October, although we expect that their earnings will come back in the November, December timeframe. Of course, volumes of shipments could be lower because it's expected that demand for their products will be lower. But they should be back in a profitable zip code with normal margins and we would expect; anticipated further improvement in the first quarter of '09 and throughout the year '09. I said in the release, that the bright side of all this is a significant drop in the cost of raw material inputs, and that's been very, very good for the steel business in general, from a cost of inputs perspective. We think in the fourth quarter that pricing and the volume of steel production shipments in that quarter will depend on the [tenure] of the market at any given point in time. I think we wouldn't tell you anything any different than anybody else has. We're living hand-to-mouth in flat-rolled. We live from day to day to day to day from an order book perspective. It's altogether different in the long products business. We have still good backlogs there in Structural and a decent backlog in Bars and a decent backlog in the SBQ arena, and so on and so forth, and we would expect those businesses to continue to perform rather well on a go forward basis. The issue will be Flat-Roll, and it's impossible to predict where we're at, although in our forecasting and modeling, we gave I guess the best signal we could. We expect our earnings to be about, about being the key word, half of what they were in the third quarter. But I would point out to you, if about means about half, then if you annualize that earnings rate, that still annualizes to or is equivalent to the second best year that Steel Dynamics has ever had at the very bottom of the trough. So we, as you know, we withdrew our guidance. I think that could have easily been achieved. We had the marketplace not literally fallen apart or imploded during the fourth quarter. You might ask is it the economy and is it demand? I think, we all can see that demand has considerably weakened in the commodity universe, if you want to call steel a commodity. There are a lot of value added elements with regards to the steel products, but it clearly has weakened. But I don't know that it's weakened to the degree that that order entry reflects. I would guess that in our personal lives, we've looked at liquidity, and a lot of people turned the personal accounts and the cash fearing uncertainties in the marketplace. And I don't think that it's any different in the business universe, I think. There are orders from headquarters out there, so to speak, to reduce inventories. Inventories at the end user level are probably at all-time record high prices and there are there are expectations in a recessionary period that prices will fall. People are cleaning house, turning inventories into cash, and they were already fairly low, and they are going to get lower as the buyers for some period of time continue to sit on their hands. But all is not lost, they will return. I can't tell whether they are going to return in November or they're going to return in December or return in January. They're certainly not going to return at 100% of level they were at. I saw some research this morning that would suggest that the industry may operate, it was suggested at a 75% to 80% level next year, this is due to economic circumstances. I don't know that I have any quarrel with that, and I would tell you that's exactly what we modeled, essentially, is that kind of activity. It seems like all we're doing these days is modeling, modeling, modeling, but we've modeled any kind of scenario you can imagine from 75% of capacity to 40% of capacity. I don't think in our wildest dreams, we could ever imagine a situation where we kind of operated 40% of our capability, but it's kind of fun exercise of the model. And I might tell you, for those of you that fear harm to our earnings, that even at 40% in flat-rolled, operating level, even at 100,000 ton operating level, you can't drive Butler to a loss. I repeat; you can't drive Butler to a loss. Now that statement is being made with the caveat that resource costs remain very soft. I can't imagine with an economy that soft, but we all think it's going to be, the resource costs are going to go up, they are just not. This may be a very bad year in the resource business. Probably going to be followed by a very good year in 2010 or if the economy turns in the spring of this year or mid-year, it's still possible that there could be very good returns in the resource arena. But if it remains as soft as it has been, resource costs are going to remain soft. And when they do, when you couple that with our conversion costs, I don't think there's anyone out there in this industry that can stay with us from a cost of production perspective, save only Nucor, whose culture is similar and whose variable cost structure is similar in nature to ours. I had breakfast with a gentleman this morning; who made an interesting observation. He said Keith, you guys may well actually perform better in a distressed economy than you do in a vibrant economy. I said that's probably true. I said in a vibrant economy, our resource costs tend to rise sharply and so do selling values. It's nice to be able to cherry pick the upper end of the market, and have the kind of great margins and $200 a ton operating profits we had. But our best ability to compete is probably in a different zip code. When times are really, really tough and resource costs are tough, we can, and you've heard me say this. We can convert scrap metal or inputs into our furnaces from a flat-roll perspective, on a vanilla basis, $125 a ton. On an alloyed basis, with the exotic kind of product we make, maybe $145 a ton kind of number. And loaded with the kitchen sink and including all of our corporate costs if you allocated it all to everyone, even though we do. Be mindful to everybody, when we talk about our pretax income at our operating units, it certainly includes depreciation and amortization and also includes interest charges. When I said earlier, you can't cause Butler to lose money; that includes interest at a 100k level. So we have an awesome cost structure, it is variable, and I hope this recession doesn't last very long, but certainly when you think you've got resources in the $200 arena, the cost of inputs, and a conversion cost in the $125 to $140 arena, I don't think there's anybody out there that could make the claim we can, and I'll let you guys do all the math on the spreads. I haven't seen any pundit prognostications that would suggest that hot [pans] are going back to $400. I haven't seen anything like that, and you haven't, either. I don't know where they are going to be. You can take the worst prognostications out there today in the pricing environment and couple that with that kind of (inaudible) knowledge that you are now armed with relative to cost to make an [hard] man and you can imagine that spreads could actually expand during that timeframe for Steel Dynamics, and results could actually get better. So, when we said in this report that it's not unreasonable, that we could a good year in '09, I think that's exactly right. It's not. We could actually have, and I wouldn't call where everybody's at in terms of looking at 2008. I'll let you be the judge. But what I read this morning, I wouldn't call those numbers. So 2009, given the resource costs remained soft, and in this kind of business climate, I think they will. We could have a better year in '09 than we actually had in '08. It's not an unreasonable assumption. Nobody has a crystal ball, you can't look out that far. But I think, for all of those people that were panicked about what's happening to the selling [guy] and happening to volumes and what not. I think we are better girded to live through all that than almost anybody out there. I think we have one of the best, if not the best cost structures. We have a good balance sheet, but certainly we don't have a balance sheet as strong as Nucor's, but for those of you who worry about things like that, we'll let Theresa address that, when she has an opportunity to speak with everyone here this morning. There's also been some early morning [press] about these guys operating costs or conversion costs were up. I don't think there's any way to measure that. There is just some errors in thinking out there. Our operating costs although higher than Butler's in other arenas by the sheer nature of business, wouldn't come anywhere close to the kind of number I was reading. I think the mix-up probably comes from somebody subtracting, taking an average selling value and subtracting an operating profit of $200 a ton and arriving at a cost structure and making all kinds of assumptions about what makes up that cost structure. Well, first of all that cost structure is dramatically affected by the likes of the taxes, where they purchased substrate, it's dramatically affected by value-added product, and we shipped more value-added products in the third quarter than we did in the second quarter or any quarter for that matter. We had more success in that arena. It's not that simple of an exercise. If you make the wrong assumption on resource costs, you end up with a bad answer. Let me just say that from a cost of conversion perspective, I think we are in great shape. I don't think resource costs, unfortunately, they may go down again in the month of November, it likely will. I think there's huge amounts of scrap sitting around out there that didn't get taken off the shelf this month because demand activities at the mills, ours included, everyone's included, was very light. So you could see a further softening in that arena, and for those who like to think about things, dream about things like people going long in December and creating a panic in scrap, I don't think that's going to happen. We have no intention to go along, and it's not a plan. We are no different than metal management from execution perspective. So I would tell you that although there might be an opportunity with changing circumstances for scrap to rise next year. I would, number one, hope we are not going to see the kind of volatility that we've seen, and number two, if the economy is as bad as some people think it might be, and everybody’s operating rates are going to be down, then there's very little opportunity for scrap to rise. I would tell you, our cost structure is just in great shape, as you measure it against any kind of pundit prognostications about where pricing may or may not go. As I said in our press release, I think our shares adverb missing? , and I don't mind saying it, everybody's shares for that matter. You just can't believe what's happened to the steel community. If you talk about an oversold universal panic, and I think a lot of that has to do with the hedge funds or more kindly said, momentum stocks. When people bailed out of commodities, they bailed out with a lot of horsepower, and they've drove this thing to almost to a silly level, where I think yesterday we were below our actual book value. So I think the shares are just truly way, way oversold. I'm going to let Dick talk a little bit about steel, Mark talk a little bit about scrap. We'll get into the Q and A. I do want to point out again that our operating profit in our steel operations was $200 a ton; not bad. Although I think the fourth quarter is going to be a dark quarter for everyone, I think we all have to just look through that. I think the first quarter will be an improved quarter. Now, what does improved mean? I don't know. I would guess it's going to be better than the first quarter of '08, that's my thinking, and I think the year could be better than the year '08. But we'll wait and see, and we'll give you more guidance on that as time goes along, and we have a better view of it. But a $200 operating profit is still one of the best in the industry today. I think our selling values were higher than the average [bearers]. I think our team has done a good job. I think our people are doing an excellent job. Need to remind all of you too that our employees suffer during times like this, because their income is tied, is variable in nature. And more of their [W2] earnings are related to bonuses, which they are not earning, than it is to base pay. So there is everybody suffering here. It's kind of a share the pain time. But I think we're going to be back and back with great horsepower in the year '09, in spite of the fact that we may be facing a recessionary period. And I certainly hope it doesn't turn into a recession. I was a little disappointed last night as I listened to the debates that there wasn't more conversation about the impact on the presidential race of a candidate who might want to raise the capital gains tax rate. There is a lot of things that this economy in the world is dealing with; the housing crisis, the mortgage crisis, the financial crisis and Wall Street, China pulling back. There's a lot on everybody's mind. But the infusion of capital in to the markets; I mean whether it's a bond market or the stock market and people's ability to earn a long-term capital gain on their investments is clearly one of the key engines that drive economic success in this country. I was disappointed candidates kept talking about marginal tax rates and whether or not there's going to be a rebate check for the poor and this and that. I don't care whether you make $250,000 or $100 million, your 10 million, whatever the number is. If you earned it, you deserve to keep it. And redistributing the wealth is a bad idea and raising the capital gains rate is a horrible idea. So, I'll get off to my political views here, but we've got a lot of problems out there, including people selling short into markets. There is no time for short selling, and it just destroys value and causes fear and panic in a market where there it doesn't need to be fear and panic. So, having said all that, I'm going to turn it over to Dick for a few brief comments.

Alright Keith, thank you very much. I'd like to just add a few comments about the steel operations, in addition to what Keith and the press release have already covered. At Butler, I'm proud to report that the Butler Division after having achieved the various status in the Voluntary Protection Program from (inaudible) disaster?. So their safety program is well underway to achieving star status. Butler is our first of our steel mills to participate in this program in the first steel producing facility in Indiana with melting and casting operations to achieve it. Butler is our major project that we have underway, with our expansion to produce 3 million tons a year and that involves replacing all four of our hard furnace [shell] with the deeper bottoms and taller side wall panels to allow for single charge opportunities, and we are in the process of finishing the first two furnaces and then we'll look at doing the other two when the equipment comes in. The fact that they have substantially improved the safety performance by reducing both the (inaudible) and loss time accidents; and I am very proud to say that the [next] Tech has achieved zero in both of those categories on a year-to-date status. Congratulations to everyone. In the long products arena at Columbia City (inaudible), I'm happy to say the mill produced and shipped its 5 million ton since inception. Also, their safety performance was exemplary with two minor loss time accidents, achieved in over 330,000 man-hours worked. From a project perspective, they are number two rolling mill is up and running. We're staffing at five days a week, 24 hours a day, producing 8, 10, and 12-inch product. Continue to expand those products as we need to do our roll pass designs, cut the rolls and the guides. Also, the number (inaudible) is under construction. The building foundations are complete. The building’s steel is being erected and we're expecting equipment deliveries just after the first of the year with (inaudible) on that immediately follow. At Roanoke, the productivity was an all-time high at record rates in spite of numerous projects that were underway, which tend to be somewhat disruptive. Projects there include a replacement to our guide [house] systems and also a scrap yard expansion to allow for more thorough inventory control. In Pittsboro, all three quarters have been record shipments throughout the course of this year, with our third quarter being our best ever. Also productivity was a record in all the operating departments in the third quarter. Modifications to both the casters and the rolling mill are underway. We're finishing the foundations with two new rolling mill stands (inaudible) as we speak, and looking forward to the completion of those projects which will take our opportunity to produce to 750,000 tons of (inaudible). Bar finishing continues to make inroads into the oil patch market. Highly engineered steel is a very high quality application, and we've been earning that business through high quality and delivery performance. At Steel of West Virginia, in spite of the decline in transportation markets they have been able to supplement their product mix serving other markets such as the RV and manufactured housing and merchant business. Also, they have had record productivity in the number one rolling mill and the second highest quarterly productivity in number two mill in their history. So a very great performance there. Thank you so much. Keith.

Thanks Dick. Mark, couple comments?

Yes. A special welcome to our employees that are listening in. I guess it certainly has been an interesting time to transition my responsibilities to the metal recycling side of our business. I take full responsibility in my two month short tenures for the $600 plunge in scrap pricing. Fortunately, I'm in good company to manage through the unprecedented times. The OmniSource organization, both in the Midwest and the Southeast is full of talented, passionate, dedicated people with a deep understanding of the scrap business. We have assembled an excellent management team with broad operational and marketing backgrounds that will lead the company towards continued growth and success. From an operational performance perspective; first scrap shipments for the quarter were approximately 1.6 million gross tons, 1.8 million net tons, 17% over the second quarter, and they increased principally due to the added contribution of Omni Southeast. Non-ferrous shipments were approximately 240 million pounds, a little down over the second quarter, like 5% down, from that prior quarter. As domestic steel production was curtailed through the quarter and export shipments diminished, scrap demand dropped abruptly resulting in that unprecedented drop of almost $300 per gross ton in August for prime grades for September delivery. As you can appreciate, margins were squeezed in September as scrap purchased at high prices flowed through the system, and with another dramatic drop of roughly $300 per gross ton in October, this margin squeeze will continue into the early part of the fourth quarter. Nonetheless, inbound price has also dropped, as spreads should widen back to normality in November or December. I think significantly, the spread between [bushling] and shredded scrap has backed off from an over baked $290 per gross ton in July to a historically normal $20 to $30 in October. The supply and demand environment would suggest, as Keith also suggested that the scrap market will remain soft for some months ahead, although I think everyone has a clouded crystal ball right there and it's little difficult to define the exact supply-demand balance. There are many drivers at play. On the demand side, a significant reduction in domestic steel production, a transition of BOF charge, or scrap charge away from prime grades towards a larger percentage of secondary grades, lower export rates, mills trying to sustain cash, reducing their inventories and not buying, are all contributing to a reduced demand position. In contrast, supply is going to be curtailed somewhat by the reduced demand. It's going to be reduced by (inaudible) obviously scrap manifest by lower scale prices is going to reduce the flow. There's also a reduced flow of prime scrap from manufacturers and the automotive producers hit by the economy. Additionally, some scrap yards, they are holding high price scrap waiting for a rebound and all these things will constrain availability. I think no matter what the outcome, OmniSource is in a great position for any eventuality. Iron Dynamics continues to perform very, very well. It's surpassed all previous production and safety records. Q3 shipments totaled 70,000 net tons for a record $26 million pretax net income. I guess our vision, albeit perhaps several years premature, along with the patience and dedication of the team is finally paying off. So congratulations to all involved there. Mesabi Nugget probably continues to go well. A lot of the infrastructure is in place. A lot of the buildings are being roofed in and should give us cover before the snow flies. [Permitting] is going very, very well. We had a great public hearing up there just recently. And we still intend to produce concentrate by the end of 2010. Keith.

Thanks Mark. Theresa.

Yes.

Wait a minute. Before we get there Theresa; Gary, you want to tell us a little about the world of fabrication?

Sure. Recently I have had an expansion of my responsibilities to include now New Millennium and I've spent much of the last couple of weeks traveling around with a plan to meeting the team. I’ll tell you it's an exciting thing to be part of this. It's a great team with great equipment, and we're very well-positioned out there. It's just great to be part of the team with Burt Holman and the rest of the folks at New Millennium. As I said, the markets have been softening in the joist business for probably more than a year now. We've seen bookings slow considerably for the industry in the recent three or four months, with August being up off by 36% for bookings year-over-year. In the face of that, of course, we've completed the re-modernization, the modernization of all the plants that were acquired in 2006 as part of Roanoke Electric, when we acquired that company. And now we have the newest, most efficient plants in the country. So we are very well-positioned there with a low cost structure. We have a very variable cost structure as does the rest of SDI, and so the seas may be a bit stormy, but the ship is well-positioned to sail through them. We are aggressively pursuing business, and very actively going out to look for new customers and to go through this tough time with the most aggressive position we can. Certainly as we see these markets strengthen when they do come back, at some point in the future we will be very well positioned to earn great returns on these facilities. So that's all there is to talk about right now. Things are going as well as can be, and frankly we have been very impressed with the performance of this team in what has been a continually softening market. Keith.

Thanks, Gary. I know there have been a lot of people that have had a lot of conversations about our balance sheet. It may not be as strong as Nucor's, but it's not in bad shape. Theresa would want to talk about that on CapEx and many other subjects if you care to elaborate on.

Thank you, Steve. I'll just take a few minutes to discuss some of the quarter's highlights. To begin with I know everyone's interested in the mix of flat-rolled shipments. During the quarter we shipped hot-rolled of 255,000 tons; pickled and oiled, 41,000 tons; cold-rolled at 34,000 tons; hot-rolled galvanized 78,000 tons; cold-rolled galvanized 55,000 tons; painted, 85,000 tons; and [galvanized] up 28,000 tons for a total of 576,000 tons. Now on to some more specific balance sheet items. Our accounts receivable, days outstanding actually decreased during the third quarter to 45 days, and it's really consistent with prior periods, but between 90% and 95% of our accounts are current or less than 60 days outstanding. We're monitoring and we always do the credit worthiness of our customer base very aggressively and we believe that our reserves are adequate. From a finished goods perspective, we remain at about 20% to 25% of our total inventory values being a part of finished goods. Scrap inventories actually increased somewhat from about 35% of our total inventories in the first quarter to between 40% and 45%. Keith suggested a significant amount of material is currently [staying] at the Flat Roll division and we expect to work through that throughout the remainder of 2008. We expect significant overall inventory balances to decrease through both decreases in volume and value through the fourth quarter. Our working capital has increased about 400 million during the first nine months of this year, due to price and volume reductions we anticipate generating additional strong cash flow for reductions in working capital during the fourth quarter. From a capital investments perspective, for the first nine months of the year, we had investments of $116 million, $33 million of which was related to the structural division and the completion of the second rolling mill and the start of construction of the second caster, $27 million was related to our metals recycling operation, $27 million was also related to our Mesabi Nugget plant, and the remainder were other growth projects predominantly at the steel operations. For the fourth quarter, we're currently expecting to spend about $110 million on capital projects, and that would consist of about $10 million at the structural mill for the second caster, $15 million to $20 million at our metals recycling operation, $60 million to $65 million for the continued construction of the Mesabi Nugget plant, and then the remainder at our steel operations. Regarding 2009, we typically don't give guidance this early for capital projects. We've tried to look in general at the various preliminary estimates, but currently we've identified about $100 million of projects in addition to approximately $70 million that would be spent on the completion of the second caster at the structural division during 2009, and approximately $200 million to $210 million of our investment at the Mesabi Nugget plant. For depreciation and amortization, we had $55 million during the quarter and we would anticipate this into the fourth quarter and throughout 2009. Our effective tax rate for the first six months of the year was 38%. We lowered the annual rate in the third quarter to 37.7%, as a result of reduction in our FIN-48 exposures, and this caused our third quarter's effective rate to be about 37.1%. From an interest expense perspective, the gross interest expenses for the quarter was $42 million, with an overall effective rate of 6.3%, and our capitalized interest for our construction projects was $5 million during the quarter. We would expect fourth quarter gross interest to be around $40 million. From a share perspective, at the end of the quarter, we had just over 183 million shares outstanding. We issued 3.8 million shares during the quarter related to the final conversion of our 4% subordinated notes. We purchased 18.9 million shares during the quarter for about $439 million, and we would expect that fourth quarter diluted shares would be approximately between 183 million and 184 million shares. Finally, I would like to address our liquidity position for just a few minutes. At the end of the quarter, we had $575 million outstanding on our revolving credit facility. The facility is an $874 million facility, it matures July 2012, and it includes an accordion feature of about 250 million. As a part of this credit facility, we also have a $584 million term loan ‘A’ layer. This amortizes $65 million annually until maturity, and that again, then there's a (inaudible) that's payable in the mid-year of 2012. These payments are principally the only meaningful debt service requirements that we have. Our current debt-to-EBITDA ratio improved from 2.5 times at the end of 2007 to 2.2 times at the end of the third quarter. We currently anticipate an even lower leveraged ratio at the end of 2008 based on where we believe the fourth quarter is going to result. Again, we believe this will drop back to levels that we experienced earlier in the year regarding our debt-to-equity ratio as well. At the end of September, we had liquidity of approximately $350 million to $360 million between cash and revolver availability. Again, we plan to manage our strong cash flow in the fourth quarter and expect to increase our available funds through the coming months. We continue to be easily in compliance with our covenant requirements, and we expect to remain well. We believe the reduction in our working capital and connection with our proven low-cost operating structure will drive significant cash flow generation. During the fourth quarter and into 2009, we intend to use free cash flow to repay borrowings on our revolver, as well as to fund capital projects, which are currently underway. Keith.

Theresa, thank you. I think it's time to open it up to Q&A piece of the conference call.

Thank you. (Operator Instructions). And we'll take our first question from Michelle Applebaum with MAR.

Hi, Good morning everyone.

Good morning.

Good morning.

First of all to your credit, for doing the very first conference call of this season; can't be easy. And I think withdrawing guidance at this point, specific EPS guidance is prudent. Theresa, you went through the cash flow very clearly, but I just wanted to be clear on it. And while I have no credit concerns, I wanted to go over some of those numbers. You are saying your maintenance level for CapEx is $70 million for '09 and $100 million of projects?

No, that's not what I said. I'm sorry, let me clarify. I said that for 2009 currently which is very preliminary and I wouldn't call it maintenance CapEx, I would say we've identified projects of $100 million for 2009 in addition to the $70 million which we would need to complete the second caster at that structural mill, and in addition to the $200 million to $210 million that we'll invest for the completion of the Mesabi Nugget plant. So the total is I think somewhere between $350 million and $375 million.

So does the 100 include maintenance level?

Yes.

Okay. And in terms of these items, I presume the $70 million you are locked into, and the 210 you are locked into. Is there a discretion on the 100?

Absolutely.

Okay. How much of that will be discretionary?

Well, we are just going through our capital budgeting process right now, Michelle, and the ongoing project that we mentioned, even there's much of the equipment and Dick can speak to that. So I would suggest that probably that $70 million we've talked about from the second caster perspective, we will spend. Mesabi Nugget as well we have commitments, they are outstanding.

She is talking about the $100 million.

Right, the $100 million has not been committed to yet. We are still talking about those projects.

Okay.

There's some good projects in there, Michelle. Lacking more visibility, half of it, roughly.

Okay. And Theresa, you say you're in good shape with your covenants.

Perhaps.

Can you get a little bit more specific and tell us, how much leeway you have in terms of those covenants, because I know you're pretty far away from any of your tests, but can you give us some specifics?

Yes, certainly. Our most restrictive covenant is in our senior secured revolver, and it's five times EBITDA covenant. And actually we’re playing with that little a bit Mitchell. And even if we weren’t -- and I'm not suggesting this at all, and Keith is probably going to jump across the table at me, but even if we weren't to make any money at all in the fourth quarter, but we were still to make our capital projects, we would still be easily in compliance with that covenant. All throughout 2009, I can't think of a dire enough situation where we wouldn't easily be in compliance with that covenant.

And that's your buyback covenant, dividend covenant, the 25 million?

No; the most restrictive covenant that we have is five times EBITDA. We have a restricted payments covenant, and all that does is limit our ability to pay dividend to a maximum of $25 million a quarter, or to have share buybacks.

So that's an irrelevant covenant.

That covenant is actually 3.5 times.

It's irrelevant because your dividends are below that right now. And I presume you're not buying back shares, correct?

Correct.

Okay. Great. Thank you for the granularity. I’m sorry to make you go through a worst-case scenario, but we need to hear that, I need to hear that. Thank you.

You're welcome.

And we'll take our next question from Kuni Chen with Banc of America Securities.

Hi, good morning everybody.

Hey, Kuni.

Don't have any good words of encouragement for you, except to say, hang in there. Obviously not pretty on our side of the business either. Just on the operational side, can you give us a little bit of color on how many shifts you're running right now at Butler, Pittsboro and Columbia City, and kind of where you see that going over the next couple of weeks?

We're running round the clock pretty much at every long products operating facility. We're bouncing around between all shifts, and you might say in two shifts, operating only one caster out of our two casters at the current time.

At the Butler facility?

At the Butler facility.

The only place we have a real curtailment, a little bit at The Techs and we pulled maintenance ahead. And also at Steel of West Virginia we are on our number two mill. Number one mill is running flat out full time. The Merchant mill actually is doing quite well and having record productivity per hour. But we have some layoffs in effect currently on the number two mill.

Thanks.

That's the Steel of West Virginia.

That's Steel of West Virginia.

We couldn't run both casters right now if we wanted to, because we pulled the maintenance project up and it's ongoing right now, the modification. The one battery is complete and the second battery is in the process. So, we probably could return to running both casters until --

We have another 10 days to go until the south furnace battery is complete.

Okay. So I should not extrapolate that, Butler is going to run at 50% for the fourth quarter.

I wouldn't say that. I think it could well run at that rate in October, because of the maintenance and upgrade activity, but I wouldn't tell you. I think that the buying community will start to come back into the market here as inventories drop below untenable levels that can sustain even recessionary OEM type activity. So, I couldn't tell you what to model for November and December. I can only tell you, I think we modeled about 60% or thereabouts is what we modeled, which is more than one caster. Now, we don't see any pull-back in long products operating activity in the fourth quarter, and generating pretty good earnings there. Butler's earnings will go backward, obviously, in the fourth quarter, to be expected when you are running at that rate, but true to form, they will be profitable, which verifies what I have been telling everyone about the variable cost structure.

Okay. And then just with the drop in scrap that we have seen and the impact there on OmniSource, obviously October is another tough month; November, I think you indicated you expect scrap to be down again; and then kind of no visibility on December. Are you profitable at these levels, at least near term, given the sharp downward moves in scrap?

I think you're at just at breakeven kind of scenario on October, probably making a reduced level profitability in November, because I don't think it will be as a sharper drop as we've seen. It couldn't be at zero at that point in time with the margins expanding in December. Mark, do you have any different thoughts or add to that?

(inaudible)

Okay.

We certainly don't think that the drop in November is going to be anything close to the financial [cost].

Right, and I think that's fair. Okay and then just one last question. Just on the balance sheets, there's [$1.04] billion of intangible assets and goodwill. Can you just walk us through kind of the year-end test to determine whether there's an impairment situation there or not?

We don't currently anticipate any impairment calculation for the impact for goodwill or intangible assets. We are currently in the process of finalizing the valuation for recycled [steel]. It currently has just north of $200 million identified as goodwill and $140 million to $150 million identified as intangible assets, and we do not believe those to be impaired.

I guess the question is kind of, what would trigger you to take a closer look at your assumptions there.

Well, we have take a close look every year. We do that throughout the year for the OmniSource operations that takes place in October. But again, we don't expect anything to have an impairment issue for them because you look out into the future and you look at discounted cash flows, etcetera. It’s a pretty complex calculation. And for [Recycle] South, we'll look at that again next fall. And for our Roanoke acquisitions, we look at that at the end of the year. And again, we don't expect any impairment to take place.

Okay, fair enough. I'll turn it over. Thank you.

And we'll take our next question from Brett Levy with Jefferies & Company. Brett Levy - Jefferies & Company: Hey guys, just to be clear, there’s no word from your banks making you decide not to buy bonds or not to buy stock at this point. This is just you guys being prudent?

That's correct. Brett Levy - Jefferies & Company: And then with respect to the five times EBITDA covenant; does that mean you're going to have five times EBITDA to interest, over what period? What's the numerator or the denominator associated with EBITDA with five times?

With five times the EBITDA is a trailing [LTM] on a pro forma basis, and the debt that's associated with it or any outstanding letters of credit of which we tend to have anywhere between $15 million and 20 million, which also decreases the availability on the revolver. And then all of our senior debt and our -- currently we have a little bit; I think 60 million or 70 million of unsecured coordinated debt. Brett Levy - Jefferies & Company: Okay, got it. Planned outages for the fourth quarter?

Butler will continue to make our modifications to the arc furnaces. We do not have any plans to take the rolling mill down through the fourth quarter. At Columbia City, we do have an outage coming up in November, which is normally about a five day outage to do repairs, normal customary repairs. Mostly to the reheat furnace and the rolling mills. We are going to replace our machine and mill housings and replace the liners on the mill. At Roanoke, again I think November 14 we'll take the arc furnace down to make a bearing change on the [slue] for the roof and mast assembly. But again, we're building inventory of billets as we speak and therefore the rolling mill will not go down in the fourth quarter for anything other than normal and customary maintenance. Pittsboro, we haven't decided yet. Right now, we don't have any need to take it down. We have some project work that could be accomplished, should we have unexpected breakdown or so. But to keep on-schedule with our expansion, we can either do the projects this quarter or next quarter, that's to be decided. And we don't have any major, we have an outage coming in Steel of West Virginia, but nothing out of the ordinary, all planned and scheduled. Brett Levy - Jefferies & Company: And last question. You guys continue the expansion into acquisition of scrap dealers and also your kind of longer term plan to build another sheet mill. I assume both of those are on, (inaudible) conditions improved?

I think most of the expansion we are going to be doing in the resource arena will be greenfield in nature. And there's nothing near term there. But as you look further out in time throughout the course of next 12 to 18 months, we have two and a half shredders in the box so to speak, sitting there on the shelf. So it's not a CapEx type thing. It's a matter of geography and the suitable site and things of that nature; very modest capital expenditures. I think most of it will be greenfield in nature. As to the new Flat-Rolled mill, we expect to generate excellent earnings next year, as I said, or have another outstanding year. But you have to understand, equipment deliveries there, we are not going to stop engineering this mill. I think it's an important new future project for the company and deliveries are out 30 months. That's two-and-a-half years from now. I don't know what the world's going to look like then. Brett Levy - Jefferies & Company: So you are still moving forward, but not spending a lot there?

No, there's basically zero expenditures, other than some early engineering activity.

We've not committed any dollars yet. Brett Levy - Jefferies & Company: Theresa, gentlemen, thanks very much.

Thank you.

And we'll take our next question from [Dave Pett] with JPMorgan.

Alright, some of my questions have already been answered, but I was hoping for a little more clarification. I understand you are saying that you are not engaged in any share buybacks at present, but do you anticipate maintaining that policy throughout the recession?

Well, I don't think there's that many shares you can consider, and at the price where they are, I don't know that it's material one way or another, but it's an accurate statement that we are not currently engaged. So we'll just let the statement go with that.

Okay. Then you had just answered Brett's question about acquisitions. But with leverage falling in the fourth quarter aided by the working capital release, you guys have a leverage target that you are planning to move towards and that would I guess overwhelm any plans to do acquisitions or anything that might come up, or is it more you will take it as it comes?

We have no significant acquisitions right now on the drawing board, and really, the only one we're looking at is a new flat-rolled mill. And as I said, that's 30 months off. We have no current resource acquisitions, non-greenfield on the board. And so our activity relative to M&A forecasting for next year is next to nothing.

So then throughout the recessionary period do you anticipate using cash to pay down the revolver and then to hold down balance sheet for a conservative sake?

That's exactly right. And I don't know that Theresa quantified where she brought a revolver ‘D’ by the year end, but it's going to be down significantly from where it's at.

Okay, thank you very much.

And we’ll take our next question from David Lipschitz with Merrill Lynch.

Good morning everybody. Question in terms of what your customers are saying with regard to imported prices, whether it be from China or elsewhere? What are they seeing? Are they ordering from them yet as prices have fallen precipitously down there and freight rates have fallen. So what are you seeing from that front?

I think there's a lot of anxiety out there. I don't see any buying going on there. I mean, people were not 30 days ago waving around $900 import steel, but I think the buyers recognize that's dangerous, uncharted territory. I think they do expect that given the level of economic activity that prices could regress. And we all know they have; they're not $1100 anymore, and exactly where they are I don't know if anybody knows, but I don't see the imports being a major influence, a pretty dangerous territory, especially when you are looking at many mills armed with cost structures, like they have. I think we could be very cost effective at keeping them out of our hair, anyway. But, where is the market going, I don't know. You can read about as easily as I can. I have no idea. But, the prices are not down to the levels that the pundits indicate they will be at in the future. I have no crystal ball as to whether or not they will ever go there or how long it will take to get there.

We hear from the economists about the commercial end market is starting to weaken and things like that. I mean, are you worried that just in terms you are saying that they're not going to come back next month, they could come back in January? I mean, is there a possibility you think they might not come back till June of next year in terms of those end markets?

No, I don't know if and when they're going to come back. We will deal them as we have to deal with them. But, I think, the end markets are probably not as bad off as the order entry rate. I think people are trying to work down inventories. I think when they get down there; let's just say our economy is chugging along at 80% of what it was. That would be a pretty terrible drop. We've a lot of steel to be purchased in this country, and I think we're in as good a shape as anybody to provide it. I think these guys right now are just working off. I think the shipping rate that is in there -- ordering down rate, right now, as they work off more expensive inventories in an effort to better weather whatever storm is out there themselves.

One more final question. I mean, could we go back to '04, '05 levels in terms of that earnings level, in terms of pricing, and if that's continues to fallen to the level out here, in terms of historical spreads? Could we get back to those levels? I think you're worried about where your share prices really.

You can't make a case, I mean that bad. If we have any semblance of an operating rig whatsoever, as I said, with soft scrap prices you be the judge of where pricing could be. I am not going engage in could it go back to '04 or '05, you can read as well I can or people think it could down too. That's a pretty nasty prediction in and of itself. But with that we'd the broadest margins we've had. So I think we are just in great shape. I can't predict where the end price is going to go. I could just tell you we and the likes of the Nucor's of this world who have variable cost structures are going to be in awfully good shape no matter what the climate is out there.

Okay, thanks.

And we'll take our next question from Timna Tanners with UBS.

Hi, good morning and thanks for the great detail.

Welcome, Timna.

I just wanted to do an exercise maybe similar to the lines of the last question. Keith, can you talk to us about what's different from the 2001 to 2003 scenario? Not so much from the economy, but from where Steel Dynamics is positioned? But certainly as you point out, it's very difficult to imagine a scenario where Steel Dynamics loses money, but your EBITDA per ton at that time was average say $75. So what have you done as a company to position yourself differently into a downturn? Can you just talk us through that, please?

Well, I think we clearly…. [Call Ends Abruptly]