Steel Dynamics, Inc. (STLD) Q3 2012 Earnings Report, Transcript and Summary

Theresa E. Wagler - Chief Financial Officer and Executive Vice President Marlene Owen Mark D. Millett - Co-Founder, Chief Executive Officer, President and Executive Director Russel B. Rinn - Executive Vice President of Metals Recycling, Chief Operating officer of Omnisource Corporation and President of Omnisource Corporation Richard P. Teets - Co-Founder, President of Steel Operations, Chief Operating Officer of Steel Operations and Executive Director Gary E. Heasley - Executive Vice President of Business Development and President of New Millennium Building Systems

Evan L. Kurtz - Morgan Stanley, Research Division Arun S. Viswanathan - Longbow Research LLC Shneur Z. Gershuni - UBS Investment Bank, Research Division David Adam Katz - JP Morgan Chase & Co, Research Division Sohail Tharani - Goldman Sachs Group Inc., Research Division Luke Folta - Jefferies & Company, Inc., Research Division Brett Levy - Jefferies & Company, Inc., Research Division David S. Martin - Deutsche Bank AG, Research Division Timna Tanners - BofA Merrill Lynch, Research Division Mark L. Parr - KeyBanc Capital Markets Inc., Research Division Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division Aldo J. Mazzaferro - Macquarie Research Michelle Applebaum - Steel Market Intelligence Inc John Charles Tumazos - John Tumazos Very Independent Research, LLC

Good day, and welcome to the Steel Dynamics Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded today, October 18, 2012, and your participation implies consent to our recording this call. If you do not agree to these terms, simply disconnect. At this time, I would like to turn the conference over to Theresa Wagler, Executive Vice President and Chief Financial Officer at Steel Dynamics Incorporated. Please go ahead.

Thank you, Clint. Good morning, everyone. Welcome to the Steel Dynamics Third Quarter 2012 Earnings Conference Call. I'd like to take this opportunity to introduce one of the newest members of our team, Marlene Owen. She joined us in September as the Director of Investor Relations, and we're excited to have her as part of the team. Marlene's contact information is on our website and also noted on our press release. I will now turn the call over to Marlene for a review of our forward-looking statements.

Thank you, Theresa. I am glad to be here. Good morning, everyone. I would also like to extend my welcome to you, and thank you for joining us for Steel Dynamics' third quarter 2012 earnings conference call. As a reminder, today's call is being recorded, and the recording will be available on the company's website for replay later today. Certain comments made today may involve forward-looking statements that, by their nature, are predictive. These are intended to be covered by the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Such statements, however, speak only as of this date today, October 18, 2012, and involve risks and uncertainties related to our metals business or to general business and economic conditions, which may cause actual results to turn out differently. More detailed information about such risks and uncertainties may be found at the Investor Center Advisory Information tab on our Steel Dynamics website, in our Form 10-K annual report under the captions Forward-looking Statements and Risk Factors or, as applicable, in subsequently filed Form 10-Q filed with the SEC. Joining today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; Theresa Wagler, Executive Vice President and Chief Financial Officer; and the company's platform executive vice presidents, including: Dick Teets, President and Chief Operating Officer of our steel operations; Russ Rinn, President and Chief Operating Officer of our metals recycling operations; and Gary Heasley, Business Development and President of our fabrication operations. Now for opening remarks, I am pleased to turn the call over to Mark.

Excuse [ph] us. Thank you, Marlene, and welcome aboard. Welcome to our team.

Thank you.

Glad to have you. I'd also like to add my thanks to each and every one of you for joining us this morning to discuss the quarter's results and also to talk about some of the nearer-term earnings catalysts that relate specifically to Steel Dynamics that will further differentiate us from our peers. But before that, I would like to applaud our team on our safety record in the quarter. I want to especially congratulate certain employee groups for a stellar performance because I think it's very, very noteworthy. Our entire Michigan division of our recycling platform, plus 47 other metal recycling locations, have had 0 recordable incidents this year. Our Steel of West Virginia, The Techs and Jacksonville steel making locations have had 0 lost-time incidents this year. At SDI LaFarga, our cold-rolled facility, has had 0 lost-time incidents for 15 consecutive months, which I think, in aggregate, is a phenomenal performance. As you know, safety is our highest priority, and my congratulations to the entire team. We continue to live and operate in a challenging time that constantly tests our mettle. The U.S. market remains tepid as uncertainty surrounding the strength of Europe's financial condition, slower growth in China and the near-term U.S. economic and political environment continues to weigh heavily on businesses' appetite for both capital investment and product procurement. Fortunately, we have a talented team that is up to the task. Each successive quarter, they continued to perform at the top of our peer group, maintaining our low-cost position, and differentiating factors, driving our success and superior financial metrics. During the quarter, we achieved sequential quarterly financial improvement in our metals recycling and fabrication platforms but saw a decline in the profitability of our steel operations as overall shipments dropped 8%. Operating income from our steel operations is down on a sequential and prior year, quarterly basis, attributable mostly to decreased profitability in our long products divisions, and most notably in our Engineered Bar Products operations. We reported net income of $13 million, or $0.06 per diluted share, on net sales of $1.7 billion for the third quarter of 2012. This is below the $0.20 reported in the second quarter this year and lower than last year's third quarter results of $0.19 per diluted share. It's important to note that most of the earnings decrease is attributable to 2 unique items we communicated to you in our guidance. The first and most impactful was a refinancing expense of $26.3 million or $0.07 per diluted share; and the second is a noncash impairment charge of $7.9 million, or $0.02 a share, related to the termination of our 2 small joint ventures. Theresa's going to provide greater detail for these items in a few minutes. Excluding these charges, our third quarter diluted earnings per share would have been $0.15. Overall steel demand was down in the quarter. Volumes fell most significantly, 32%, within our higher-margin special-bar-quality products as customers began to realign inventories throughout their supply chain. The exuberant 2012 growth expectations communicated late in 2011 and to this year related to the yellow [ph] line, transportation and other heavy manufacturing sectors dissipated somewhat as actual growth was less than anticipated and customers realized their inventories were mismatched to current growth expectations. Our steel metals operated at 79% production utilization rate during the third quarter, which is lower than the rate of 83% we displayed for the second quarter this year. This compares to an estimated third quarter domestic industry rate of some 75% among U.S. producers. Notably, though, even though nonresidential construction is still anemic, our Structural and Rail division has increased utilization to 54% year-to-date. Remarkably, the mill continues to remain profitable. It's a testament to our highly variable cost structure and low-cost position. Rail production continues to provide support to our market diversification strategy there. Our 2012 year-to-date rail shipments were 107,000 tons, or about 14% of our sales mix, compared to the same period of 2011 with shipments of 97,000 tons. We remain focused on increasing this volume and providing greater market diversification for this facility and mitigating our dependence on the nonresidential construction sector. Operating income per ton shipped for our steel operations decreased 15% from the second quarter rate of $91 to a third quarter rate of $78. Average steel pricing related to third quarter shipments declined $45 in the quarter, just over 5%. The cost per scrap used in our furnaces in production during the third quarter declined $44 per ton. Our steel backlogs were generally lower at the end of September compared to the end of June. On our second quarter earnings conference call, we noted that our market intelligence indicated some customers were preparing to reduce inventory in order to mitigate market exposure and release working capital from their supply chain. We indeed saw that happen in conjunction with softening demand in some sectors. Although customer sentiment remains relatively positive, there's an ongoing hesitancy to build inventories in this environment of uncertainty. There's a mentality to order strictly what will meet near-term needs. End markets remain mixed, automotive and manufacturing sectors remain positive, transportation softened somewhat, and additionally, agriculture continues to remain muted due to the impact from extreme drought conditions throughout the U.S. We've also seen some pressure in the energy sector specifically related to reduced natural gas drilling as natural gas prices remain low. Nonetheless, our steel operations continue to outperform our industry peers throughout the market cycle. The team delivered best-in-class results by maintaining their laser focus on being the lowest-cost producer out there. They also remain committed to creating customer value and exceeding our customers' highest expectations. For metals recycling, the domestic industry experienced a volatile third quarter. Going through the quarter, the ferrous scrap market remained oversupplied as the export market weakened, leaving material that would normally have gone to Turkey or elsewhere here in the States. This resulted in significant price declines. On top of that, U.S. steel mill utilization declined, resulting in reduced domestic demand. As compared to both the second quarter of 2012 and the third quarter of 2011, our ferrous scrap shipments declined 10% to 1.3 million tons for the quarter. As we ended August, scrap pricing rose sharply due to increased export activity and perceived domestic inventory shortfall at the steel mills. This uptick was a significant factor in achieving the 23% increase in sequential quarterly ferrous margins. Nonferrous margins held steady overall, although unrealized hedging losses during the quarter decreased earnings by some $9 million. Nonferrous volumes decreased 4% when compared to the sequential second quarter and 7% as compared to last year's third quarter. Last quarter, we said we were implementing several initiatives in 2012 and into 2013 to help offset some of the macro supply and demand dynamics that continued to hinder the metals recycling market. We opened additional retail yards to increase flow of higher-margin material and are introducing new technology to recover even more nonferrous materials from our shredding operations to reduce year loss and increase margins. We expect these recovery operations to begin operating in the first quarter of 2013. The metals recycling business was quite a rollercoaster ride throughout the third quarter, and it's unlikely we will see that volatility subside in the near term in any meaningful way. As is typical for us, we're taking deliberate actions to mitigate the impact market volatility has on our business performance, at least to the degree we can, and the team has done an excellent job developing, planning and implementing these initiatives. In our Minnesota operations, one of the key aspects of our success has been controlling our costs as far as the supply chain is possible, coupled with innovative approaches to execution. We said that our pioneering assets in Minnesota will provide SDI with capital source of iron, eliminating dependence on foreign pig iron markets. They have. Even though we purchased a small amount of third-party pig iron this year, production at both our Minnesota operations and Iron Dynamics could have fairly supported our current steel production requirements for pig iron. We currently don't expect the need for further third-party purchases. Last quarter, we indicated that significant progress has been made since restarting the nugget facility in May, and the mechanical and process changes were necessary to fully achieve production and product quality expectations. While operating during the third quarter, we were able to determine the exact nature of these changes. As mentioned in our press release, beginning mid-September, we began a 6-week outage to lay the groundwork necessary to prepare for the implementation of productivity and quality improvements. Our current expectation is to recommence operations in November with additional equipment installation expected to occur in the first half of 2013. We obviously will provide more specific time line as we go forward. And keep in mind some of this timing is contingent on equipment delivery schedules. So we're pleased to report that our Minnesota iron concentrate facility started operating in September and supplied its first shipment to the nugget facility before the end of the quarter. We are proud of the team there and appreciate their dedication and hard work. This is a pivotal achievement toward lowering the eventual cost structure of iron nuggets. As we've suggested in the past, please keep in mind we still have higher-priced iron concentrate in inventory, which must be used through the remainder of 2012 and into the first quarter of next year. Therefore, we want to immediately realize the full benefit of the reduced-cost concentrate. We continue to pursue permitting of our brownfield mine, and there are no new updates relative to that effort. Moving on to fabrication operations. The continued weak nonresidential construction market provides a challenging operating environment for our 6 fabrication plants. Although 2 months' trend does not make, and although only incremental, the Architectural Billing Index began an upward turn in July and continued to improve in August, slightly breaking over the 50 threshold after declining the 4 previous consecutive quarters, I mean, months. The upward tick would suggest a potential improvement in future nonresidential building activity, and the data suggests that growth is occurring principally in the South and the West U.S., which aligns well with our new plants in Arkansas, Nevada and Mexico. Our volumes are growing through gains in market share as the team continues to win new customers. The group continues to broaden our geographic footprint to garner national accounts and remains focused on customer service and cost containment. Our backlog in September was stronger than at the end of June, and we're pleased to report continued improvement in operating profit for our fabrication operations. We set up facilities and their operating teams were ready to execute as the market opportunities presented themselves. And they are. And as a reminder, we're configured with a national presence now, having 425,000 tons of capacity, and the team is working diligently to utilize that capacity. They're making progress, and we appreciate their contributions. I think it can be seen that Steel Dynamics is still delivering superior performance despite very challenging markets, and the company continues to drive towards maximizing opportunities to effectively and efficiently perform through the cycle when compared to our domestic peers. Our operating and EBITDA margins continue to be best in class. Superior operating and financial performance clearly demonstrates the sustainability of our business model. In keeping with the entrepreneurial spirit that flows throughout the company, we will continue to assess opportunities for growth, whether new products, new technologies or new business lines. The focus is to reward not only top line revenue growth, but growth that will enhance and provide consistency to margins to provide our shareholders with a return that demonstrate our commitment to making Steel Dynamics the preferred investment decision. And to that end, I believe recognizing the latent long-term value of our company is clearly demonstrated in our ability to successfully weather the downturns. And we are squarely focused on positioning the company for long-term growth, and there are number of earnings catalysts that I would suggest are compelling. As I mentioned on the last quarter's call, we have expanded our steelmaking capacity to 7.4 million tons since the 2008 downturn and have yet to fully realize the benefit. We will be expanding the capacity and product offerings of our SBQ operations, hitting all the key success drivers: product and market diversification, customer support, increased margins and great returns on capital. The SBQ expansion will offer greater utilization in our Structural and Rail division as they are intended to supply booms to the SBQ expansion. The mill -- the Minnesota operations will benefit from our lower-cost iron concentrate, and after equipment modifications are completed, we expect to achieve increased productivity, which should drive significant improvement in financial performance. These are a few of many initiatives that have the potential to be appreciable earnings drivers, and we look forward to keeping everyone up-to-date on the progress of these initiatives as they occur. And so with that, I will pass the call over to Theresa for an update on our financial results.

Thank you, Mark. As mentioned, our earnings per diluted share for the third quarter were $0.06, above our earlier guidance of between $0.01 and $0.05 per diluted share. Two unique charges reduced our earnings in the third quarter. Had those charges not occurred, the company would have reported third quarter earnings of $0.15 per diluted share. Those unique items included the incurrence of nonoperating charges related to our third quarter refinancing activities of $26.3 million or $0.17 per diluted share. Those charges are shown in our income statement as other expense below the operating income line. I will detail the resulting average maturity extension and interest savings in a few minutes. We also recorded noncash impairment charges of $7.9 million, or $0.02 per diluted share, related to the intended termination of 2 small joint ventures. One related to the manufacture of composite type, of which we own 84%, and the other is production of abrasive materials, of which we own 90%. Just to note, neither of those operations were in our reportable segments, so you won't see that allocated to the earnings of any of those segments. The decisions to terminate these joint ventures triggered an assessment for impairment in the third quarter: the impairment charges less the difference between the estimated fair values of the assets compared to their book value. On a sequential quarterly basis, that is, comparing the third quarter of 2012 to the second quarter of this year, revenues decreased $216 million, or 11%, caused by a 13% decrease in revenues from both our steel and metals recycling businesses as booked volumes and pricing decreased in the quarter. Our consolidated gross margin percentage declined 30 basis points. Margin compression within our steel operations was more than offset by gains achieved in our metals recycling and fabrication operations. Despite decreased volumes, ferrous margins expanded our metals recycling operations, resulting in operating income of $16.6 million or $25.9 million after excluding noncash, unrealized hedging losses. This compares to operating income of $5.1 million or $4 million after excluding noncash, unrealized hedging gains in the second quarter of this year. When we compare the third quarter of 2012 to the same period of 2011, our gross margin percentage decreased 51 basis points primarily due to macro industry conditions explained earlier. Our operating income per ton shipped for steel operations declined $17 when compared to the third quarter of 2011 as average pricing fell further than scrap costs during the period. However, operating income from metals recycling improved $5.1 million. Gross interest expense for the third quarter was $41.8 million based on an effective interest rate of 7%. Based on our current refinanced capital structure, the fourth quarter of 2012 will benefit approximately $6 million in interest cost savings when compared to our pre-financed structure. Moving into 2013, the expectation, based on our current capital structure and prevailing interest rate, is for interest expense to decrease approximately $20 million as compared to full year estimates for 2012. Our third quarter effective tax rate was considerably lower than previous quarters at 15.4%, including noncontrolling interest. The decrease in the effective rate was attributable to a favorable adjustment in our reserves for unrecognized tax benefits, which was based on new information gathered in the third quarter. However, this benefit was largely offset by an increase in our overall estimated full year [indiscernible]. You may also have noted that our diluted shares in the third quarter were lower than usual. We will require to exclude the share impact of our convertible notes, about 16.6 million shares, because the result would have been anti-dilutive or, in other words, would have actually increased our diluted EPS during the quarter. Cash flow from operations provided $117 million during the third quarter. Funding operational working capital was $23 million, primarily related to decreased inventories, which were more than offset by decreases in payables and accruals. Strong cash flow generation during this challenging environment is a continued testament to our low-cost, highly variable cost structure and diverse, value-added product portfolio. Our third quarter capital investments totaled $58 million and were $150 million year-to-date. Just over 40% of these third quarter investments were related to our copper rod mill, which started operating in July, and our iron concentrate joint venture, which began operations the last week of September. Third quarter depreciation was consistent at $45 million. Our current estimates for fourth quarter 2012 capital investments is in the range of $50 million to $60 million. As mentioned on our last quarterly earnings call, over 70% of capital investments planned for 2012 are what we would consider growth-oriented, or projects that are intended to increase capacity, efficiency and margin in future periods. We are very pleased with the execution of the tenders in August for our 7.375% Senior Notes which were due November of 2012 and our 7.75% Senior Notes which were due April 2016. We repaid $170 million of the notes with available cash and refinanced the remaining $750 million from net proceeds received from the issuance of new Senior Notes: the 7-year 6.125% $400 million tranche due in 2019 and a 10-year 6.375% $350 million tranche due in 2020. We've created an even greater long-term flexibility on our capital structure through the repayment of a portion of our debt, which we indicated will be due earlier this year, and through the extension of our debt maturity profile and through the reduction of our interest burden. At the end of the third quarter, total debt was $2.2 billion. Our current net debt, defined as total debt less cash and short-term investments, to trailing adjusted EBITDA was 3.1x, and our interest coverage ratio was 3.8x. Our long-term preference is to maintain that leverage below 3x. If trailing adjusted EBITDA is adjusted for the full year 2012 refinancing charges of approximately $40 million, our operating net leverage remains below 3x at 2.9x. At the end of the third quarter, cash and restricted cash totaled $315 million. We also had the full benefit of our $1.1 billion revolving credit facility which had no outstanding borrowings at the end of the quarter. Our balance sheet remained strong with over $1.4 billion of liquidity and minimal secured borrowings. Looking forward, our near-term cash allocation plan remains to invest in our existing operations, to reduce a portion of our outstanding debt while maintaining sufficient liquidity for growth and to provide for cash dividends to shareholders. Lastly, for those of you who use the breakdown of our Flat Roll division shipments for your financial models, during the third quarter, we shipped 254,000 tons of hot-rolled, 82,000 tons of P&O, 38,000 tons of cold-rolled, 89,000 tons of hot-rolled galvanized, 50,000 tons of cold-rolled galvanized, 100,000 tons of painted products and 26,000 tons of Galvalume for a total of 639,000 tons. Thank you. I will now pass the call back over to Mark.

Thanks, Theresa. I guess in conclusion of our opening remarks, I'd like to again thank all of our employees for their continued hard work and their dedication and their commitment to safety. Each and every one of you contributes, and each and every one of you makes an impact to our company. I also would like to thank our loyal customers and shareholders for their continued trust and support. So now, Clint, I'd like to open the call for questions that you may have, any of the listeners may have, for myself or the team.

[Operator Instructions] We'll go first to the side of Evan Kurtz with Morgan Stanley.

I was hoping to kick it off with kind of a 2-part question on scrap. Have recent conditions been tough enough to kind of encourage some of the smaller, maybe less advantaged scrap processors out there to close up shop? Are we starting to see any sort of a supply response given the weak profitability there? And then also, I just kind of wanted to get your take on maybe the 5-year view for scrap processing. How do you kind of see supply and demand playing out as we move forward here?

Well, Russ, you got your crystal ball. You have your 5-year crystal ball.

Well, to answer the first one, I think certainly, the pressure on scrap markets and scrap suppliers has been very difficult. Again, as Mark talked about, the rollercoaster ride, the ups and downs, certainly put pressure on the margins and the profitability of all [indiscernible]. So certain -- I would -- I think as we suffer, I think everyone else in the scrap industry suffer. So have we seen a series of closing? I haven't seen that. But certainly, I think everybody's under pressure. On the 5-year look, well, I think, I mean, if you can tell me what the mill utilization rate here to the next 5 years, and you might have a shot there. But it's -- as you look at this year, rollercoaster ride, up and down and up and down. And not just up and down in a small range, up and down in a big range. I think until we get some economic certainty in the global economy, I think it's going to be that rollercoaster ride.

Okay, great. And maybe I'll make it a little simpler and talk about the very near term on scrap then. I was actually pretty surprised to see on Bloomberg prices come down as much as they did given that we've kind of been hearing that some of the supply was fairly lean going into the month. So I'm assuming that's probably still the case. And just wondering how you see things setting up in November. Where do kind of, in your opinion, did scrap inventories stand at maybe both the yard level and also at the mill level as we go into negotiations here for November?

Evan, I think the inventories in this entire supply chain, I think, remain fairly lean. Again, another rollercoaster ride. The old adage "You just don't know until you plow", I think everybody pretty well modeled that in this time frame because it's just too risky to hold inventory. Mill utilization rates are still, as Mark indicated earlier, were down from where they were earlier in the year. I don't see anything that tells me those are going to jump up to 80% anytime soon, so I think we're just going to kind of rock along. As I look where we're at on the October levels, pricing levels, they're very similar to the July pricing levels. If you'll recall in July, those low price levels relatively pretty much shut the flow off at the dealer level. And so I think we're experiencing some of that as these October prices are at that similar level. What happens in November, I think it's probably sideways. Strong sideways will be my guess. But again, that can change very quickly. I would say the indications are that we are at the bottom, and I think the balance of the quarter should be upward pressure if anything.

We'll go next to the side of Arun Viswanathan from Longbow Research.

I guess my question is a little bit along the same lines. What makes you say that we're nearing a bottom on scrap? Have you seen any difference in, I guess, the export market? Because that -- to me, it seemed like that's change in August to get some momentum back in the market.

There has been a little bit of uptick in the export market. It's -- again, just like the regular scrap market, steel markets go in fits and spurts. But again, I think the real issue is the scrap yards are not attracting -- the prices are not attracting scrap out of the fields or out of the dealers. I guess it's going to put a constraint on the supply so that the scrap yards and dealers all have to pay higher to get there. Therefore, the pressure is going to push the price up from those lower levels. But again, it's such a volatile market and it can change very quickly.

All right. And another question I had was on SBQ side. There's been a number of, I guess, capacity increase announcements over the last year or so, and maybe up to 30% or so being added to the domestic market. And you've gone through some destocking recently. I guess I just wanted to get hopefully your thought process for adding capacity at this point and where that is going to be soaked up.

I'll be happy to take a shot at that one. I would tell you if you looked at the list of the announced SBQ expansions, the vast majority are capacity expansions. The difference with us at this point [ph] was ours is a product mix diversification expansion, and we're really driving down into the higher accuracy, the demanding -- the tolerance-demanding small bars that we have no -- really no significant presence in today. And so I can't speak to the viability of the capacity expansion projects and their ending results, but I would tell you that I'm still very optimistic about the positive results mostly because we have the early indications of customer desire, and we are going through customer approvals and different evaluation processes and -- during this time in anticipation of our next year start-up.

Yes, and several -- just to add, I think we consider that to be an incredibly compelling project. It's an incredibly effective use of capital. It's $75 million, $76 million or so to get 325,000 more tons. That puts us into an incredibly low-cost position in that arena. We already are one of the lower-cost operators, I think, SBQ. And so you're starting with a culture, a low-cost position and also sort of a low-cost overhead for fixed cost for that material. The -- as Dick said, this huge customer support for that product. And I think one needs to recognize that Dick, Barry and the team here have done an incredible job over the last 3 or 4 years. We are the beneficiary today of what they've done, engineering new products and new qualities of bar some 4 years ago, and they've gone through years of approval and quality certification. And that creates a high hurdle of entry into that business. And it's got -- it's not a matter of switching an SBQ mill on and accessing some of those markets. You really have to prove yourself, create the product and it's again difficult to get into.

All right. So just to clarify then. These products theoretically would be somewhat more immune to some of the destocking that you experienced in this last quarter or so?

I'm not going to make that statement because we're not hugely penetrating that market today. So I'm not -- I haven't followed it. But again, I would tell you that we consistently earn our share of the market. I would tell you that our belief is we've grown our percentage of market participation during this downturn and that we are fully believing that because we're bringing a new product. There's always a customer desire to have a new opportunity to have a new supplier because that changes the dynamics of the market. And so, therefore, I believe we'll have a great acceptance, and then it's up to us to earn their continued business.

I think we also should recognize the 3 and 5/8 inch, and that -- that's -- that represents about 55% of the SBQ market, which is probably an 8 million- to 10 million-ton market. So you're looking at penetrating 325,000 tons into a 4 million, 4.5 million ton market, which we would suggest is somewhat incremental and, as Dick says, with the customer support and loyalty that we have, with the quality of our product and the fact that we're going to be the largest single-site SBQ facility in North America. We have about 900,000 tons of product capability under one roof, which brings a lot of value and a lot of logistical savings to the customer.

We'll go next to the site of Shneur Gershuni with UBS.

I guess my first question is I kind of wanted to talk about pricing but on the scale side. There's been a couple of attempts in the last couple of days to lift pricing by some of the industry participants. Do you think that there's going to have decent momentum behind some of these lifts? And are there any areas of the market or any indicators that you're looking at that you think we should look for, for pockets of strength that carry any momentum if they're -- if it should continue?

I think the -- well, again, the rest don't have the only clarity crystal ball. I think the steel industry in general is tough to predict. But on a macro basis, we certainly have seen sheet markets decline from its May highs. And I think if you look at the drivers there, the elimination of [indiscernible] sort of removes the support for the July increases. We've had a -- or had a premium to global markets, but we certainly have destocking through the supply chain. And as we've seen in the past, our customers are very, very closely laser focused on the scrap markets, and there's an anticipation of a declining market and hence they took their foot off the accelerator. And I think all those in conjunction tended to drive prices down to their recent levels. But I think we perhaps are at an inflection point to some degree. At least, there are drivers out there that might suggest that. And the recent pricing perhaps is definitely for that. But customer inventories remain very, very tight, and the MSCI data recently show that on an absolute basis, total volume came off, ticked off a couple of percent. So inventory through the supply chain is tightening, probably will still go through some additional destocking or realignment of inventories. But nonetheless, it's tight. The pricing decline domestically and a slight improvement in China has reduced the premium domestically. As such, we've seen a slight drop-off of imports. In August, licenses came up incrementally and September by 5% to 10% but nothing too alarming. And I think that there's some rationalization taking place. People are anticipating outages over the next couple of months. RG is off-line. And so there are some positive drivers to support the present pricing, prevent deterioration anyway, and maybe show an uptick and have this to be another kind of mini cycle. I think we're also entering the November to April time frame that, over the last 3 years anyway, had seen an appreciable increase in prices. Don't necessarily suggest that there's going to be huge increases as we've seen in other years because I think demand is somewhat muted. But there are drivers there to suggest an uptick is possible. Any thoughts?

All I'll say is we're realizing the change in direction and are conscious of the magnitude and pursuing it aggressively.

Okay. And maybe a follow-up to Arun's question on SBQ. I was wondering if I can sort of approach this, I guess, on the demand side of the equation. Are there any particular end markets when you say that there's expected to be some weakness? But are any particular end markets driving the weakness in the SBQ market as natural gas or yellow goods? Or is this something that's just new and broad across-the-board?

I think the yellow goods have taken a quick inventory assessment and are constricting their consumption at this moment. A little bit of energy. I think there's a lot of giddiness in the gas patch. I know there's still drilling going on, but it's shifting. They're shifting from the shale gas into the wet gas and oil exploration areas. But every -- we could -- we track it. There's 2- or 3-rig count decrease, at least, in the United States. And last week, I think there was a little bit of an uptick in Canada. But it's an attitude that is, I think, coming about in that field, and that it's going to become a little bit tighter because production continues to be pretty good and consumption is waning a bit.

We'll go next to the side of Dave Katz with JPMorgan. David Adam Katz - JP Morgan Chase & Co, Research Division: I mean, you were talking about -- I guess you've spoken a little bit about the demand is more muted than in past years. But you did say the -- a possible future catalyst, that the capacity has been expanded to 7.4 tons per -- or million tons per annum. When do you think the market would support a more marked move towards that capacity?

I think if you look at that capacity of let's just call it 1 million tons for the sake of argument, 1.2 million tons compared to 2011, we shipped a record 5.8 million tons in 2011. So there's 1 million, 1.2 million of latent capacity there. I think half of that over the next 18 months, given our expansion, hopeful expansion, of rail offerings and also the SBQ will occur or come back regardless of economic recovery. The other half is obviously related or principally related to the residential and nonresidential construction. A lot of that capacity remains at the construction mill. And so nonresidential construction has to come back to fully utilize that. David Adam Katz - JP Morgan Chase & Co, Research Division: Okay. And then I guess as a follow-up, given what you've said with construction being fee [ph], given that we've seen the architectural index move up for 2 months in a row, it's been so long since we've seen kind of improvement there. When historically would you see the movements in architectural index show up and improvements in your volume?

Yes.

The ABI has been moving up. It was stronger earlier in the year. It fell off a bit. It's coming back. And these are small incremental. What we've seen in some markets, though, is continued growth. The joint industry's demand for the year is up 15%, and the deck industry's up about 12%. So we've seen pretty good growth in those areas, and we've seen that reflected in our order books. Our backlog is up year-over-year about 45%. So the growth has continued. Any positive sign in the ABI, we certainly won't -- we don't think there's some major catalyst that's going to come that's going to immediately change the world of construction and dramatically improve demand in that market. We think it will be slow, steady growth from here. Looking into 2013, the analysts that are looking at construction spending expectations are -- some of them, at least, are expecting to see 6% to 8% growth in overall construction spending next year. Whether that comes to be or not, I think depends a lot on what we do in this country to handle some of the fiscal challenges we're -- but we are looking for something that dramatically change the nature of the construction markets. We do expect some continued steady growth barring slipping into some deep recession.

And then -- thanks, Gary. And then on the residential side, obviously there has been a little bit of a forward movement there. Housing starts have picked up a little bit. Inventories are folding, receding. And rents are going up. So I think -- at least we think that is a positive sign.

We'll go next to the side of Sal Tharani with Goldman Sachs.

Theresa, I just wanted to ask you questions reconciling some numbers which you reported. On the ferrous recycling in the statement, you mentioned that there was an OmniSource profit of $16.6 million. But obviously reported numbers are a loss of $9.5 million and that intangibles, $15.7 million. So first thing is that which number should be compared with amortization of intangibles or after that? Second thing, I know that it includes Mesabi Nugget loss, which was $11 million post tax. What will be that pretax? And what are the other items in there which made the swing in the reported versus what you saw at the OmniSource actual numbers?

Certainly. So the number that I would look at is before amortization, Sal, or the amortization is just really to the intangibles from the purchase accounting. So that's really nonoperational. And if you look at the components that are in both metals recycling and the ferrous segment, you have not only Minnesota operations but you also have a very small component related to the copper rod mill and then Iron Dynamics. And we tend not to separate those out individually. And what I would suggest is that the Minnesota operations number that we give you is the net after-tax number. So from a pretax perspective in the third quarter, you're looking at Minnesota operations of a loss of approximately $23 million. And remember, that $23 million is 100% of the losses, and we only own 81%.

And is there any loss on the ramp-up at the joint venture you have with Magnetation?

A slight loss of about $1 million. And again, we only account for that.

Okay. And the rest, as you said, LaFarga -- SDI LaFarga was in there?

LaFarga and Iron Dynamics, correct.

Okay. And the second thing is, Mark, just want to understand the benefit of the iron ore joint venture you have right now. Just give us an idea. I mean, Mesabi is running at a little lower rate or lower rate than what we had thought earlier. So how are you positioned for your iron ore which you had been buying or you had to buy because you had an agreement with, first of all, whomever you're buying it? And so when would the lower-cost iron ore, which you are now extracting from the tailings, is really going to impact on the P&L based on your run rate of the Minnesota project at the moment?

Sal, I think, as we've suggested in the past, the impact will start to be seen in the second quarter of next year. We still have a reasonable amount of inventory, as you suggest, to consume here in the fourth quarter and the first quarter.

And would you need earning a Magnetation [ph] fallout percent? Or are you going to slow down because you have too much iron ore on the ground?

No, we will ramp that up. Currently, they are running or have achieved -- actually, they have achieved design throughput at the plant. There is some recirculation right now. We need to restore a ball mill to grind the incoming material to get full productivity. But the operation is working extremely well. The quality is running around about 62% to 64% total line. We need that ball mill to get it up to a -- to exceed consistently the 63% that we've targeted. But not the -- so the plan is to ramp that up.

Okay. And then Baldwin [ph], was it an afterthought? Or did you know that you're going to need it in the beginning?

No, no. It's -- it was planned from the very beginning. The equipment delivery is just delayed a little bit. So again, it doesn't stop us from producing. It's just -- the increase of the recirculation of the facility to -- going around the, I guess, in the surface, you can say. And so it just compresses the actual output through the next couple of months.

Great. And just one quick thing. Are you going to reach your cost estimate of $50 after the ball mill is in?

Absolutely, no problem.

We'll go next to the side of Luke Folta with Jefferies & Company. Luke Folta - Jefferies & Company, Inc., Research Division: First question is on recycling. Obviously, if you look at the quarterly results in second quarter, you're experiencing inventory holding losses. And I would guess by just looking at the movement in scrap in the third quarter, you probably benefit from some inventory holding gains from scrap acquired in July and sold later in the quarter. I guess I'm just trying to get a sense of what the impact of that could have been, and more so just trying to get an understanding of what cash metal spreads did over the last 3 to 6 months in the recycling business.

Well, that's -- I'm thinking of the rollercoaster ride. It was down, a hard time in July, up in August. They're down again in September and certainly made those spreads look swollen [ph]. Again, obviously, in a strong up market, if the -- you get the benefit of the inventory that flows over. You get the opposite effect you get the -- when you got a strong down market. So I think across the spectrum, I don't think we had a huge movement in the overall spread. What we were able to do effectively, I think, is worked very hard on a cost side basis. And I think that's one of the things that's been our focus, and I think we're starting to see some impact of the hard work by our team on focusing on the cost aspects of our business.

I think just the -- for the, well, sort of intellectual, academic consolation, we keep roughly -- or the flow is roughly 2 weeks of inventory at OmniSource and roughly 4 weeks of inventory at the steel mill. So as the market goes up and down, I think you could, at least as a guide, sort of back out maybe as to what that impact might give you. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. But when you look at cash metal spreads month-to-month, I guess I'm trying to get a sense of they -- obviously, they've come in because of increased competition and those have been very solid factors. But do you think that they've reached a point of stabilization? Or are they getting worse every month or better?

I would say they're relatively stacked over time. I think there's -- again, as the mill utilization rate goes down and the demand goes down, that's going to -- they're going to compress. But again, as I look back, they’re relatively stacked over time. If you take out their cycles, Luke, if you go -- for sure, year-over-year, they're very stable. It's just hopefully fluctuations have kind of -- has changed -- well, changes dramatically. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. And I guess my second question is when we think about SBQ into 2013, can you give us a sense of how many of the -- I mean, the agreements that are in place as it relates to base pricing, and that -- did the -- did those all -- I mean, is there high percentage of those contracts or agreements that reset January 1? And it seems like the negotiating environment this year is quite a bit different than last year. So is that something that we need to think about as a step-down? Or how should we think about that?

I would say that we have agreements that are ending scattered throughout the calendar year. And that's a -- our purpose not only by us but by our customers. And sometimes, it coincides with models and life cycles on their products. But we don't believe that the markets that we're supplying, there's going to be a tremendous readjustment or realignment. There is in volume. And as always, they're cognizant of what's a fair-based price because they want us to recognize that it's an engineered product and it's not a commodity. And we have so many more or we had so many more surcharges in the -- in that business that tend to adjust the price without necessarily touching the base because of -- all the alloys and swings at each of those prices can be had on a per pound basis as well as scrap. So I don't think there ought to be a whole lot of alarm in thinking about there's a monster ship coming January 1. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. And then just one last quick one. The Mesabi outage that's occurring late third quarter and fourth quarter, what sort of impact would you say that, that might have in fourth quarter results?

I think quarter-over-quarter should be somewhat similar.

We'll go next to the side of Brett Levy with Jefferies & Company. Brett Levy - Jefferies & Company, Inc., Research Division: Can you talk about whether or not you've gotten a bit more granular on 2013 CapEx, a little bit of a sense of sort of project by project? Just want to revise our models a little bit. And I guess the second part of the question is, it does look like, unless things really turn south, that you guys could generate some decent cash flow here. Are there growth projects? And also, you're not -- you aren't on the list of final guys bidding for the ThyssenKrupp mill. Has the bidding got just too high for you or you just don't like the asset? So it's kind of a M&A at the end, but sort of growth CapEx for 2013.

I'll take the first part of your question. Related to capital investments for 2013, we'll be providing a lot more information on that on the first quarter conference call. There will be some rollover on the SBQ expansion projects. We'll spend probably around $20 million this year. So the incremental $55 million to $56 million will be spent in the first half of next year related to that project. Otherwise, I think it's safe for you to build in probably $100 million. So if I were looking at investments right now, I might probably put in $150 million for CapEx next year. And then after we go through our specific planning, which takes place in late October and early November, we'll provide greater detail on our first quarter call.

And Brett, I guess your question really relates to sort of capital allocation. And I -- I mean, our first thrust is to continue the strength in the balance sheet and reduce our debt. And as Theresa indicated, we're making progress there. I think that being said, we're still a growth company. We're not going to grow just for growth's sake, but our focus is to enhance the quality of our earnings and also to try and improve the consistency through the cycle, so to speak. And I think you can see that our immediate focus is on maximizing the potential opportunities within our existing mills, such as the [indiscernible]. Brett Levy - Jefferies & Company, Inc., Research Division: And just a follow-up. Does that kind of mean that ThyssenKrupp mill, in your eyes, is the bidding has already gotten too high?

I think, well, that's a big -- big enough for us to chew and swallow in any way, shape or form. The recent suggestion on that mark is they're looking for $5 billion, $6 billion, $7 billion. It's difficult to see that at that level of pricing, anyone is going to get a good return on that investment. But that's up for those parties to figure. But we will just wait and see in the sidelines and be an excited spectator.

We'll go next to the site of Dave Martin with Deutsche Bank.

Just one clarification first. In response to an earlier question, Mark, on Mesabi Nugget, I think you said potential impacts will be consistent in the fourth versus the third. And is that true for the entire Minnesota operation?

Yes. As we report Minnesota operations on a net basis, I think it's safe to look at the quarters being very similar, not materially different.

Yes, okay. And then secondly, coming back to SBQ, inventories and destocking trends, could you maybe give us a sense of how inventories are in the supply chain potentially on days of supply and how far you think they had -- need -- I'm sorry, need to come down? And then secondly, would you expect SBQ shipments to be down in the fourth quarter versus the third?

We had forecast the fourth quarter to be probably pretty equal to where the third quarter is. We've made those forecasts and nobody's throwing us red flags as alarm. We're always kind of cautious, but I would tell you that we're not running because of the fire.

And relative to the specific inventory, we don't necessarily have insights into our customers to that level of degree. Because that inventory readjustment is realignment, is not just in bar stock, it's in sort of the semifinished pieces that the other goods people sort of assembled. So that's why I think it's been a protracted realignment. And I do think it's going to continue into the fourth quarter. But I do believe as Dick said that, hopefully, our volume should be somewhat stable quarter-over-quarter, maybe down just a little, but nothing material.

We'll go next to the side of Timna Tanners with Bank of America.

I think a lot of the questions has been asked and been answered, but a few final clarifications I think I had. During the quarter, definitely a volume decline. But was that all because of weakness in demand, or was there at any point a decision made on the part of your operations folks, to not produce given slim margins? I know that's something you talked about in the past.

Yes, it is a demand-driven issue.

Okay. So your positive operating margins throughout the environment?

Yes.

Okay, great. And then within OmniSource, I thought it was interesting when you talked about, generally speaking, efforts to recover profitability in the scrap division and certainly excess supply and less export interest. Can you talk a little bit about what can you do with OmniSource, or is it just a structural issue? I mean, definitely margins have been under pressure there from historical levels, so I was curious about how you're looking at that business going forward.

Well, obviously, there has been structural change there. We're cognizant of that, and I think the principle initiatives are, first and foremost, trying to shift the flow of material away or the percentage of flow away from the prompt scrap into more retail, which is a higher margin business. And Russ and his team have been reconfiguring a lot of our retail businesses, scrap yards, along with the opening up new ones. So that is one initiative. The introduction of new technology to extract more nonferrous from the supply chain of the shredders is a significant one. As we said, that's going to be piling [ph] up one late this year, early first quarter and the second one, probably late first quarter going into the second quarter maybe. But there is a handsome return, I do believe, on those 2 facilities. We're also spending time and a little bit of money on technology to improve the products that we offer to the marketplace, and thereby, extract a little more margin, a little bit more value. We have stepped our toe in water on the order process business, but I would say it's meaningful. It's more to learn that business more than anything, currently. But it's an effort to look at it back to the integrated into the supply chain of halts [ph]. I think we, from an investment standpoint, we don't necessarily intend expanding our geographic footprint within metals recycling, but we certainly are looking sort of on a circular basis at small opportunities that will improve our sort of regional market presence. That's just a smaller yard here or there, and we're not talking about massive dollars, $1.5 million, $2 million or so. But the intent there is to perhaps take advantage of the financial stress that some of the smaller players are having, as was indicated earlier, and improve our market position.

Okay, that's helpful. And then last one for me, I guess, on fabrication small, but has had a nice swing. Can we be comfortable that given the better backlogs and maybe some of the improvement you've done internally that, that should in any confidence in continued small profits going forward there, or how would you think about that business going forward?

Well, it's continued to improve, Timna. As we've gotten some stability in the hiring we've been doing out west and stacking up those plants. Those plants are now more stable in their staffing position. And we should see increase productivity helping to drive more, well, improved performance in those shops. That helps a lot. If the market continues to grow as it is, we should see continued improvement. Of course, seasonality will impact that, so the first quarter may not be better than the fourth quarter, but we should see continued improvement year-over-year, and hopefully, sequentially as we move forward.

We'll go next to the site of Mark Parr with KeyBanc.

All of my questions have really been answered. I just wish you well here in the fourth quarter, and hopefully, we'll see a little better economic environment next year.

We'll go next to the site of Tony Rizzuto with Dahlman Rose. Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division: I've got a couple of questions. I was wondering if you guys are seeing any discernible change improvement in your order books in the past several days given obviously the fairer price hikes. And by the comments that you made, Mark, and I think Dick commented about aggressively pursuing, can we draw that you guys have also followed this flat-roll price hike?

I would say that we have seen better order entry, a little bit more than the last few days, I'd say the last week and a half, which again has suggested to us that perhaps we had a little bit of an inflection point. And I think one has to stress that these market shifts are greatly influenced by procurement mentality, almost more than anything. The underlying demand probably has, across-the-board, has probably softened a little bit. But it's the volatility, the tight inventories, people stay in and out of the market and then an absolute need to get in, whether it be on the scrap recycling side or whether it be on the finished product side, that's exaggerating or amplifying the moods. But to answer your question, yes, we've seen a pick up. And yes, as Dick said earlier, we're pursuing appreciation and pricing along... Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division: Fair enough. And with regard to the scrap market in the past and seasonally, we typically see a pickup as weather starts getting colder, we are seeing some improvement in overseas scrap buying. And I'm wondering if you see that playing out and maybe giving a further impetus as well in addition to these other factors.

I think we will, Tony. I think that's going to happen. Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division: Okay. And the final question I have. Just to follow up a little bit on SBQ. I was wondering if you guys could tell us, is the weakness you're seeing a combination of the demand as well as supply and if one may be has a little bit more influence in your opinion at this point.

I would tell you that it's a demand-driven adjustment, and I don't believe it's a supply. Again, I said we firmly believe that we have increased our market participation in that arena, and therefore, it's totally demand, not supply. Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division: Okay, okay. And then the final question is the main weakness on the transport side, is that more ag and some truck as well? Or could you just be a little bit more, provide a little bit more color on that?

I think it's across the board. Ag is a part of it. Again, earth-moving equipment, it has, I won't say, stalled but it has been, I think reevaluated by the retail yards. And therefore, they've backed it up a bit. I think the large diesel trucks are slowing a little bit. You see that when talking not only to what we sell, but also other component manufacturers. And the trailer build rate has tapered off from the first half of the year, and so therefore, it's just a realignment. And needless to say, every time there's really a drop-off in or an uptick in like the trailer markets, there's corresponding ones in related markets that's just for trucks, material handling, equipment and the like. So it's just a harmonious movement across the board in many of these markets.

We'll go next to the site of Aldo Mazzaferro with Macquarie.

Dick, just to follow-up on that question on the SBQ, can you say roughly how much of the mix of SBQ shipments goes into automotive and light trucks compared to ag earthmoving, the diesel trucks and the trailers that you just mentioned? Like what kind of mix is automotive for you in SBQ?

Aldo, being bluntly honest, I cannot give you that specifics of the breakdown. I mean we really look at it by products and some of the grades and sizes and our sales team may be has some of that data, but I look at it purely only upon size grades and where those movements go. I don't know the exact end users.

Yes. Any feeling like, is all half of it or less than half?

I'd say it's less than half.

Yes. And then a follow-up question to Gary. Nice improvement on the margins. I'm wondering I heard your comments, and I still just have a little question. Where do you think your 3% or so margin is compared to what you think your ultimate normal margin might be in this kind of market?

Our normal margins will be significantly higher, Aldo, but it's going to change as we see a continued expansion. Right now, our margins are compressed because we have, again, I don't -- plants, being start-up costs continue. Well, these plants haven't started at the year, but productivity gains. There are plants built that are still to come. Our plants in the west are now running about 60% of productivity than our plants in the east. When we make up that difference, that could have a significant impact on margins. I don't know of what our '13 projected or '14 projected margins are right now, but obviously, it's significantly higher.

Great. And if I could just have one more follow-up for Russ. Russ, some of your big competitors in the market have closed a few sites, and I guess they're getting overhead reductions in labor cost reductions in there. And I noticed your -- you attributed your improvement to the metal spread improvement. I'm wondering if you exclude the impact of metal spreads, do you have any significant cost changes in your, what might be considered, labor and overhead in the OmniSource division sequentially?

I think as the markets move, we're always going to adjust to the market. If you're expanding, we're going to expand. If they're contracting, we're going to contact, and I think that's just the nature of the business. But it's not just overhead and people and that nature. It's also how your -- being smart about how you're doing business and making sure you're doing the right things with your product and your kind of supply, so that you're not overreaching on the buy side or overreaching on freight side or any of those things. And all that has taken a concerted effort of our tech team and I'm awfully proud.

Right. So no major changes in your -- in the structure of the company in the quarter or anything, just better management?

Yes.

We'll go next to the site of Michelle Applebaum with Steel Market Intelligence.

So I wanted to ask you, Mark and team, now that this new team has had a chance to digest a couple of quarters here, I was curious to know, Mark, kind of your view from the top and what you think the kind of strategic challenges are going to be moving forward, of course, besides the economy? And what the best opportunities you see moving forward?

Well, I think it's an exciting time for us even though we're in a challenging markets and a time of diversity. I think it creates opportunity and makes one look inwardly to your operations and where can we streamline, where you can cut costs even further. So we're certainly going to come out of this as we've done in past and in terms of stronger fourth. We certainly have a phenomenal team. We have great books in order and technology out there. And the combination of our assets and our culture and our people is driving, has driven and will continue to drive financial metrics better than our competition. And if you look at operating income per ton, if you look at our EBITDA margins, they are consistently, through the cycle, good and bad at top of class. And the team is squarely focused on continuing that. We, strategically, will focus, as I said earlier, on maximizing the opportunities within our company today. The SBQ project, I think, is incredibly compelling. I think we wish we had probably a dozen of those projects out there. But looking at that, looking at expanding or diversifying our structural mill is a focus for us. If you look across our company, having a diversified portfolio of value-added products has served us well in many arenas, in the sheet arena, in Steel West Virginia, in Engineered Bar Products. Construction mill being principally single market, single-product focus has obviously had a tough time the last couple of years. And our focus there is to diversify there through expanding our rail presence, and secondarily, diversing it through the supply of blooms to SBQ. If you think about that sort of indirectly expanding or mitigating the risk because that SBQ product is 250,000 tons, perhaps a little more, will go down to Pittsburgh. That material will be going into automotive and into off-road and into manufacturing applications. So the intent there is to, a, improve the margin profile of that business; and secondarily, improve it through the cycle by having a diverse product portfolio. So I think -- and again, focused on our customers. We have even greater sort of focus, I guess there, not only on serving them well, on creating value there. But as formally, more importantly, identifying the products and the services that they're going to need going forward, not focused necessarily on just making the products of today, but where will the automotive will be, for instance, in 3 years, 4 years or 5 years, making sure we can supply those products and expand further our portfolio and protect ourselves. I think as we grow, we're going to focus on leveraging our core strengths and our culture. And I think also not just looking at margin, the quality of our earnings, but recognizing that perhaps imports going forward could play a part and position the company to insulate ourselves somewhat from there. If you look at the SBQ with the engineered-type focus of their product portfolio. You should have the spread of products that doesn't get into painted products. Looking at the Steel West Virginia, very, very unique products that they produce there. You look at rail, rail being produced at the -- weld them together at 1,600 feet, a challenge any Japanese supplier of rail to put down on a boat and import it. So it's just growing with a focus of maintaining our earnings through the cycle. So we're excited.

That's great. Hey, listen. The question much earlier about the sheet price increase, you went through kind of the whole dynamic, but then, the 4 or 5 words that Dick got in, it sounded much more pumped than you do. So can Dick talk a little bit more about why the sheet price increase is happening? And we did see an almost -- we saw one company and then the next day, everybody else followed. I don't know that we've seen that kind of pile-on, I guess, that quickly in the past. So did you have anything else to add?

No, not a whole lot. I'm an observer, I'm 30 miles away. I was up there on Monday, and I was responding based on the fact that they'll, at least, follow the order entry rate 2 weeks ago is dismal. A week prior, it was a major uptick, and that got everyone's attention and started making us look at who's buying, why they were buying and so forth. The first 2 days of this week, one was up there, were tremendous days of order intake. And I would tell you that earlier this week, the text had similar performance. So it doesn't take a rocket scientist to say that's the time you want to be protecting what you're doing and taking advantage of the markets. We have a very focused attention to the margin and bottom line and opportunity.

Okay, great. So you think you sensed that everybody was responding to their book, as opposed to looking at a posted price in China or whatever, it was a book driven kind of pick-up. This is our first call since this happened, so any more color you can give would be great?

I'm going to give you a lack of color, but I'm going to tell that Mark was probably tied into them a little earlier. I call it, herd mentality in some cases, that when they -- when it starts breaking, then all of a sudden, everyone thinks they're going to be one left behind in the gate. And all of a sudden, it just flows forward. And so and again, because of the nature of the downturn, the way it went down, there was people sitting on their hands. The consumption rate necessarily wasn't dropping off the cliff. It was just a matter of everyone thinking, "Hey, there's a better price lower tomorrow, and that drives that kind of reaction.

So the buyers were all kind of waiting, and then as soon as like one guy came in, everybody's panicking. So it's kind of a rush, not out the door but a rush to get in the door on the buyer side.

Yes, because ultimately, we say, "We freeze order intake and the price is up." So if it's in, it's up.

Okay, amazing. And great quarter, tough environment, but it's awesome to see the DNA playing out. Nice job.

To set the record straight, I am always parked.

Okay.

We'll go next to the site of John Tumazos with Very Independent Research.

We really admire the steel mills and superior operation of steel mills. When we look at the segment financials, it looks like 45% or 50% of the asset's in the steel division earned all the money. And I was wondering if you see that as a problem, and what you would do to change it? And last month, I went to Vale's Carajás S11D project in Brazil, where they plan to produce 90 million tons at a $13 cost in the boat. And I'm concerned that the iron price isn't going to be the way was the last few years, could be lower. And your inventories of $1.2 billion are about the same as your tangible net worth, and is that a particular asset account that you'd like to reduce?

Well, John, I think you had a myriad of thoughts, and I think 2 questions that I could discern. Relative to looking at the profile of our sort of earnings engines, you're very right, steel tends to be our principal earnings driver, no doubt about it. And the margins in that sector, compared to recycling and compared with fabrication is stronger. Recycling margins tend to be naturally thinner than the steel in any event. But nonetheless, we are, as I outlined earlier and as Russ outlined, making or taking initiatives to strategically boost that margin and return them to fair territory, as Gary's doing on the fabrication side, looking at products castellated beams and different services to provide greater value to the customer to expand margin. Relative to ore pricing, again, crystal ball is pretty cloudy there. If you look at the cost curve, global cost curve, you can substantiate most pundits that would suggest pricing through the cycle has been arranged from $100 to $115 a ton. Sometimes, it may exceed that; other times, it may drop as we saw here a month or so ago. Still not much about value, $13 in the boat is -- would will be a hell of a price, if that's what they can achieve.

Mark, you should have a strategy to make sure that the core strength of converting iron units, melting and rolling is exploited in that -- the OmniSource decision 4 years ago doesn't detract from all the other wonderful value created.

I'd agree. I think OmniSource has been strategic for us. If you look at the synergies or whatever, it obviously gives us a stable source of supply. It's [indiscernible] having the transparency or the division into the supply chain. It's allowed us to reduce our inventories across our business. We used to keep 6, 8 weeks of inventory at our steel mills. Today, we're 3, 4 weeks. That's helped us depending on what market pricing, but it's probably $100 million, $120 million, maybe $140 million improvement in our working capital needs. The other great driver on the recycling side is having a large pocket of scrap, when we go to buy scrap from third parties for our steel mills. Because as I think you know, only about 45% of our scrap flows from OmniSource to the steel mill. 50%, 55% of the scrap is actually bought from third parties. When you have that supply in your back pocket, you can leverage the market to some degree. And as you all know, scrap trades at a range, it doesn't trade at a specific point. It does trade at the American Metal Market bushling price, it trades perhaps $10, $15 a ton, plus or minus that number. And with the OmniSource acquisition, we are able to buy our third-party tons at the lower end of that range, can sell them -- the OmniSource tons to third parties, perhaps at the higher end of that range. That value accrues to the steel platform, not the recycling platform today. So we are happy with the OmniSource acquisition still. Would have preferred not have bought it at the top of the valuation cycle, but hey, we weighed it, so...

That concludes our question-and-answer session. I'd like to turn the call back over to Mr. Millett for any final closing remarks.

I guess for those that are still on the call, we dwell -- as the industry seems to dwell just a few weeks ahead of ourselves and the horizon seems to be very short nowadays, and I just want you all to recognize we are squarely focused on positioning the company for 3, 5, 7, 10 years out. And I think there's a lot of positives out there if you do that longer term. The -- you're starting to see reassuring of manufacturing, it's not that cheap or it's getting more expensive to produce in China today. The shale gas phenomenon is going to drive investment in this country. You've got an aging infrastructure that will require dollars to be spent and turn into a good product, good opportunities for the steel mill arena. On residential, and residential will come back, and I do believe the U.S., although we went down and downhill fast back in '08, '09, at least we did it ahead of other economies, so we're probably going to be -- the economy that comes out at first. So we're actually very, very excited and bullish longer term even though we have to deal with the challenges and the vagaries of the media markets. But thank you for your time today. Thank you for your support. And to our employees, a heartfelt thank you for your hard work and commitment. Work safely out there, guys and girls. And to our shareholders, thank you for your support. Customers, thank you too. Have a great day. Be safe.

Once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation, and have a great day.