Good day, and welcome to Steel Dynamics' Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised that this call is being recorded today, October 20, 2016, and your participation implies consent to our recording of this call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to Tricia Meyers, Investor Relations Manager. Please go ahead.

Thank you, Doug. Good morning everyone and welcome to the Steel Dynamics' third quarter 2016 earnings conference call. As a reminder, today’s call is being recorded and will be available on the company’s website for replay later today. Leading today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and Theresa Wagler, Executive Vice President and Chief Financial Officer. We also have our leaders for the Company's operating platforms, including our Metals Recycling operations, Russ Rinn, Executive Vice President; our Steel Fabrication Operations, Chris Graham, Senior Vice President Downstream Manufacturing Group, and our Steel Operations -- Barry Schneider, Senior Vice President Flat Roll Steel Group. Please be advised that certain comments made today may involve forward-looking statements about future events 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 and we refer you to a more detailed form of this statement contained in the press release announcing this earnings call. These predictive statements speak only as of this date, October 20, 2016, and involve many risks and uncertainties related to our businesses and the environments in which they operate, any of which may cause actual results to turn out differently than anticipated. More detailed information about such risks and uncertainties may be found in our most recent Annual Report on Form 10-K under the heading Special Note Regarding Forward-Looking Statements and Risk Factors in our quarterly reports on Form 10-Q or in other reports which we from time to time file with the Securities and Exchange Commission. And now, I'm pleased to turn the call over to Mark.

Super, thanks Tricia. Good morning everyone. Welcome to our third quarter 2016 earnings conference call. I would appreciate you sharing your time with us today, and I hope everyone has enjoyed the summer. It seems hard to believe we’re already headed into the home stretch for 2016. We recognize you all have a busy day today, so we’re going to keep our prepared remarks a little briefer than normal. But I do want to take a moment to welcome our newest team from Vulcan Threaded Products to SDI family. We completed the acquisition in August and integration is going very, very well. We're excited to have everyone aboard and look forward to growing our futures together. I'd also like to thank the whole SDI team for an incredible job in producing an excellent quarter -- this past quarter. And I think when earnings season is complete it will show their effort has once again driven a best-in-class performance relative to our peers in the industry. So again, phenomenal job guys and girls. But to begin this morning, I have Theresa to comment on the financial perspectives of our third quarter performance.

Thank you, Mark. Good morning everyone. Excluding the litigation settlement charge of $4.6 million, third quarter 2016 net income was $160 million or $0.65 per diluted share. On an adjusted GAAP basis, net income was $157 million or $0.64 per diluted share, both within our guidance range of between $0.63 and $0.67. On additional note: the Vulcan integration is going very well and the transaction was accretive to our third quarter results despite the $2 million non-cash purchase accounting charge. Despite lower volumes across the operating platforms, third quarter 2016 revenues of $2.1 billion were slightly higher than sequential second quarter sales as realized flat roll prices increased over 20% and sequential long product pricing also improved, although to a much lesser extent. Our third quarter 2016 gross margin was steady at 19% driven by the performance of our steel operations in an increasingly challenging environment. As a result, our operating income for the third quarter was $284 million compared to second quarter results of $256 million, an 11% improvement. For the third quarter 2016, steel shipments decreased 9% to 2.3 million tons. Volumes declined across all divisions but most notably at our Columbus Flat Roll Division which was partially attributable to both a planned galvanized outage to install Galvalume equipment and to an unplanned maintenance outage in late September. Additionally, late in the quarter customers were hesitant to make purchases ahead of anticipated scrap price decreases. Third quarter 2016 steel platform average selling values increased $100 per ton to $740, outpacing increased average scrap cost of $24 per ton. Improved steel mill spread more than offset lower shipments resulting in operating income from our steel operations of $311 million, a 13% improvement over sequential quarter results, another strong performance. The operating environment for our mill recycling platform continues to…

Super, thanks Theresa. As in the past calls, I want to reiterate that the safety and welfare of our employees remains our number one priority. Nothing surpasses the importance of creating and maintaining a safe working environment. Our safety performance remains better than industry averages and we continue to work toward a zero incident environment at every location. We've reduced our total recordable injury rate by 14% so far this year and 64% of our locations are incident free. We are on pace for another record year and my sincere thanks go to the entire SDI family for their dedication and continued focus on our most important priority. The steel platform performed well in the third quarter in spite of lower shipments. The divisions, especially the flat roll group achieved meaningful metal spread expansion as increased average product pricing outpaced higher scrap costs. Additionally, due to our diversified value added product offerings, our third quarter steel production utilization was 85% compared to the domestic steel industry operating rate which decreased to about 69%, 70%. 2016 has certainly provided a changing landscape to the domestic steel market. Demand from the automotive and construction sectors remains positive. But demand relative to heavy equipment, agriculture and energy while not deteriorating further is still anemic. Specific to flat roll, year-over-year imports have declined while customer inventory remains lower than historical levels. Longer demand outlook is relatively unchanged but late in the third quarter customers were hesitant to make purchases ahead of expected scrap price declines. And as a result, steel shipments were lower than anticipated, especially for hot rolled coil. Despite this, our flat roll production utilization rate was at 97% as the Butler flat roll division continued to operate above estimated production capacity. Conversely, third quarter 2016 production utilization for our long products…

[Operator Instructions] Our first question comes from the line of Evan Kurtz with Morgan Stanley.

So my one question will be on your internal growth strategy, so it sounds like you're headed for kind of the low 300,000 level on shipments to your own downstream. I am just trying to get a sense of what inning we’re in here. If you kind of look out five years or so what do you think that number will be? Are there lot of opportunities out there for reasonably priced downstream operations that can kind of feed off of maybe Pittsboro or Columbia City?

Evan, I believe there are numerous options. We've actually had a very very very busy summer reviewing those options. We're very very disciplined though, we want to make sure that any opportunity conforms to our culture, conforms to the fact that we can bring that culture to leverage better performance, making sure that there is diversification and making sure that it really differentiates ourselves or we’re going into business businesses where we differentiate ourselves from who of that competitor might be. I would say in general, and there's no algorithm or formula. But as a gut feel we’re aiming for roughly 20% of our total capabilities, so that’s probably a couple million tons. The new millennium billing systems, they pushed about 600,000 tons of product in total. If we wanted to, they could have bought a lot more this past year. But as you know in the second and third quarters, our steel mills have better options to the sell that product at higher margin. To others, while new millennium, they were to take advantage of lower sort of commodity prices that some of our competition were offering. So I think the model is a very valid one. Because again as steel pricing did come down this year, the lowest new millennium raw material input cost and their earnings, so having that pull-through volume allows us to head through the market, insulate us a little bit from -- help mitigate a little bit the cyclicality of our business. And it will be a focus for us going forward.

Our next question comes from the line of Matthew Korn with Barclays Bank.

Good morning everybody. So let me ask, last quarter you mentioned the expectation that your – that some long product buyers in looking at the increase in scrap that was pending actually pulled forward a little demand into the second quarter. And that was going to lead into third quarter a little bit of a decline in shipments. Question for you as you think whether or not in the sheet business, you had some of the similar effect now in hindsight where buyers try to get ahead of the price hikes and there right now some of the demand softness is due to the fact that they're sitting fairly ample inventory wise.

Not quite. I think the sheet buyers anticipated further price erosion and I've been sitting on the sidelines of over the last couple months, probably two or three months for that matter. But I do think that we are approaching an inflection point for sure. So the kind of the slight dampening of demand that this suggests I think is principally seasonal. There is obviously a lot of noise out there as to the marketplace and there are some markets that are off. But I would tell you we are strong believers that there are no -- that there is not a structural change in demand, it’s principally seasonal. And that we’re going through the similar cycles we saw last year -- the fourth quarter of last year was pretty well paralleled what we’re seeing today. And that the volatility is driven more by I think procurement decisions, by inventory positioning than any structural change in demand.

That’s very helpful. Let me follow on that then. You’ve got inventories that are fairly light, got lead times that are short and you got current price that doesn’t really track a lot in the way of imports. Do you think that we're potentially coiled for a pretty sharp rebound in pricing once the buying activity does return and would you think maybe that returning comes more into the new calendar year?

I think we’re certainly at the bottom of the marketplace. And I think there's an inflection point around the corner and whether that is next week or whether it's a month or two, your guess is as good as mine. I would tell you that -- I don't know whether one week makes a market but the order activity and the inquiry activity just in the last week we're going to have is considerable compared to the last two or three months for sure. But if you look at the probability of price direction and an inflection point, there are several -- several factors that in my mind would suggest that the pricing is going to be moving up. The import arbitrage has certainly reversed itself. Import pricing today is very very unattractive. Hot rolled coil Q1 offers are probably 4.60 to 4.80 today, give or take a little bit on a delivered basis. The import light gauge coated products, the spread to domestic product was I think peaked right to 180 bucks, the standard to $100 today it would strengthen Asian market. And customers are starting to see that import deliveries now from the smaller countries where both have to pick up coils from different ports and deliver them to different ports, there is a certain unreliability there that, that’s creeping in. But there's no doubt that the import scenario is changing dramatically. And I think Russ would tell you that scrap prices has as likely reached the floor. So that's the eliminating that resistance to ordering steel due to any anticipation of falling scrap prices so that's beyond us. And I think scrap is somewhat at parity and with the Chinese billet conversion for Turkey. So that's probably going forward kind of a flat up a little type pricing environment and so there's no incentive for folks that hold off or in today from the raw material perspective. As you said supply side inventories are at very low levels and some may look at the fact well it's on a shipment rate basis two point four two point five months when I set a pretty low shipment basis. When the tide turns that suddenly is a very tight position for the rich folks to the end. And then the raw material cost structure of the integrated mills, coke has gone orbital, doubled or more than double in the last few months. That's putting pressure -- pricing pressure on the integrated mills. Again three cases are going to remain in effect and limited in the import levels as well. And one other kind of side note, the speculators that tend to take large positions and they're the ones that tend to draw all the market pricing down in a trough like period that we're in today. Most of those folks have taken those positions. And so I think the pressure is off. So you have a model multifaceted kind premise that we’re nearing an inflection point.

Our next question comes from the line of Alessandro Abate with Joh. Berenberg.

Good morning, Mark and Theresa. My question is related to Columbus. It’s a kind of double question because you mentioned you might be seeing some recovery in the energy segments. So I was wondering considering the exposure of Columbus to the energy market, in terms of a potential upside on margin what are you going to be able to quantify in terms of expectation? And the second one of course is a follow up, considering the significant investment in the money [ph] market in Mexico, I was wondering whether you were planning a potential step into the market and think kind of activity light, for example, your competitors are doing at the moment? Thank you much.

Well, I think from a energy recovery perspective I'm not sure that we are doing cartwheels that the volumes are going to be dramatically higher in the first half of 2017. I think energy prices are up which is supporting a little more activity on the rig side, OCTG inventories are drawn down. I think there's still four five six months, so it’s still pretty considerable. But it is a I think an indication that the energy market is certainly bottomed, there's some glimmer of activity there. I think even in our engineered bar products division those folks are seeing a couple of pockets of order activity. So it's just going to be I think a slow but sort of positive momentum. Barry, would you agree with that?

Absolutely, agree and I would add that in some cases we're developing more products to service that market at Columbus. So some of it is just being able to make newer products that are being asked for.

And then to your second question on Mexico. Obviously that is an incredibly -- well it's boom time for steel. And a couple weeks ago I spent some time down there and even though you read about it and you hear about it and you study it, the growth there is it's unimaginable. And it's also -- well most of it is steel consumer. We're in an incredibly good position with the Columbus acquisition, those folks from the KCS line. So they have a direct access down through the spine of Mexico, from Monroe, some fuel, and I can't pronounce these names San Luis Potosi --But nonetheless we have a great great logistics avenue to penetrate that market. The recycling platform actually has been developing quite well down there and we have about 240 million to 250,000 tons of material that we’re responsible for sort of processing and distributing and selling to the U.S. Automotive companies, Ford Chrysler, the stampers as they move down. They want us to continue to use to service them in that environment because we are a sort of a public company, someone they know and that they trust, so that business has developed quite well. On the steel side, I think Barry, we're going to sell 180,000, 200,000 tons of product into Mexico this year. Our aim is to move that up to somewhere between 400,000 to 500,000 tons. The advent of our pain line coming online in the first quarter will certainly help and facilitate that bombing. But we're well on a way there or already.

I was just going to add, because I had some earlier calls but Columbus but fair and entertainment, and they have done to change that. I think the word exposure to energy is maybe a misnomer these days. We have an opportunity as energy recovers to leverage our capabilities but we are by no means dependent on that as the diversification has happened over last year.

Our next question comes from the line of David Gagliano from BMO Capital Markets.

Hi, I just had a quick question regarding the near term outlook. We did get some results out of one of the I think the biggest service center this morning and I believe they're guiding shipments down, close to 6% to 7%. And I am wondering if that's consistent with what you're seeing with regard to your order books on a short term basis in terms of order of magnitude and is that a reasonable range to assume on volumes for you for fourth quarter? Thanks.

David, we tend to try not to give expectations even near term going out. We did mention the fact that we are expecting lower volumes actually across the platforms as well, primarily because of seasonality. And so yeah, we’ll see a reduction, I'm not sure that it will be in the same magnitude but it will be meaningful probably compared to third quarter.

Our next question comes from the line of Alex Hacking with Citi.

Thanks, Mark and Theresa and good morning. You mentioned on the call that you have some confidence in demand for infrastructure steel next year coming from large public sector projects. Could you elaborate a little bit on what indications or data is giving you that confidence? Thanks.

I would just comment, part of the optimism is coming from the advent of the highway bill and conversations, that if you’ve paid attention to some of the states that actually committed significant dollars to these infrastructure type projects. However given the election year it's really not dependent upon who may win the election but it's just trying to understand which administration will be in place. And so there has been some pullback and the expectation is that that construction will start in 2017. So we believe that there could be some pent-up type of construction projects available coming into the first half of next year.

Our next question comes from the line of Brett Levy with Loop Capital Markets.

As you – thanks for taking my question, Mark and Theresa. As you guys look to continue to be a growth stock and grow through either organic or acquisitions, I'm just wondering where do you look next? I mean I think most of the big things are either bought or controlled by somebody else. You might look at Mexico, you might look at other things like Vulcan further downstream or the paint line. But you know as your EBITDA to interest or adjusted EBITDA to interest is now over 10 times. And you're looking at some call dates coming up, is it possible you’ll look to the investment grade? So I guess it’s a two part question. One is what areas do you look to buy geographically and business sector wise and then also sort of the potential move to investment grade. You're very close already now.

As you said we’re very focused on downstream value added type opportunities that would perhaps have higher margin or better quality margin as I’d like to call it and gain that pull-through volume. And I think there remains -- we've looked at a lot of them this summer and discounted them. Again I think we’ve hopefully demonstrated that our acquisition and inorganic growth strategy is very disciplined. We’re not going to be emotional and outbid someone just to get it and pay an exorbitant number. Nor are we going to grow just for growth sake. We're going to be very very very patient. Relative to investment grade I would suggest that we will eventually get there. We're not looking to sort of engineer that in the near term.

Brett, I would just add from IG comment is that if you look at where our notes are trading today we’re basically only about maybe 15 to 20 basis points wide of investment grade, until we would like to retain the flexibility and optionality that being in the position we're in today affords us for growth. And then to Mark's point eventually we’ll just get to IG on our own but for right now I think we're well positioned.

Our next question comes from the line of Curt Woodworth from Credit Suisse.

Hi good morning. Mark and Theresa, I had a question just more technically looking at your conversion cost performance in the mill segment this quarter. I mean I understand that sequentially you would see unit level cost increase and a lower volume. The way we derive the total conversion just by taking total COGS less the implied scrap buy, it looked like the aggregate amount of spend was up about 8% sequentially. Yet your volumes were down 9% which is pretty rare looking back historically to see that type of divergence. I am just curious, what drove that, was that energy, the cost of share and can you give any sort of color on how you see conversion costs trending into the fourth quarter?

From the flat roll side of the business, the Columbus operations went through a pretty significant regular maintenance outage in the third quarter. So the additional costs you see in conversion have to do with some of that – some of the bigger jobs that we took the opportunity to get behind us. They all went well but some of those jobs are expensive. So that's the Columbus side of the business.

And I would say heading into the fourth quarter it really will depend upon obviously volumes but I think from a one-off perspective we won’t have more significant items such as the Columbus outage.

Absolutely. We do have an outage that we did fourth quarter here in Butler but less costly overall than what we saw at Columbus.

Can you quantify the impact of the Columbus outage?

We really can’t. I apologize but I just don’t have that information available right at my hands.

Our next question comes from the line of Timna Tanners from Bank of America Merrill Lynch.

Good morning everyone. So wouldn’t – maybe I heard wrong on the comments regarding scrap in the introductory statements there, Mark. But I understand the inflection point on steel and I thought that was quite interesting. But then I thought I heard you say that you didn't see a lot of catalyst for scrap. So can you elaborate on or clarify that position on scrap please?

I already stated my piece. Russ, why don't you weigh in with your in the trenches knowledge.

Well I think, we’ve seen based on a strong dollar, low mill utilization rates that scrape has fallen in the last three months, we believe is at a bottom and it should flatten out. I think still you’ve got to get the utilization rates to come up. We have seen some activity in export market starting to pick up a little bit which further tells me we reached a bottom point, inflection point on the scrap, that also combined with the fact that you've got potentially winter weather which slows the flows down coming in front of us. So we believe we’re at the bottom on the scrap side, not necessarily anticipating a significant move in the upward pressure but again we also don't see that there's much downside push either.

And then I wanted to ask a little bit more about the exposure to infrastructure of those services of long products, I always understood that it’s more 15% not as a rail [ph]. So if you could elaborate on your exposure by long product as a percentage and the percent of your overall product mix?

Timna, you were going in and out, I don’t think we had a clear –

Sorry about that. So real quick on the exposure to infrastructure, can you provide some sort of gauge of how much you have relative to your overall long products or how much infrastructure exposure you have within your mix?

We had probably around million a half tons or so, maybe 2 million tons of what I’d consider latent capacity or that we just haven't had a market to totally exploit. And most of that is correlated to construction.

Okay. That would be beams mostly or also some of your sheet, is that what you’re referring to?

That is principally beams, merchant shapes from Roanoke as well. Obviously some of it would be a little bit would be from engineered bar products, but not too much.

Our next question comes from the line of Phil Gibbs from KeyBanc Capital Markets.

Got a couple of easy ones and then I’ll pop right off. One for Theresa just on the sheet mix in the quarter and then two from Mark, the galvanized investment in Butler, I believe you said 180,000 tons. Just what -- question basically on that is what are you trying to accomplish, how do you do it and what what's the timeline?

The timeline galvanic expansion is --

The equipment’s all been ordered, the products that we sell on the line for the most part we have a great mix of products that are developed. So as we get closer to implementing the – be through second quarter next year when most of the equipment’s actually being installed. It's also going to allow us to do a lot more housekeeping between the two galvanizing lines at Butler as to what products we specifically run on which line. So for us we do see the ability to add some new customer base there. But we’re really exploring what we want to grow with our existing customer base.

I think that will come online in the second half of 2017.

Second half -- mostly the equipment construction and installation will be first half, mostly second quarter and then third, fourth quarter, we'll start seeing those improved production numbers.

And if you think about it, that was a $15 million investment, it’s a very cost effective. And then you wanted the volume, so hot rolled and P&O for the quarter was 770,000 tons, cold rolled was 163,000 tons and coated products were 688,000 tons.

Our next question comes from the line of Jorge Beristain with Deutsche Bank.

Hi, Mark and Theresa. Mark, I'll help you out with Queretaro in terms of pronunciation. I wanted to just dive more deeply, maybe going back to the met coal situation and just trying to understand, obviously you said it's gone orbital. Our back of the envelope numbers indicate it could be as bad as $100 per ton cost increase to the integrated. So I'm trying to understand if you're concerned that perhaps the integrateds at the margin shift more of their blast furnace mix to scrap and therefore put more upward pressure on scrap prices, or are you more bullish overall that you think that the higher cost base that the integrated will face just means it's setting a new bottom for HRC?

I think the latter. I don't think that the increase in scrap consumption by integrateds is going to make a meaningful impact on the price or the supply demand balance. And so pricing there really is driven more by exports than anything over the last few years and as Russ articulated, we don't see that changing much from the last few months. So not too much pressure there. I think it really does pressure the cost structure of the integrateds. You certainly see the Asian pricing, Chinese pricing going up I think largely because of the increase in coal costs. And I think it sets sort of a nice environment in the US that at some point they're going to have to compensate for that and increase their pricing. So to your last point, yes, I think it's supportive of hot rolled coil.

Okay. So it sounds like in 2017 you'd be setting yourselves up for a pretty good environment with flattish scrap, if you believe the integrateds will not pressure demand there, and on the flip side potentially higher HRC for all the reasons you outlined earlier?

Yes.

And then on your steel ops, just to dig a bit more deeply on that quarter-over-quarter cost increase, your unit costs were up $71 a ton sequentially. We only saw a $24 per ton sequential increase in scrap. So can we attribute the bulk of that $50 per ton differential to the Columbus regular maintenance outage, or was there anything else in that number? Because you did talk -- I think Theresa mentioned about a normalization and not having that one off again in the fourth quarter. So we just want to understand how much of that was really driven by Columbus.

No, I wouldn't suggest that all of that is, because you did have a significant reduction in volume, so 9% reduction in volume does have an impact on conversion costs. So I can't really tell you how much of that was related to Columbus off, I don't have those numbers but it certainly wasn't all of it.

But as we look at the –

I would say there's also a Columbus – we acquired scrapyards in the region and right now we are doing quite a bit of housekeeping in those yards to bring those up to where we want them to be. So it's not capital investment right now at this point but we've been bringing those costs in and not exactly seeing the volumes to offset those yet because we're more interested in making sure that the infrastructure there, the process of bringing scrap to the yards, so we're spending more money on those scrap businesses right now that will be offset in the future but it's not really a structural change, it’s just a new cost for Columbus, that’s some of the additional costs we’ve seen.

Our next question comes from the line of Aldo Mazzaferro with Macquarie.

Hi, good morning. I wonder if we could just chat a little bit about – thanks, yeah. Very good. I was wondering if we could chat a little bit about the average selling price you guys had in the quarter. It surprised me in the upside and the metal spreads were wider. And compared to the index, you seem to be catching up. So I'm wondering if you were to say our prices were strong in the third quarter because reasons one, two, three, how would you rank the reasons being if you looked at it between mix, the fact that the mix improved, or the fact that maybe you sold more steel in the early part of the quarter before prices came down a little bit? I'm just trying to get a feel for let's say prices fall in the fourth quarter by $100 a ton, what do you think your prices might do under a scenario like that for flat roll I'm talking?

Good try on the end there, Aldo. But those compound questions are tough to handle. The pricing environment I would say is principally product mix and also we have on the sheet side of the business a reasonable amount of indexed contract which lags and so that helps support our price in a downward price environment.

Have you got time for one more, Mark?

Yes.

On the stock buyback, you said it depends on market conditions and you're thinking maybe 18 to 24 months. Is that the outside amount of time that you would expect? I'm surprised you're not looking to do it quicker.

Well let’s simply say that we feel that our share prices is dramatically undervalued right now. And I'll just leave it at that. End of Q&A

There are no further questions in the queue. This does conclude our question and answer session. I’d like to turn the call back over to Mr Millett for any closing remarks.

For anyone on the call again thanks for sharing your time with us. We’re fully focused on yourselves, we’re fully focused on our employees and fully focused on our customer base and other constituents. And I just would like to thank everyone for their support of our company and to the employees that may be on the line guys and girls, absolutely phenomenal job this past quarter and for everything you do for us. You do set us apart. We are best in class and we’ll continue to be so. And just be safe in everything you do. Thanks everyone.

Once again ladies and gentlemen that concludes today’s call. Thank you for your participation and have a great and safe day.