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Steel Dynamics (NASDAQ:STLD)

Q1 2012 Earnings Call

April 19, 2012 10:00 am ET

Executives

Theresa E. Wagler - Chief Financial Officer and Executive Vice President

Mark D. Millett - Co-Founder, Chief Executive Officer, President and Executive Director

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

Russel B. Rinn - Executive Vice President of Metals Recycling, Chief Operating officer of Omnisource Corporation and President of Omnisource Corporation

Analysts

Luke Folta - Jefferies & Company, Inc., Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Unknown Analyst

Evan L. Kurtz - Morgan Stanley, Research Division

Timothy P. Hayes - Davenport & Company, LLC, Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

Michelle Applebaum - Steel Market Intelligence Inc

David S. Martin - Deutsche Bank AG, Research Division

David Lipschitz - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Operator

Good day, everyone, and welcome to today's Steel Dynamics First Quarter 2012 Earnings Conference Call. Today's conference is being recorded. For opening remarks, I'd like to turn the call over to Ms. Theresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics. Please go ahead.

Theresa E. Wagler

Thank you, Ryan. Good morning, everyone. Welcome to Steel Dynamics First Quarter 2012 Earnings Conference Call. As a reminder, today's conference is being recorded and 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 and involve risks and uncertainties related to our metals business or the general business and economic conditions, which may cause actual results and turn out differently. More detailed information about such risks and uncertainties may be found at the Investor Center Advisory Information tab on our Steel Dynamics website and our Form 10-K annual report under the captions forward-looking statements and risk factors or as applicable in subsequently filed Form 10-Q filed with the SEC.

I know many of you are accustomed to Fred Warner, our long-time Investor Relations manager, handling this portion of the call. However, as many of you are aware, Fred retired in March after many years of service to the company. We all wish him well in this next stage. Until we announce Fred's replacement, please feel free to contact me directly for any investor matters.

Now joining me for today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and the company's platform executive vice presidents including: Dick Teets, President and Chief Operating Officer for our steel operations; Russ Rinn, President and Chief Operating Officer for our mills 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.

Mark D. Millett

Thanks, Theresa. Good morning, everyone. Thank you for your interest in Steel Dynamics and for taking the time to join us on our call to discuss our first quarter 2012 results.

As last time, I will provide some commentary, which hopefully anticipates some of your thoughts and your questions. After which, Theresa will present more financial color, and then we'll open up the call for your questions to each and every one of us.

Turning to the first quarter, 2012 sequential net income grew 51% to $46 million or $0.20 per diluted share. That result was at the high end of our recent guidance of $0.15 to $0.20 per share. And if you add back the net expense associated with our January financing activities, earnings would have been $0.23 diluted share.

I think this solid performance by a phenomenal team in a challenging business environment is continuing testament to our business model that focuses on our customer commitment, our innovation, our innovative low-cost operating culture and our diversified portfolio of value-added products.

The increase in sequential quarterly earnings was principally attributable to expanded metal margins in both the steel and metals recycling platforms. Steel margins expanded as the average selling price increased $22 per ton shipped, while the average ferrous scrap cost increased $10 per ton melted.

Operating income increased 19% to $139.7 million. Our metals recycling margins also increased as with both ferrous and nonferrous shipments. This drove an increase in operating income at 59%, reaching an amount of $25 million for the quarter.

Although steel shipments were essentially flat quarter-over-quarter at approximately 1.45 million tons, a shift in product mix was evident. As we suggested in our last investor call, increased domestic capacity along with attractively priced input opportunities created a headwind in the Flat Roll market. The market was further disrupted in mid-quarter by a temporary slowdown in order input rate as our consumers anticipated the moderating scrap market and held back their orders.

By quarter end, this trend had reversed, order input rates have been reestablished and pricing firmed. Nonetheless, Flat Roll shipments were impacted and were off approximately 38,000 tons as compared to Q4 2011.

While the SBQ markets remain strong, our Engineered Bar Products division shipped 8% less volume in the quarter as a result of an unexpected maintenance outage. Despite the outage, the metal continues to improve productivity and market share as they benefit from the exceptional quality, the downstream processing and our superior on-time delivery history. Despite reduced SBQ shipments, our combined long products divisions recorded a slight increase in sequential quarterly shipments.

When looking at the first quarter 2012 compared to '11, notably and despite a continued anemic non-residential construction market, the Structural and Rail division increased shipments by 37%. Rail shipments were approximately 34,000 tons for the quarter, 13% of the product mix.

On the metals recycling front, ferrous scrap shipments increased from the fourth quarter levels as inventory collected in November and December was sold into a higher-priced January market. In fact, ferrous shipments increased 20% to 1.6 million tons in the quarter, a record level since we purchased OmniSource in 2011.

During the quarter, 48% of OmniSource shipments were delivered to our own steel mills. Our nonferrous team increased shipments 15% to 292 million pounds of nonferrous materials, stainless aluminum and copper.

Generally, positive scrap flow throughout the country created supply side pressure in the quarter. Mild weather sustained obsolete scrap flow and growing manufacturing and order production increased prompt industrial scrap flow. Furthermore, the export market remain bearish, while attractive import pricing grew in foreign prime scrap and pig iron. After an uptick in early January, the market moderated through the quarter continuing into April.

Our fabrication platform shipped just over 60,000 tons of joist and deck in the quarter, a slight reduction from fourth quarter. We believe this decline is more of a seasonal effect than a true demand effect.

Operating losses were $2.7 million in the quarter, slightly higher than the fourth quarter results. Increased steel costs could not be absorbed in the marketplace, and additional ramp-up expenses related to manning were incurred at our Hope and Fallon locations to address our strengthening backlog.

We continue to see slow improvement in our market share participation, particularly in national accounts now that we have a broader geographic presence.

The impact of losses from our Minnesota operations on first quarter 2012 consolidated net income was consistent with Q4 2011 at $10 million net of tax or approximately $0.04 per diluted share. Productivity dropped to 46,200 metric tons as we intentionally decreased feed rate to offset a constriction that developed in the off-gas system on the rotary hard pass. Despite this, certain process and equipment change did produce an increase in operating time during that period.

A planned 4-week outage has started to address the off-gas issue, along with a series of mechanical equipment modifications that are expected to produce significant operating improvements going forward. The impact to second quarter earnings from the Minnesota operations is currently expected to be similar to those recorded in the first quarter.

As we have discussed in the past, even when assumed productivity levels reach over 30,000 metric tons per month, no significant financial improvement will be achieved until low-cost iron concentrate is available to replace the higher-cost market -- material that we're consuming today.

The good news is that a solution is well in sight. Construction of iron concentrate joint venture in Minnesota is proceeding as planned, with continuing expectations of a third quarter 2012 start date. Then after we use the remaining high-priced concentrate that we would have in inventory, the financial performance in 2013 should be considerably improved.

Shifting to current market dynamics, we have seen steady underlying demand for our flat rolled products. Auto continues to be strong, along with energy, heavy equipment, transportation and agricultural markets. The new and restarted domestic capacity is certainly providing a headwind, particularly in coated products. The market disruptions and associated volatility, as we experienced this past quarter, I believe are principally procurement-driven through erratic buying behavior as consumers try to tie in the market as opposed to any discrete changes in specific demand.

Non-residential construction markets remain soft. Although, certainly improve from the first quarter of last year. The recent MSCI data would suggest structural shipments are up year-over-year by approximately 15%. Our wide plant shipments actually are up 38% year-over-year and up a few more percent from last quarter. This progress, along with forward-looking March ABI index that recently came out, remaining over 50, suggests a recovery has perhaps begun.

Utilization of the structural mill is being helped as we gain market share in the Rail business. Rail customers are excited about the quality, dimensional torrents [ph] and physical properties of our standard rail. We view this market as further diversification of our value-added product mix and our long-term opportunity to mitigate a portion of the structural mills exposure to nonresidential construction. Through the cycle, the rail market tends to be more stable. We are further committed to the development of premium rail to give our customers a more complete range of products.

As I said, the transportation, automotive and heavy equipment sectors are particularly strong, creating a strong demand and solid backlogs for our Engineered Bar Products and Steel of West Virginia steel divisions. Based on our customer outlooks, we believe demand in this arena will remain strong and anticipate participating in the growth to an even greater degree as we complete the $76 million expansion of our Engineered Bar division.

As announced in February, we plan to increase the mills' annual rolling capacity to 950,000 tons, a 52% increase from today's capability. The expansion provides for state-of-the-art precision rolling of small -- or smaller diameter bars, thereby, expanding our product mix into a large segment of the SBQ market that resides below 3 5/8 inch diameter. It will also include additional finishing capabilities for nondestructive testing and will double its inspection capacity of finished bars.

Expansion is incredibly efficient in terms of additional personnel and at a budget of $76 million is a very effective use of capital. Furthermore, it will consume approximately 250,000 tons of billets from the Columbia City structural mill, thereby, diversifying their product mix and providing a good base load to mitigate the vagaries of the structural markets.

With this expansion, our Engineered Bar division would be among the largest single-site SBQ production facilities in North America. We're excited to provide additional first-rate one-stop shopping for our customers and to provide what we believe will be a superior return to our shareholders.

Relative to raw materials, moving through the second quarter and into the summer months, it is difficult to predict relative scrap movements, however, the environment of higher demand, driven by increased domestic steel capacity utilization and reinitiated export activity, could support moderate upward pricing movement in the months ahead.

Although it's important to consider such short-term market trends, I would like to again emphasize that our focus is very much long term. Through the recent downturn, we have continued to position ourselves for the eventual economic return, and capacity that was added during the crisis has still not been fully utilized or the full benefit realized in our bottom line results. I think it should be noted that steel shipments for the quarter on an annualized basis which is 5% short of our record shipping level ever, yet, we have an additional 1 million tons of capacity yet to fully exploit as the residential and nonresidential markets return.

In keeping with our entrepreneurial spirit that emanates throughout our company, we will continue to assess opportunities for growth whether in new products, new technologies or new investments, with a focus on enhanced and more consistent margins and additional top line growth with effective margins and returns. I think leveraging existing facilities through capital effective organic growth, such as that of the SBQ mill expansion, will further this goal.

So with that, Theresa, can you review some of the pertinent financial facts for us?

Theresa E. Wagler

Thank you, Mark. During the first quarter of 2012, our gross margin percentage improved over 150 basis points in comparison to the fourth quarter of 2011. Our steel and mills recycling operations each achieved margin expansions in the quarter.

Within steel, on relatively flat volumes, our average sales price outpaced increased raw material costs, and operating income per ton shipped increased almost 20% from an average of $82 in the fourth quarter of '11 to $98 in the first quarter of '12.

Mills recycling saw increases in both ferrous and nonferrous shipping volumes and modest increases in overall metal spreads resulting in a $9 million or 59% increase in sequential quarterly operating income.

Though we outpaced our fourth quarter results, when we compare the first quarter of 2012 to the first quarter 2011, gross margin percentage actually decreased just over 160 basis points, as the historically high flat rolled and recycled ferrous margins achieved during the first quarter in 2011 were not repeated in 2012.

Our operating income per ton shipped for steel operations declined $40 when compared to the first quarter of 2011, and our operating income from metals recycling declined $36 million.

Gross interest expense for the first quarter was $41.4 million based on an effective interest rate of 7.1%. In comparison to the fourth quarter of 2011, interest expense was reduced by $3.2 million in the quarter as we replaced a portion of our senior notes with lower cost term debt in January.

Based on the current refinanced capital structure, the second and third quarters of 2012 would also benefit approximately $3.6 million in each quarter due to these interest cost savings when compared to our pre-financed structure.

We are very pleased with the execution of partial tender that occurred in January. Nearly 40% of holders tendered their notes, representing $280 million of notes tendered and $420 million remain in place. We refinanced the tendered notes through net proceeds received from the expansion of our senior secured credit facility in the form of a $275 million term loan. The term loan has minimal amortization requirements with the final maturity in the third quarter 2016. The balance outstanding at March 31 was $272 million.

Expenses related to the refinancing, net of interest cost, decreased our first quarter 2012 earnings by approximately $10 million or $0.03 per diluted share. The expenses related to the tender of $14 million are classified in Other Income and Expense on our income statement.

Our first quarter effective tax rate was 39%. It was at the high end of expectations. If you remember on last quarter's call, we actually thought it would be in the range of 38.5% to 39%. The rate was impacted by certain discrete items during the quarter, as well as the inability to recognize any benefit from research and development tax credit that have still not been approved by Congress for 2012. If the R&D credits are approved, we would expect our tax rate to fall significantly.

Cash flows from operations provide $21 million during the quarter. It was reduced by our company-wide profit sharing distribution, which was made in March, and that was in the amount of $38 million. Operational working capital required about $70 million of funding as receivables increased due to higher selling value and raw material inventory volumes increased during the quarter.

Our first quarter capital investments totaled $46 million. About 45% of these investments were related to our copper rod and iron concentrate joint ventures. First quarter depreciation was $45 million, and we currently believe a first quarter -- excuse me, a full year 2012 estimate of $195 million for depreciation and $36 million for amortization of intangible assets is reasonable.

Currently our estimate for total 2012 capital spending is between $225 million and $250 million which includes approximately $35 million to be spent in 2012 for the SBQ expansion project. Currently, the second quarter could contain peak spending for the year due to timing of certain projects.

Other 2012 capital investments nearly 40% would be related to our cover rod mill, iron concentrate plant and the SBQ expansion. Over 70% of the capital investments planned for 2012 are what we would consider growth, projects that either increase capacity, efficiency or margin.

Liquidity remains very strong. At March 31, we had no outstanding borrowings on our $1.1 billion revolving credit facility, and our liquidity was over $1.5 billion. Funds that were available to us after our minimum liquidity covenants were $937 million. Our current net debt to trailing EBITDA is 2.6x. And remember, our long-term preference is to maintain that leverage of below 3x, and our interest coverage ratio was 4.5x.

We believe the framework for strong cash flow generation, coupled with our strong capital structure, has the flexibility to sustain our current operations and support future growth.

And now finally to conclude, I know there are quite a few of you who like to have the breakdown of our Flat Roll division shipments for the quarter. So with that, during the first quarter, from the Flat Roll division, we shipped 297,000 tons of hot-rolled; 74,000 tons of pickled and oiled; 44,000 tons of cold-rolled; 97,000 tons of hot-rolled galvanized; 53,000 tons of cold-rolled galvanized; 74,000 tons of painted products; and 19,000 tons of galvalume for a total of 658,000 tons.

With that, I'll pass the call back to Mark.

Mark D. Millett

Thank you, Theresa. I think we'll pass it actually back to Ryan for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Luke Folta with Jefferies & Company.

Luke Folta - Jefferies & Company, Inc., Research Division

My first question, your -- one of your close competitors reported results this morning and gave an outlook that they expected to see a modest improvement in the second quarter. Is that kind of in line with what you guys are thinking?

Mark D. Millett

We would anticipate sort of incremental growth into the volume. So I would hope that would be the case. If you contrast it with last year, obviously, the February, March, April, May period had some pretty terrific spreads that allowed profitability or pretty extensive profitability of the Flat Roll division. It would be difficult to see that those spreads would plateau and that same performance occur this year.

Luke Folta - Jefferies & Company, Inc., Research Division

Okay. But your expectation at this point would be some improvement mainly driven by higher volume more than anything else?

Mark D. Millett

Yes.

Luke Folta - Jefferies & Company, Inc., Research Division

Okay. Secondly, I wanted to ask about -- just looking through the numbers on what you've reported on the recycling segment, did Iron Dynamics lose money in the quarter?

Mark D. Millett

No. No, Luke. Iron Dynamics contributed...

Theresa E. Wagler

No, they did not lose money in the quarter.

Luke Folta - Jefferies & Company, Inc., Research Division

No. I mean, just looking at the results, if you did and maybe -- I mean, there is too many numbers to do on the conference call. But I'm just looking through that you made $25 million in OmniSource and you lost, say, $13 million or so million pretax on Mesabi. I'm just trying to kind of maybe understand where the rest of the offset might have been.

Theresa E. Wagler

Yes. Luke, the difference is that when you're looking at the segment results, we have to report 100% of the losses associated with Mesabi Nugget, and what gets the consolidation is only our portion of that. So we only own 81% of Mesabi Nugget, and what you see in that segment information is 100% of the loss versus just our portion.

Luke Folta - Jefferies & Company, Inc., Research Division

Okay. All right. And then just the last one, on SBQ, just wanted to get your sense of what you've been seeing in the market. It seems like we've seen a little bit of a pullback in lead times and maybe some availability -- availability increasing. I just wanted to get your sense, what you're seeing out there.

Mark D. Millett

We're seeing -- I'm not so sure, a pullback relative to that, specifically looking at demand. There seems to be a stability away from the sort of phonetic ordering that we saw in the early part of 2011 where people were ordering beyond 3 months out. Today, it's more controlled, more stable and more consistent I think. Dick, would you agree with that?

Richard P. Teets

That's very true, Mark. Exactly right. I would tell you that the vast majority of our customer base is positive and optimistic for a slow but continued growth, and that's just reflective of the different buying pattern, not a demand issue.

Operator

And we'll take our next question from Shneur Gershuni with UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

My first question, if I can -- if I may, is related to the iron ore concentrate comments that you sort of made in the press release and on the call. You sort of -- you talked about that there's some significant cost savings that potentially could result by not making the third-party purchases and so forth. I was wondering if you would be able to provide us with a little bit of color of how material this is relative to what you're buying for versus what can be produced and so forth.

Mark D. Millett

If you just -- Shneur, if you compare -- just simply, current market pricing is edging up in the $150, $155, $160 range for iron concentrate. Last year, it peaked at about $185 a ton. And we, unfortunately, are reliant in the most part or have been reliant on most part for that market type material. Going forward, the Magnetation -- and Magnetation as suggested, this is going forward well. The construction is well underway, and we're expecting a third quarter start-up. That material should be produced in the $45 to $50 per ton range. So obviously, you've got that immediate effect as you go from $150 to $160 down to the $50. That's a considerable change. And the additional -- the initial impact is that it takes, let's just say, roughly 1.5 tons of concentrate to produce a ton of nugget. So you have that compounding also.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

And you would be able to capture that complete difference, let's say, if I round numbers $150 to $50, so you'd be able to capture the full $100 essentially?

Mark D. Millett

Sorry. Say again?

Luke Folta - Jefferies & Company, Inc., Research Division

Let's assume the concentrate market, just to make numbers around, was $150 and the cost was $50, you're saying you'll be able to capture that full $100 benefit and then be able to magnify it based on the 1.5 ton ratio per concentrate in Nugget.

Mark D. Millett

Yes, if you look at our -- and as we've addressed in the past, we sort of separated -- not separate out Mesabi Nugget in Magnetation. If you look at our Minnesota operations in general, that would be the case.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Right. And one follow-up question if I may, in relation to Luke's question, there's been some commentary about some softening in the sheet market and so forth. Is this related more to how you're seeing the customer changing its buying patterns? Or is there a little bit more weakness in the market right now that we should be aware of?

Mark D. Millett

Well, they suggested the market disruption sort of mid-first quarter I think was definitely sort of buyer pattern related. The underlying demand, I think we've found to be relatively steady, and it continues to do so. Auto -- as I said, auto is very, very strong. I think we produced 14.4 million units or whatever in March. But auto is strong, energy is strong, agriculture is strong, so we're not seeing any dramatic drop off in demand.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

And are you expecting the imports to kind of lay off with the spread that's come in from Europe as of late?

Mark D. Millett

So the domestic to global spread has dissipated dramatically, and we would suggest that imports won't be as attractive to the buyers going forward here.

Operator

And we'll take our next question from Arun Viswanathan [ph] with Longbow Research.

Unknown Analyst

I guess I had a question on the cost side. Have you guys seen any benefits from lower natural gas costs? And do you anticipate to see those benefits in future quarters?

Richard P. Teets

I would tell you that we have seen the benefits, but it's been such a long tapered decline in those costs that they've been rolled in, and we've been realizing them all over the last couple of years. I mean, starting in about 2008, there started to be a decline in the forward pricing and the spot pricing of natural gases. So I guess I'm saying that you're not going to see an additional change. They've already been tapered in through our performances over the last couple of years.

Unknown Analyst

So going forward, you don't expect a large incremental decrease because of spot prices have dropped in that gas?

Richard P. Teets

No, because again the drop in spot price gases that has occurred has again been slow and steady. I don't see it up in the whole lot from the $2 range that we all hear about.

Theresa E. Wagler

Okay. Just of note, natural gas is really maybe 3% of our overall fuel manufacturing cost. So it's not a tremendous cost.

Unknown Analyst

Okay. And then I guess the other question was on the markets. You noted that construction has gotten a little bit better from 1Q '11. I mean, where would you characterize us relative to the peak? I mean, are we still 60% to 70% below the peak? Or is that much better these days?

Mark D. Millett

Well, I can't give you specific percentages to -- against the peak, but it is anemic and incredibly soft. So there's a huge upside there as the economy recovers. Again, on the structural side of things, our shipments have improved in the wide tranche arena. And we see that principally through our fabricators in medical centers, hospitals, warehouses and some energy-related infrastructure.

Unknown Analyst

Right. So if that continues to improve, do you think that the fabrication segment could reach profitability this year on a needed basis?

Gary E. Heasley

It looks like that could happen. The challenge we're having in that part of the business is more spread than anything else. As we have ramped up, we've seen the industry increase bookings year-over-year by about 21 -- 29%. If you look at the January and February, we got market data for January and February '12, they're about 29%. Our bookings quarter-over-quarter are up more than 60% for joist, about 35% for deck. So the growth is there. The challenge with this business is we're continuing to invest in the resources necessary to drive that growth. A little additional spread over steel cost would be back helpful. We are doing some things to reduce cost, but really what's driving this performance or the lack of dramatic improvement in results is the investment in both sales, engineering and production costs to drive the growth that we think positions the company best for the long term. And everything that we're seeing continues to support that model. The spreads though, if you look at pricing year-over-year, they're roughly flat. And by this time, pricing should be up a bit. So it's just got a bit more shakeout that happened in that market as the market evolves.

Unknown Analyst

Okay, Gary. And do you think the investment is kind of reaching an end? Or is there a lot more to go on the investment side?

Gary E. Heasley

Well, from an SG&A standpoint, it's probably 80%. But as we see backlog growth, our backlog is up about, I think, 27% from December 31 to March 31. We've had to add some production crews in order to address that backlog. So we are very carefully adding production capacity as we must to address customer demand. And so that will continue through '12 that we'll have to add capacity to address that demand. But we measure it very carefully to try to make sure that we get the best results we can without giving up customer relationships that we think are really important in the long term.

Operator

And we'll take our next question from Evan Kurtz with Morgan Stanley.

Evan L. Kurtz - Morgan Stanley, Research Division

A question on Mesabi to start off with here. Just wondering, what sort of monthly profitability and operating rates are you kind of assuming post the downtime here to kind of get you to that roughly loss of $10 guidance that you gave? I'm sorry, $10 million?

Mark D. Millett

Well, I think the -- we've suggested in the past, obviously, we've got to get the operating rate up. The financial performance there is driven by 3 main issues. One, volume, and we're expecting and hoping to get up to sort of at least on an annualized basis a 300,000-ton year rate by year end, which would hopefully flow into next year. It's driven by the concentrate cost, which obviously we will be turning that around. Again, that won't happen until -- probably Q1 because we will have -- even though we will be producing concentrate for Magnetation in the fourth quarter, we're obviously going to have to consume any remaining higher price concentrate brought over to the market. And thirdly, the price of the pig iron and you can't predict that. Obviously, the recent downtrend that seemed to be a floor at around about 460 NOLA, 480 NOLA. But the financial performance is also going to be driven by where that market defies.

Theresa E. Wagler

Evan, as far as the estimates that we gave in the press release, the question was what were the assumptions that went into that statement.

Evan L. Kurtz - Morgan Stanley, Research Division

Right, right.

Theresa E. Wagler

It doesn't relate to gas. The assumptions were that production is very similar to the first quarter as they ramp up and that pig iron pricing is similar and that we're using market price iron concentrate.

Evan L. Kurtz - Morgan Stanley, Research Division

Great. Okay, that's really helpful. Then the second question though is on OmiSource. I think Keith said on the call maybe a couple of years ago or so that he thought the mid-cycle margins for OmniSource would be somewhere around $200 million a year. I mean, just given that your volumes are kind of near record levels at this point, profitability is probably about half of that right now. Is that still something that you think could play out as the economy starts to improve? Or have you tweaked that a little bit?

Russel B. Rinn

Well, I would tell you I think certainly that's stretched on the margin side in today's market environment trying to get to that level. I believe we are back up to margin or to volume levels that we experienced pre-acquisition. But again, the margin in the supply lines, as Mark referred to earlier, supply-driven marketplace that we sit in right now is going to make that I think very tough until we get to mill utilization rates up to a very high level.

Evan L. Kurtz - Morgan Stanley, Research Division

Okay, great. And just finally, what were Columbia City's operating rates this last quarter?

Russel B. Rinn

Just one second.

Theresa E. Wagler

Columbia City operated at about 54% of its capacity. It's basically the same as in the fourth quarter, just slightly lower.

Operator

And we'll take our next question from Tim Hayes with Davenport & Company.

Timothy P. Hayes - Davenport & Company, LLC, Research Division

Actually my question was probably mostly asked on the recycling. It was more just to flesh it out the operating profit per ton has been low the past couple quarters. Some of that is probably cyclical. But is there anything that structurally has changed in the last year that's made those spreads narrow, perhaps just tougher to buy the unprocessed scrap? Or is there just even more shredder capacity that's been added in the last year to go along with what was that and prior to that?

Russel B. Rinn

Well, I think certainly shredders, there's still an exorbitant number of shredders in the marketplace which have tightened those buy prices out in the marketplace and made the squeeze the margins to some degree. I don't know that there's a tremendous -- again, the scrap market -- the scrap supply market is generally where it is. We've had -- with automotive improving, certainly some of the prime grades have increased somewhat in the last year or so. So that's put some pressure on the supply side there. But I don't know if there's any fundamental shift over time from a year ago or 2 years ago in the supply side from the scrap perspective.

Operator

And we'll take our next question from Timna Tanners with Bank of America Merrill Lynch.

Timna Tanners - BofA Merrill Lynch, Research Division

So I wanted to just take a step back and ask a philosophical question if I could. So if you look at your EBITDA per ton just over the entire company, it's down 1/3 from year ago level. So normally a strong Q1. And I guess you're talking about getting up to nearer your full volumes, but it just seems like there's something structurally that's changed, and the industry is getting back up to 80% utilization, but the pricing power isn't back. So I mean, is this something where the structural over supply is going to get fixed anytime soon? I mean, how do you look at the market dynamics that way? Do you think anybody needs to or would take out capacity at this point?

Mark D. Millett

Well, obviously, the quality of our earnings, so to speak, dropped considerably quarter-over-quarter from last year and in large part related to the spread. If you think of the spread between the hot band and prime scrap. As I said earlier, February, March, April, May, they were at historically high levels with the exception of the single period in 2008. And here in the first quarter, we're kind of at the bottom end of the range. Generally, that spread vacillates between roughly $250 to $300 a ton. And we would hope and would suggest that normality is going to return and our spreads expand going forward for the rest of the year.

Timna Tanners - BofA Merrill Lynch, Research Division

But what about the market is going to help the margins at this point? I mean, demand -- is demand better second quarter versus first quarter in your view? Is there -- I mean, what's going to help pricing power in your ability to pass that additional margin relative to what you had in the first quarter? Because that's the challenge I'm seeing is that we hear the demand is better, utilization is rising, but we're not necessarily seeing margins improving.

Mark D. Millett

Again I think, Timna, you have the headwind of the increased capacity come online. That is the headwind that until that goes away, that margin won't expand dramatically. I don't believe.

Timna Tanners - BofA Merrill Lynch, Research Division

Okay. That's helpful. And then just a nitty-gritty question, if I could, on the paint line. I thought that the capacity was considerably higher, like 430,000 tons. So the run rate is much lower than that. Is there anything about the paint line that's not as strong in terms of demand than we would have expected that's -- maybe I'm going -- dating myself here, but it seem like that was a pretty strong project running at higher levels in the past.

Richard P. Teets

There's nothing constrained in production that would be based on our order rates that we have to ship. So everything is fine, and we expect it to continue to remain strong and grow.

Mark D. Millett

I think, Timma, also it might be product mix. Obviously, the paint line is -- it doesn't run every product at the same speed. And as we ventured into different markets -- because the residential construction, the raised garage door panels were pretty strong running or fast running products, as those folks had a tough time. And we've gained market share in other arenas. We probably got some slower running material, but we can't guarantee that.

Operator

And we'll take our next question from Michelle Applebaum with Steel Market Intelligence.

Michelle Applebaum - Steel Market Intelligence Inc

So my first question for you was just to confirm your guidance on the second quarter. So Nucor said that they would only expect modest improvement in the second quarter, and you're saying you hope for modest improvement in earnings? Or are you just saying you hope for improvement in volume?

Mark D. Millett

I would suggest that if volumes should increase at least if our customers are correct and there are prognostications, Michelle, and that with margins remaining as they are, should give us a modest improvement.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. All right. So based on certain assumptions, you might have a modest improvement.

Mark D. Millett

Given the vagaries of the market, both on the scrap side and the product side, I don't think anyone in the latter part of January felt that we're going to have the market disruption that we had 2 weeks later. So when I say hope, I guess I'm just hedging my bets. It's very, very difficult to tell what's going to happen 6 weeks ahead anymore in our markets.

Michelle Applebaum - Steel Market Intelligence Inc

Right, right. I mean, we see steel cycles of a year and then we have steel cycles 6 months, and then we had steel cycles of 3 months, and now it's 6 weeks. So I agree. Okay. But I just wanted to make sure what you were saying. My next question is on the SBQ expansion, can you address -- there's a lot of that going on. And so -- and SBQ has been neat because it winnowed down more than any other product line. So it's been tight for a while. Barriers to entry for new players are very high, but existing players are expanding. Are we going to end up with another glut of that, the way we did like in the early '90s?

Mark D. Millett

Well, there's a lot of plant capacity. And I'm not so sure that all of it's going to come online as advertised would be one comment. And secondly, I do believe we are well positioned. And Barry and Dick and the team have done a phenomenal job in structuring and expansion. Again, we're going into a product arena of smaller diameter of ours, 3 5/8 inch diameter which is an arena that we're not really in today. And that arena is probably 4 million, 4.5 million tons of the SBQ market. If you look at the SBQ market in total, it's been 8 million to 10 million tons in a normal year. So a good portion, 40%, 45% of that market is in a place that we're not -- the expansion has kind of come on the heels of our customers suggesting and wanting us to get into that market arena. And we feel that a lot of our product will be going to existing customers. And to your earlier point, there's a huge hurdle both in costs and in time and effort to get into the higher quality market niches that we're in today. Qualifications with the Caterpillars and the John Deers and everyone in the world is not an overnight occurrence. And I think we have a good number of years sort of leg up on our competition.

Richard P. Teets

If I can add just quickly that again, I think Barry and his team have attempted to position ourselves as a leader in the future in the market that we aren't even in yet, except we have a good a reputation -- a great reputation in the larger bars. And entering in this market, the equipment that's being chosen is, what I'd say, the highest order of delivering the highest quality product. And there are suppliers out there today, no matter what capacity they have cannot deliver that quality of a product that we will bring into market. So we're geared for a good growth. And if a fight comes on, we're going to be positioned for exciting blocks, block and beam furnaces, just things like that, that aren't necessarily a custom tool -- or customary tools in the industry in that market.

Mark D. Millett

And one last point, Michelle, if it's integrating into our existing facility, it's incredibly efficient from a labor perspective and also from a capital perspective. $76 million for 300,000 tons of capacity is an incredible effect of use of capital and should put us into a low-cost position compared to any of our competitors.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. And the 45%, is that -- can you tell me you would -- who logically -- who is in that market right now? Is that a big import market? Or are you fighting domestic integrated competitor there or comparable companies or...

Mark D. Millett

I would say all of the above.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. So there is a import piece of that market?

Mark D. Millett

Yes.

Michelle Applebaum - Steel Market Intelligence Inc

All right. Changing gears here. At this point, you would say you have 1 million tons a year of unutilized capacity. So you could shift 1 million more, you said that earlier?

Mark D. Millett

Yes.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. And then one more question. If Nucor ramps up their DRI facility in Louisiana, what kind of impact will that have on the local ferrous feedstock market, prime, scrap, pig, all that kind of stuff? Is that going to impact with new capacity, a new local capacity of DRI?

Mark D. Millett

Well it certainly will help the supply-demand balance or the supply side on scrapping of raw materials. If you look in the southern hemisphere, the Houston, Texas, the Corpus Christi arena, today they have a reasonably good supply of obsolete scrap. A lot of which is actually exported more than anything. But in the prime arena, it's very, very tight. So it will certainly help the dynamics there.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. Do you think if prime -- if it makes prime prices go down, that could have an impact on the sheet market? Or last year, prime prices didn't move. The whole year sheet prices went up a lot and then they went down a lot, so this would...

Mark D. Millett

Obviously, one imagines that Nucor isn't going to sell that material into the open market, and it's destined for their own facilities. And thus -- but in turn, that's going to take demand away from the regular market. So one would have to assume that, that is going to ease that situation.

Operator

And we'll take our next question from Dave Martin with Deutsche Bank.

David S. Martin - Deutsche Bank AG, Research Division

I just had a couple questions. First, coming back to the Flat Roll business. I know, Mark, in your comments you noted the decline in shipments versus the fourth quarter was attributable to market share losses and new entrants. Also today, you had appear that reported about a 10% quarter-over-quarter increase in sheet shipments. I guess, what I'm asking is, can you help me interpret those different data points? And are there regional differences and demand trends, et cetera?

Mark D. Millett

I can only comment from our own experience in the marketplace. And I would suggest that particularly on the tax -- from a tax perspective, we're seeing a greater competition in the southern markets where CYK and Nucor sort of dominate. So it most likely is regional, but we're not seeing any displacement of our order book from our peers in any material way up in the Midwest arena.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And then that's fair. Secondly on engineered products, I know you noted you had a maintenance outage in the quarter. Can you quantify the financial impact of that outage on 1Q?

Theresa E. Wagler

Not the financial impact, but we did make a suggestion that it affected the SBQ shipments by 16,000 tons. At which point you would have SBQ actually shipping more in the first quarter than in the fourth quarter. But we just don't go into that granular level with our operations.

Richard P. Teets

Maybe I just clarify a little bit about that maintenance outage. We had a maintenance outage planned for the early part of April. And included in that outage was the plan to replace some components inside of our Walking Beam Furnace there. And whatever -- for whatever reason, the leak developed a little bit quicker than we anticipated. And we determined for the integrity of the refractory and the furnace, it was prudent to shut down a month early. We kept the melt shop running, and it didn't miss a beat, but the rolling and finishing was impacted, hence, the shipments. But again, the work was anticipated. The materials are all on hand, and it was going to occur in April. So really, I would tell you the shipments shifted from the first quarter and will be reflected with really no loss into the second quarter.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And then lastly, Theresa, you noted some special items which were on the Other Expense line in the income statement. I had missed those details. So could you quantify what the items were on the impacts?

Theresa E. Wagler

Certainly. The comments that I made was that the premium associated with the tender offer in January, it amounted to about $40 million. And that $40 million expense is showing in Other Expense in income. Otherwise, you would have had Other Income in the range of $2 million to $3 million, which is very typical for us quarter-over-quarter.

Operator

And we'll take our next question from David Lipschitz with CLSA.

David Lipschitz - Credit Agricole Securities (USA) Inc., Research Division

Quick question. Could you talk about your lead times sort of end of year, beginning of the year, sort of mid-quarter and sort of now and sort of compare and contrast if they moved or stayed the same?

Richard P. Teets

Well, I would tell you from that -- I will believe the vast majority will stay the same. Again, even when we thought we took orders, sometimes they were more of a reservation and not an order on a specific product. And so therefore, we have time consumed, but not necessarily a backlog tonnage that was noted. So we talked emotionally about how far it's out. But in reality, we all recognized that putting things out at 9 months or 12 months when some people has claimed that, it's a little bit harder to realize that, that's -- those are the true products that are going to get shipped. I would tell you that we continue, as Mark indicated, under pressure in the East from our Techs divisions, and we are working on that situation, looking at other products and other opportunities there. But I would tell you that backlogs have not appreciably changed across the book, other than maybe the appearance of it at the SBQ from the end of the year to mid-quarter to now.

David Lipschitz - Credit Agricole Securities (USA) Inc., Research Division

Okay. And just a follow-up, and I'm sure beating a dead horse here follow-up on Timna and some of the other questions. What gets us -- what stops the pressure if everybody's going to continue to bring on product? What's in -- I know demand is slowly improving but not enough to offset the supply. Anytime prices arise, the imports come rushing in. It doesn't look like Asia or Europe is getting better than where it is now, that much better at least. What changes this whole situation that we just don't keep muddling along?

Mark D. Millett

Well, I think, obviously, the capacity, the new capacity has to be absorbed. And that capacity has been coming on now for probably 1.5 years or so ramping up. And at some point, obviously, demand is going to be matched. I think going forward, if you look at a normalized economy, where America needs 120 million tons or 125 million tons, the new capacity is going to be easily absorbed. And as I've stated in the past, believe that the import scenario is going to be a little more challenging for consumers than it has been in the past. And the hurdle or the spread to make imports attractive has increased. And in the years past, if you could save yourself a $50 bill for imports, it would be attractive. But given the volatility in the market and the exposure or the financial risks that you have sort of speculating on that import material, I think it's increased dramatically. And the imports, mark-to-market when the market spread is dramatic, they will find their way to our shores at a much higher spread. Recently, we didn't really hear a huge amount of that import activity until that spread was over $100, $150 a ton. That's a different scenario than we experienced in past years.

Operator

[Operator Instructions] And we do have a follow-up question from Michelle Applebaum of Steel Market Intelligence.

Michelle Applebaum - Steel Market Intelligence Inc

My follow-up question was answered.

Richard P. Teets

You don't have another one, Michelle?

Michelle Applebaum - Steel Market Intelligence Inc

I have about 10 more, but I'll finish offline.

Operator

And we have no further questions in the queue at this time. I'd like to turn the conference back over to Mr. Mark Millett for any additional or closing remarks.

Mark D. Millett

Super, Ryan. And again -- once again, thank you sincerely for your support and for taking the time to join our call. Thank you to our loyal employees that each and every one of you have an impact on our performance. And we wish you the very best, and just remind yourselves to be safe in each and everything that you do. And also, thank you to our loyal customers. Without you, we wouldn't be here. So again, thank you all. Bye bye.

Operator

And that does conclude today's conference. Thank you for your participation.

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