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Executives

Fred Warner - IR Manager

Keith Busse - Chairman and CEO

Mark Millett - EVP, President and COO for Flat Rolled Steels and Ferrous Resources

Richard Teets, Jr. - EVP, President and COO for Steel Shapes and Building Products

Danny Rifkin - EVP, Metals Recycling; President and COO, OmniSource Corporation

Theresa Wagler - VP and CFO

Analysts

Timna Tanners - UBS

Chris Olin - Cleveland Research Company

Bob Richard - Longbow Research

Brian Yu - Citigroup

John Tumazos - John Tumazos Very Independent Research

Aldo Mazzaferro - Goldman Sachs

Mark Parr - KeyBanc Capital Markets

Nate Carruthers - Michelle Applebaum Research

Steel Dynamics, Inc. (STLD) Q1 FY08 Earnings Call April 22, 2008 10:00 AM ET

Operator

Good day, everyone, and welcome to today's Steel Dynamics First Quarter 2008 Earnings Call. Joining us today are Keith Busse, Chairman and Chief Executive Officer; Mark Millett, President and Chief Operating Officer, Flat Rolled Steels and Ferrous Resources; Richard Teets, President and Chief Operating Officer, Steel Shapes and Building Products; Daniel Rifkin, President and COO of Recycling segment; Theresa Wagler, Chief Financial Officer; Gary Heasley, Strategic Planning and Business Development; and Fred Warner, Investor Relations Manager.

For opening remarks, I will now turn the call over to Mr. Fred Warner. Please go ahead, sir.

Fred Warner - Investor Relations Manager

Welcome to today's Steel Dynamics conference call being webcast, April 22nd, 2008 from Fort Wayne, Indiana. A replay of this call will be heard... can be heard and downloaded as a podcast from our website, www.steeldynamics.com.

Now, I will read a cautionary statement about some of the information to beat the stuff in today's conference call. Today's management discussion includes forward-looking statements. We caution that actual future results and events may differ materially from statements or projections that are made today. You may obtain additional information concerning a variety of factors and risks that could cause actual results to differ materially from today's forward-looking statements by referring to our most recent Annual Report on Form 10-K that’s filed with the Securities and Exchange Commission and in other reports we file from time to time with the Commission. Specifically, please refer to those sections in our Form 10-K and Form 10-Q reports entitled, "Forward-looking Statements and Risk Factors." These reports that we file from time to time with the Commission are publicly available on the SEC website and on our website, steeldynamics.com.

After today's management discussion, we will open the call for questions from participants who have informed us they may wish to ask questions. We will begin with remarks by SDI's Chairman and Chief Executive Officer, Keith Busse.

Keith Busse - Chairman and Chief Executive Officer

Thanks, Fred. Good morning, ladies and gentlemen, thank you for joining us this morning. As the headlines of our press release read, SDI had record sales and earnings for the first quarter of 2008. To say that it was a very good quarter would be an understatement, it was an excellent quarter at least from our perspective and for those of you who still look at the earnings through the eyes on a pre-split basis it was $1.44 whereas our guidance... revised guidance was $1.25 to $1.30, but we've found continued strength throughout the quarter, especially in the Flat-rolled segment of our business.

Our net income, when you measure it against the first quarter of '07, increased 40%, and our net sales more than doubled to $1.9 billion. More meaningful comparison to the first quarter would have our net income up 46% with net sales increasing 31%. I think, we are starting to see the impact... very positive impact from certain acquisitions, Roanoke has certainly been tucked in for quite a long time, but Roanoke continues to just have outstanding results throughout their entire unit. And so we are pleased with the integration of that asset.

I think, we certainly saw the effects of the Techs acquisition; in this kind of a market, very positive results from Techs, has been a very good integration and I would tell you the integration is about complete, spirits are high, new incentive programs are in place and these guys are delivering record performances and [inaudible] for all those of you on this call listening in from the text.

OmniSource had a terrific quarter, probably going to have a terrific year and I will let Danny Rifkin share more of that good news with you and all of the… all of the results from all of the operating segments saved only building products were just really very, very strong. As you can see in the second paragraph of our news release, our steel shipments were 1.6 million tons, that's up about 11% and a fairly significant increase. Our mills are all running fairly well. A couple of them faced minor outages here in the second quarter, two, three days type outages, which would drag shipping volume down in the affected months. But that's all baked into the forecast that you saw us provide in this press release.

We should mention that the OminSource was accretive to earnings by about $0.09 per share, fairly significant number. I think on a go-forward basis, we believe they will continue to be accretive. And therefore, it's not a subject we are going to discuss in any great depth on an ongoing basis.

The Recycling division is experiencing very strong demand with ferrous scrap. A lot of drivers for that, currency will be one of them. Exports are at probably record levels at a time when certainly in the Upper Midwest, we had a pretty rough winter. We have to question the issue of global warning as you look it through the eyes of our winter anyway, it was pretty rough winter and the flow of scrap probably slowed a little bit during the winter over its normal flow levels. It was also impacted by American Axle strike, demand for automobiles, construction market demand, etcetera, etcetera. So a lot of drivers for some pretty strong demand for Ferrous and Non-ferrous Resources, which Danny can highlight a little bit later on during the conversation.

Our outlook is really fairly positive as we go forward as you could read. I think, scrap... I think Mr. Daneyko [ph] in his comments last week was fairly spot on when he said, he thought there would be some moderation in the cost of Recycle or Ferrous Resources on a go-forward basis, but he couldn't predict exactly when; certainly demand right now, today is still fairly strong. So any moderation could be a month or two away but likely to occur.

At some point in time, as flows continue to increase and I think the flows into the scrap recycling yards all across America have dramatically improved as we move into spring. But with the continued weak dollar and world market pricing being equal to or greater than domestic prices, it’s not likely that prices are going to abate all that much if any. You could see a situation where pricing may have reached a peak number, it may not; I mean I just don't have a crystal ball that big. But I see no reason for it to recede other than demand dropping off rather dramatically in the recessionary environment that we are all experiencing and that our customers are experiencing.

And so therefore the customers have improved and are fine with all of this but their inventories are out somewhat, I think people are generally speaking buying on a month-to-month basis. But when… and I think credit is an issue, one used to be able to buy two apples for the price of one, credit becomes an issue and becomes a driver and how much inventory you can carry, how much inventories they’ve all sagged on a go-forward basis from where they are today. We don't expect to see imports change throughout the course of the year all that much and clearly shipments are down as seen through the eyes of our customers but with this much steel being exported today, the situation is really no different than scrap, the weak dollars is causing record imports of finished steels out of this country to other points of destination.

So when you consider the capacity that the industry enjoys today minus the rate of export shipping activity and add back to that finished steel imports probably running at a 15 million to 20 million ton level, you’re short. In spite of a recession, I don’t think demand is backed up to that level, demand used to be in the probably low-to-mid 130 million ton arena and even though the capacity of the industry is perhaps above 110 million tons, generally it doesn’t run and is not capable of running at that level. So it may well run in 106, 107, 108 if we may well export 12 million tons and when you connect the exports against the actual run rates and add back to that 15, 16, 17 million tons of import activity, it only leaves you at 110 million tons of supply trying to beat something north of that in terms of demand, demand really all have slipped from 130-some million tons back to the high teens. But we are still probably left... probably look at it being still short for some period of time and I don't know of anyone that thinks imports are going to pick up significantly, other than people could become desperate for supply and could go abroad or, okay, well be fed up with the pricing environment that exists here, and may well go off abroad for other reasons. But I don't think there's a likelihood of huge import activity impacting the market in the next quarter or two. So as I said in paragraph 5, our outlook is fairly positive on a go-forward basis.

We did take a stab at the earnings in the second quarter, forecasting $0.80 to $0.90. We've hit the middle of the road, that's up about 18% over first quarter, which would be another fairly significant increase in earnings activity. And it will certainly set us on a course to approach $6 a share on an old basis and $3 a share on a new basis although we are not trying to prognosticate out that far, we've commented on it in the past, I don't see that that’s changed much at all in our eyes.

Steel operations, going to the second page, remain SDI's largest segment representing 58% of the first quarter net sales activity. We, as I said, shipped about 1.6 million tons during the first quarter and had net sales activity of $1.3 billion as it relates to steel operations alone. So it was a fairly good quarter. Operating profit, I don't think that was a record, Fred, I ask you that question. But I don't think $148 a ton was a record operating profit although a fairly high level of activity as you look back historically.

Selling values for steel operations, the average price was $782, an increase of $72 a ton from $710 reported in the fourth quarter and an increase of $136 from a year-ago activity. Scrap costs increased about $50 per ton, I noted that compared very closely with the increase that some of our competitors had, about $50 on a quarter-over-quarter comparison. As I said, scrap division was fairly strong, Danny will comment on that, Mark will comment on our activities in the Mesabi Nugget that we are proceeding well as I understand it, we’re on target for the start up of Nugget next year and as you can imagine with today's pricing activity that exists in the marketplace, the spread between the cost of production and the selling value of that material is going to be rather significant. As I said earlier, our Ferrous scrap shipments were very high during the quarter, Non-ferrous activity remains fairly strong as well.

Steel Fabrication, probably the weakest length at this point in time although coming out of the winter hopefully into a little bit better period from an activity perspective, spring and summer. The second quarter tends to be a little better than the first quarter, but depending on economic circumstances, there could be still a rather weak quarter although I noted in our press release that we that we… that we’ve just about finished rebuilding the three Roanoke facilities that were in need of being rebuilt and reconfigured and they have broader capability and lower cost structure. So with an improving construction market, we will have to see downstream improved earnings. I really don't have any other comments at this point in time and will turn it over to Mark for his comments about the Flat-rolled segment and Mesabi Nugget project and Iron Dynamics…Iron Dynamics ran very well this quarter.

Mark Millett - Executive Vice President, President and Chief Operating Officer for Flat Rolled Steels and Ferrous Resources

Thanks, Keith. Good morning, everybody. I guess we continue in a very intriguing market for sheet products and I expect that this is not materially different that probably outlined [ph] by Keith. The domestic steel demand remains very low if not [inaudible] and for residential construction, on moderate production, generally weak, if not recessionary economy, the continued loss of manufacturing to foreign shores, the effectively constrained the domestic demand, service centers and distributors with diminished credit capacity, the recent record transaction values and I’m reluctant to speculate given the uncertainty in the market, service center inventories therefore remain low and they’re just essentially posting [ph] their immediate needs. How is [inaudible] high industry utilization, steel supply remains high, driving the recent market strength, the weak dollar, strong global pricing, substantially reduced import activity or driving significant export volumes, competitively making the domestic steel industry short, still short on the supply side.

Transaction values have less [ph] appreciated substantially, and essentially offsetting the appreciation in raw materials that Danny will discuss and has presented opportunity for [inaudible] metal margin expansion. [inaudible] we think these market fundamentals are well defined and our crystal ball suggests that they are not going to change in the near future and I would suggest there is also a strong pricing situation going forward at least for the future. [inaudible] tax probably committed through May, the tax are opened for June, and honestly we… our customer base desires [ph] with a lot more tons than we could actually provide. So in fact we see a very, very strong market.

Mill performance, above [ph] has done a phenomenal job, [inaudible] and his team had record productivity for the first quarter and even more impressive it was absolutely instant-free from a safety perspective. So I hats off to the team. Our production was 710,000 tons for the quarter.

[inaudible] productivity that they reached operating record levels and shipments were just shy of their previous quarterly record, given the fact that they’re still going through the final stages of integration is I think the testament to the quality team of people we have there.

Certainly Iron Dynamics, [inaudible] and his group have done a superb job optimizing the electric [ph] arc furnace and we continue to improve the ratio of liquid pig iron being transferred to the [inaudible] still mill. The first quarter, it averaged really at 17% of the [inaudible] we shipped roughly 43,000 metric tons of liquid iron to our electric arc furnaces and that’s improved further recent weeks that we have been on an active [ph] 90% of the DRI-produced [inaudible] turned into liquid iron. So my hats off to the team. And if you think about it in the given recent raw material markets, pig irons roughly would deliver [inaudible] a gross ton, [inaudible] is sort of paying the dividend that we envisioned some years ago with the [inaudible].

Mesabi Nugget, just briefly, construction continues through the one end, proceeding well. It would appear that both construction and procurement schedules would allow us to start up late [inaudible] third quarter of 2009 [inaudible] for the mine. It has been initiated, probably slower than we would like, I believe [inaudible] to be initiated late 2010 levels [ph]. So generally to my arena, we’ve got a phenomenal team doing some phenomenal things [inaudible].

Keith Busse - Chairman and Chief Executive Officer

Thanks, Mark. Dick. [inaudible].

Richard Teets, Jr. - Executive Vice President, President and Chief Operating Officer for Steel Shapes and Building Products

Yes, sir, Keith. Good morning, everyone. I’ll start with Columbia City and just say that they do continue to have a full backlog, and they have had record uptime in their rolling mill operations and due to the fact that we’ve had our permits for continued construction of bank [ph] house and so forth, they are now allowed to run their firms [ph] more efficiently by staggering them and we've had opportunities to increase our inventory of semi-finished billets, everything is running well there.

In spite of the uptime in the rolling mill, we have had to refuse those rolling requests by customers and that continues to show the strength of the market. We will have an outage there spanning the end of April and the beginning of May for three days, a planned maintenance outage. And I guess the only note that is disappointing there is that on note number two, we continue to have delivery delays from equipment suppliers that are impacting our scheduled start-ups. And so it’s being pushed down to the very end of the second quarter and in fact may almost bring to the third quarter disappointingly. But other than that, things are going quite well at Columbia City.

The same in at Roanoke, we have a full backlog; in fact we did for the first quarter use rebar as a bill-in product there and we are making less rebar going forward in the second quarter. And that tells us that again the backlog is strengthening and credit book is fine. We have in spite of having a failed static bar, which is owned by the power company, continued to produce in the melt shop about 5% reduced productivity issue. That static bar had a delivery of replacement through 12 to 16 weeks. And so we are in the midst of that. Towards the end of this, hopefully, we will get those repairs done and be able to get back into a higher melt shop productivity opportunity.

They too though will have an outage spanning April and May and theirs is going to be a little longer, about seven days. And it again has to do scheduled routine maintenance items. Our Pittsboro operation does have a strong backlog, one of the strongest it’s ever had. They also have had very strong performance. They’re… they had the most productive rolling mill quarter, rolling 153,000 tons, which actually is 15% better than any prior quarter at Pittsboro. And melt shop had the second best productivity quarter and that's in spite of occasionally choosing not to melt due to economic reasons from a powder cost perspective. So hats off to the employees at Pittsboro.

Steel of West Virginia had to reduce their hours in the rolling mill due to the dramatic drop off of a truck trailer business, but they have been very resourceful in attempting to bring additional products back on line, products that have a made in years or new products and to offset some of the trailer drop off. And as Keith did mention, New Millennium Building Systems did have a slow first quarter, seasonally expected. But I am happy to report that production hours are picking up with increased hours being scheduled on each of the [inaudible] lines and we did have an improved strength in three of the five facilities from a sales order book perspective last week. So hopefully, we are turning the corner in that seasonal business. Keith?

Keith Busse - Chairman and Chief Executive Officer

Hi, Dick, someone may actually ask you, why do we need to spend money to expand capacity at Pittsboro since they’re doing so well. If you annualize 150,000 tons that was at 600 on a mill that was only supposed to produce 480. So the team is doing rather well.

Richard Teets, Jr. - Executive Vice President, President and Chief Operating Officer for Steel Shapes and Building Products

Yes, upside opportunity.

Keith Busse - Chairman and Chief Executive Officer

Danny?

Danny Rifkin - Executive Vice President, Metals Recycling; President and Chief Operating Officer, OmniSource Corporation

Thanks, Keith, and good morning everyone. The scrap segment turned in outstanding results in the first quarter, largely related to significant price increases for both ferrous and non-ferrous scrap commodities. As reported, total ferrous shipments were 1.4 million tons with scrap representing approximately 90% of that volume.

Ferrous scrap prices rose dramatically during the quarter as a result of several key factors. The combination of a weak dollar and strong international demand has produced record exports for US scrap. Current estimates for 2008 are between 16 million and 18 million tons, which is roughly 20% of total domestic ferrous scrap volume.

The US remains the largest of the most sophisticated scrap-generating markets in the world followed by Russia, Europe and Australia. Russia has imposed export restrictions and is becoming a net importer of scrap. Europe has always been a global source of supply and Australian scrap is primarily consumed in Asia and more recently, the Middle East. Therefore, the US becomes the place to shop for scrap in the world market. In addition, domestic steel mill demand remains strong as a result of reduced steel imports and a growing percentage of VAF mills operating today. This tight supply situation has been exacerbated by sharp production and industrial scrap generation, especially in prime grades. High-quality automotive scrap flows are down sharply as a result of the American Axle strike and lower auto production with no end in sight.

Obsolete scrap flows have been off during the winter despite high prices but are expected to increase based on seasonal factors going into spring and summer. This may take a bit of the pressure off that may also just fill the gap created by the continuing shortage for fine scrap and export demand. The non-ferrous shipments of 240 million pounds reflect steady volumes and translate into an annual pace of almost a billion pounds, which would be a record year for OmniSource. Scrap flows are steady, also related to record price levels for copper and aluminum although non-ferrous markets remained highly volatile. Current non-ferrous markets are influenced by the same factors as ferrous markets. Strong export demand especially in Asia is driving copper and aluminum prices and short supply in the US is affecting flows into domestic consumers. We do not see any reason for conditions to change in the near term.

From an operating point of view, our efforts to integrate processing operations are ongoing with Tennessee and Virginia transitions going quite smoothly. We expect the new [inaudible] in Indianapolis to be running late in the second quarter or perhaps very early in the third quarter and continue to evaluate additional opportunities to expand our processing activities. Keith?

Keith Busse - Chairman and Chief Executive Officer

Thanks, Danny. Therasa, would you like to provide some financial highlights?

Theresa Wagler - Vice President and Chief Financial Officer

Yes, thank you, Keith. Good morning, everyone. I'll just take a few minutes to bring about some financial aspects to the quarter and give you some guidance for some aspects of 2008.

Regarding working capital comments and you’ll know that accounts receivable did increase substantially but what I want to… what everyone know is that in spite of some of the worries in the credit markets, our days outstanding actually decreased from quarter-to-quarter and we still have a very good ageing of the receivables. So we are not concerned from that perspective.

Our inventory has also decreased slightly which might be a surprise to some given the cost structures that occurred due to a reduction in volumes of raw materials and an increase in some volumes of the finished goods at the increased costs.

Capital expenditures for the quarter were $94 million, about 67% of that was related to steel mill operations and 40% of that was related specifically to the addition of the second rolling mill in the Structural and Rail Division. For the full year of 2008, inclusive of the first quarter, we are currently expecting capital expenditures to be in the range of $400 million to $450 million. Currently the revenue-generating projects that we have in line, some for completion in '08 and some in completion in 2009. The larger projects are the completion, the Structural and Rail Division second rolling mill in Caster for approximately $135 million to $145 million. In Mesabi Nugget project for 2008, we expect to spend approximately $120 million to $130 million and in the scrap operation, we expect to spend approximately $75 million for different developmental projects there.

For depreciation and amortization for the quarter, we had $53 million. For the remainder of 2008, I would estimate somewhere between $45 million and $50 million a quarter. Goodwill and intangibles changed slightly. We’re still refining our final purchase accounting for OmniSource; we’re almost there. Currently we have amortizing intangibles of about $200 million related to OmniSource with average life of between 10 and 25 years. For an ongoing amortization number of our intangibles, I would model somewhere between $7.5 million to $8 million a quarter.

Our effective tax rate for the quarter was 38% versus a full year 2007 effective tax rate of 37.4%. The increase is related to some items in our actual state tax planning. I review that on an ongoing basis as well.

During the quarter from a liquidity perspective at March 31st, we actually had $147 million outstanding on our revolver but on March 31st, you may have seen that we raised an additional $218 million on our senior secured facility. That was comprised of $124 million in additional revolver capacity to now a revolver… a $750 million revolver is actually an $874 million revolver and we increased our term loan A by $94 million for a total of $218 million.

In addition to that in April of 2008, we actually raised $500 million in the high-yield market. It's a term of eight years, four-year non-call due 2016 at 7.75%. The interest on an ongoing basis for the quarter was actually gross interest is 35 million with capitalized interest of 5 million. I would anticipate gross interest being around the $40 million range on an ongoing basis and that does not take into account capitalized interest.

Other income for the quarter was $7.8 million, $6.7 million of that was actually related to earnings from equity investments in certain ferrous resource companies.

From a share perspective, we repurchased just less than 2 million shares on an effective tax-split basis for $46 million in early January. Our current remaining authorized shares for purchase are 4 million shares. Our treasury shares at the end of the quarter were 29 million at an effective cost of $17 per share. Our outstanding shares at the end of the quarter were 189 million and we still have convertible securities outstanding of 8.5 million shares and we have options that are exercisable of approximately 3 million shares. So if you are trying to estimate maybe for the second quarter what shares may be, I would think just somewhere in the 200 million range.

Some details regarding the flat-rolled shipments for the quarter. Our hot-rolled shipments were 305,000 tons. Our pickle and oil shipments were 38,000 tons; cold-rolled, 56,000 tons; hot-rolled galvanized, 111,000 tons; cold-rolled galvanized, 86,000 tons; painted products, 52,000 tons; and Galvalume products, 27,000 tons. And just one quick comment regarding exports, again we talked considerably about that this morning. About less than 5% of our net revenues actually came from exports this quarter and approximately 60% of that was related to the non-ferrous materials that Danny mentioned from our OmniSource operation. Keith?

Keith Busse - Chairman and Chief Executive Officer

Thank you, Theresa. Peter, I think we are ready for the Q&A.

Question and Answer

Operator

Great, thank you. [Operator Instructions]. We’ll take our first question from Timna Tanners, UBS.

Timna Tanners - UBS

Yes. Hi, good morning. Wanted to ask about what your scrap assumption might be into the second quarter a little bit more to reflect the fact that your inventory numbers went down, it sounds like that might mean that you might have a scrap price reflection that would be a little closer to what we are seeing in the spot market. Can you comment on that, please?

Keith Busse - Chairman and Chief Executive Officer

Well, clearly they are going to go up during the quarter. I don't know that I have a handle on the scrap numbers that went into the model, but I think that last month we saw the numbers were fairly aggressive in the market. I think with demand remaining strong, they are going to be again... it’s not going to be as significant, but the direction is probably still up. I'll let Danny comment on that. Most of the resource material that we’ve baked into the forecast was already known to us in terms of what we have on hand and can melt in the month of April and May. So the unknown piece that you really have to take a stab at is June and I think we've modeled... initially we thought that the obsolete material might actually go down a little this coming month. I suppose there's still a possibility that that would happen, but no a likelihood that it would happen. And the scrap material, as Danny said, is still somewhat constrained and is likely going to be bid up again. But Danny, could you comment provide any further color?

Danny Rifkin - Executive Vice President, Metals Recycling; President and Chief Operating Officer, OmniSource Corporation

Sure, Keith. We believe that export will remain strong through May and perhaps into the summer. We know that well over 700,000 ton has been already booked for shipment to Turkey in May at levels that would have been reflective of a mid-to-high $500 shipping point price on the coast. That would be for obsolete scrap. I think we are expecting obsolete both [ph] throughout the US to increase quite dramatically over the summer, which would allow the export demand to be satisfied and still allow domestic mills to consume what they need. The wild card in the ferrous market though remains the prime scrap situation and we could see that go either away. If there is an extended… a further extension of the American Axle strike and the automotive prime scrap production remains at current levels, we could see that continue to remain tight, very tight and drift upwards if that strike is settled anytime soon and production resumes and prime scrap flows then would come back on to the market and relieve the pressure that would be especially in the Mid-Western part of the country. So I think I would agree with Keith that our models reflect probably pricing to remain high. We haven't forecast a tremendous increase or a tremendous decrease and would say that that is as hard to predict scrap prices today as it is the weather. So --.

Timna Tanners – UBS

Fair enough. I guess what I was looking for is something a little more concrete in terms of the impact on your segment for steel mills. And so if we look at the scrap price increase that you discussed, you talked about a $50 increase Q1 over Q4 whereas the number one heavy melt price probably went up closer to $90. So as we see Q2 over Q1 at least $150 or so, I mean I just was wondering if you could give us a little bit of guidance in terms of modeling for the impact on your steel mills segment?

Keith Busse - Chairman and Chief Executive Officer

Well, obviously since we're seeing... we think we're going to see better margins in Q2 and that's baked into our earnings forecast, you would have to conclude that the pricing that will exist in the second quarter will outpace the cost of resources. I usually am prepared with that, but I don't have it in front of me right now. I can't tell you what I think is going to occur there. I mean I think the margins are going to grow. If you give us a minute, we may come back to that later in the call. Theresa is going to go look at what activity we have built into the model and we could provide a little more specific color.

Timna Tanners – UBS

That'd be super. Thanks, Keith.

Operator

We'll go next to Chris Olin, Cleveland Research.

Chris Olin – Cleveland Research Company

Good morning.

Keith Busse - Chairman and Chief Executive Officer

Good morning.

Chris Olin – Cleveland Research Company

Just a little clarity on the non-residential construction part of your business, looking at the beam side, I apologize if you covered this, but I missed earlier portion of the call. Can you talk a little bit about your visibility into this market, if you are hearing anything about cancellation of projects related to material costs and how comfortable are you looking third quarter and beyond?

Richard Teets, Jr. - Executive Vice President, President and Chief Operating Officer for Steel Shapes and Building Products

Maybe I... this is Dick Teets and I'll give you a little bit color on that. I would tell you from a beam perspective, we have not seen cancellations of projects or even delays due to the escalating price of a product. About the only place you may see a little bit of that might be in our New Millennium Building Systems. Their non-residential construction activity at this time, quite a bit of it, let's say schools and many times schools, needless to say, they go out, they get the architect to do the engineering work, they get the bids, and then they go out and get bonds and when the bonds tend to have a fixed value and then the price of the product like ours goes up reflecting current cost, sometimes there is a crunch going on and schools are delaying some of their construction activities having to decide what to do about the actual connected cost currently versus what it was when they went to market with their bonds. So there is some delay in that market but from a beam perspective, we haven't seen any slowdown.

Chris Olin – Cleveland Research Company

Thanks.

Richard Teets, Jr. - Executive Vice President, President and Chief Operating Officer for Steel Shapes and Building Products

Sure.

Operator

We will go next to Bob Richard, Longbow Research.

Bob Richard – Longbow Research

Good morning, and thanks for taking our call.

Keith Busse - Chairman and Chief Executive Officer

Good morning, Bob.

Bob Richard – Longbow Research

I appreciate your comments, Mr. Busse, on the shortage of flat-rolled, if you will, more of a supply than a demand issue. Would you say that the shortage is more acute on galv than the lower-volume products?

Mark Millett - Executive Vice President, President and Chief Operating Officer for Flat Rolled Steels and Ferrous Resources

This is Mark Millett, I would suggest that the [inaudible] would be on our arenas that we serve [inaudible] currently.

Bob Richard – Longbow Research

Wow, I just, contrary to what I would have guessed based upon your galvanized shipments, if I heard Theresa right?

Keith Busse - Chairman and Chief Executive Officer

I think the question was when do we see the greatest tightness, I am not suggesting that [inaudible] demand is not strong, it’s very, very strong. There appears to be more opportunities than the spot market currently than anywhere else.

Bob Richard – Longbow Research

Okay, fair enough and one quick follow up if I could and I don't want to beat this the non-ferrous [inaudible] but traditionally did OmniSource export a fair share of that or was that traditionally consumed domestically?

Keith Busse - Chairman and Chief Executive Officer

Our export of non-ferrous has grown steadily over the last seven or eight years as the demand for aluminum and stainless has grown in China. So I think what we are seeing today would be very fairly typical of what we have seen in recent years.

Bob Richard – Longbow Research

Okay. And could you offer a mix between what domestic and export business is for your non-ferrous?

Keith Busse - Chairman and Chief Executive Officer

I would say… and this would be an approximation, over 80% of our business would be domestic and not more than 20% exports.

Bob Richard – Longbow Research

Okay, thanks for that and great quarter and best of luck.

Keith Busse - Chairman and Chief Executive Officer

Thank you, Bob.

Operator

We will go next to Brian Yu with Citi.

Brian Yu - Citigroup

Great, thank you. My question relates to energy cost, Keith, and can you refresh our memory on how much energy constitutes of your total non-metallics costs and how much is electricity or what's natural gas and what might be protected under long-term contracts?

Keith Busse - Chairman and Chief Executive Officer

Mark, you’re probably in a better position to answer that line item.

Mark Millett - Executive Vice President, President and Chief Operating Officer for Flat Rolled Steels and Ferrous Resources

[inaudible]. In the natural gas arena you probably have said over next certainly six months at 30% to 40% [inaudible].

Brian Yu - Citigroup

Okay. Great thing. And then one other question that has to do with pricing that we're just kind of reading in the trade press that some of the mills are going back to the customers and learning on surcharges on previously booked orders because of the rapid rise in scrap prices, are you guys doing the same thing too or just kind of waiting for the old words [ph] to build before the new prices take effect?

Keith Busse - Chairman and Chief Executive Officer

On the sheet side of our business, we are… our lead times are incredibly short. We only went out for May business a week ago. And that’s potentially carried out to take into effect the volatility of the scrap. So before we go out for business, we know what the scrap market is going to be potentially, and we put in some degree of [inaudible]. So in our pricing, it's already built in.

Brian Yu - Citigroup

Okay. Great, thank you.

Keith Busse - Chairman and Chief Executive Officer

I might just... I think our energy costs at least from electrical energy perspective, Brian, we are probably about 4%, somewhere in that arena. We might guess, maybe 5% and of course with prices moving up significantly, it becomes half of that. Prices of [inaudible] doubled in the last six months. So energy certainly is not... as Mark said, we have a very good contract, I think at Butler which is the primary consumer. Dick, you might want to comment on where your energies went recently in the spat?

Richard Teets, Jr. - Executive Vice President, President and Chief Operating Officer for Steel Shapes and Building Products

Really Pittsboro and Columbia City are the two that are exposed to market pricing, Pittsboro has a defined calculation with their energy provider, whereas Columbia City is out in the open market buying on an hour-by-hour basis, we do hedge, we need to have layered in a 15-megawatt package for the year, just for a base load for early mill and ancillary equipment and we buy and we do have about half the year purchased out for the melt shop and then the balance of that is in the spot market. We use that as a strategy and the same philosophy as in Butler although executed independently on a natural gas basis that we have up to 36 months hedges. But most of them are in the short term. Now we want to get to different seasonal aspects from an exposure standpoint from hurricane in Gulf Coast item.

Keith Busse - Chairman and Chief Executive Officer

I guess the only point I was trying to make earlier was the percent of our cost to production for energy obviously is diminished… diminishing by a percentage… from percentage perspective due to the rapidly escalating revenue line. I do have the listing... a rough number for you for the second quarter. We think scrap will probably up at least $130 a ton on a quarter-over-quarter basis. So that might help you a little bit. Prices will be up more than that obviously.

Operator

We will take our next question from John Tumazos with John Tumazos Very Independent Research.

John Tumazos - John Tumazos Very Independent Research

Good morning. Danny commented that higher price benefited OmniSource's results, which I am sure it did, but there may be a lot of subtle value-added contributors, the non-ferrous recovery, shredding and separation. Agency services like brokering the auto auction monthly. There might be incidental services, not the same, but in the vein of a heck of international mill service or logistics or other services provided to steel mill customers. Could you try a venture how much of the OmniSource profits are aside from the price of steel scrap rising, whether a third of the profits or sort of the other and higher value-added stuff? I don't want to oversimplify the fine quality of OmniSource just in terms of the price of scrap rising.

Keith Busse - Chairman and Chief Executive Officer

I don't know that the margin what Danny answered as well. The margins on the brokered material for the automotive list, they're just half their margins. So they're not going to expand all that significantly in high-growth periods like that. Obviously, people in the processing business buy much of their [inaudible] some indices that they're tied to. So therefore there might be an early quarter advantage prior to major changes in indices impacting that margin, but obviously, obsolete margins tend to broad rather significantly during times like this. I don't know what percent of Omni's earnings are non-ferrous but it is to your point a significant number, their results were very good. Danny?

Danny Rifkin - Executive Vice President, Metals Recycling; President and Chief Operating Officer, OmniSource Corporation

I would say we haven't looked at it quite in the way that you've asked the question, John. But approximately 60% of our contribution comes from ferrous and 40% from non-ferrous. As Keith accurately described, our management and service business, those are fixed-fee contracts that are done over a long-term basis, unrelated to the market. So our income from that segment of the business is steady regardless of the market prices. Beyond that, we haven't really evaluated base business was separated, base volume without any market change compared to movement of market, but historically because of the lagging nature of both industries, the margins expand slightly in rising markets and especially when market moving [inaudible] the markets are falling.

John Tumazos - John Tumazos Very Independent Research

Thank you.

Danny Rifkin - Executive Vice President, Metals Recycling; President and Chief Operating Officer, OmniSource Corporation

John, I hope that --

Keith Busse - Chairman and Chief Executive Officer

We're getting a lot of static on our end. I hope it's not affecting how it comes through relative to answering your questions. [inaudible].

Operator

We will go to our next question, Aldo Mazzaferro, Goldman Sachs.

Aldo Mazzaferro - Goldman Sachs

I guess the static [ph] you just have to turn the service after the conference call I guess. Are you still there?

Keith Busse - Chairman and Chief Executive Officer

Static bar is having more of an impact than we thought.

Aldo Mazzaferro - Goldman Sachs

Keith, we’ve always… it's amazing how you can get the $130 scrap increase and the price goes up more. Do you still talk about what your conversion cost is for hot band? And if so would you mind letting us know what you think it is now with all the alloy cost having moved in stuff?

Keith Busse - Chairman and Chief Executive Officer

Well, I... it's certainly north of $125 and I think south of $150, somewhere in that area. It does vary. Mark, do you want to take a stab at that?

Mark Millett - Executive Vice President, President and Chief Operating Officer for Flat Rolled Steels and Ferrous Resources

On a strictly operating basis, it's running about $126 to $130, Aldo.

Aldo Mazzaferro - Goldman Sachs

Yeah, that's still excellent. Thanks. On your... I got another question kind of a broader question, Keith. How the... the capacity that's been announced for the industry recently in North America seems to be focused on structural steel which is kind of surprising, since that's in my opinion anyway, not as in short supply as flat-rolled. I'm just wondering why do you think the structural market has attracted so much capacity in the flat-rolled, except for second quarter, fairly little so far and I'm wondering what you think about the future in that trend?

Keith Busse - Chairman and Chief Executive Officer

Well, I think margins certainly were greater in that segment of the business for quite a period of time, although I would tell you the margin opportunities does change from time to time are better in flat-rolled and we recently haven't been able to recover the full cost of resource escalation. So probably a little bit of margin compression going on in there which I would tell you we have modeled. I really think if you are referring to the activity at [inaudible] that's years away given how equipment deliveries are in the marketplace, they will be 2012 before you see a project like that really integrated into the market. And then it’s fairly remote from a delivery and freight perspective from where much of the tonnage is consumed on the North American continent. Obviously there was an announced project in Mexico and how much of that could find its way into this market remains to be seen. But other than those two projects, I am unaware of... there's some rumors that certain individual is looking at another project in this country within the 48 distinguished states that even I would tell you that that might be given today's lot more demand activity pretty periles adventure. I know years ago when we got into the structural business, there… certain individuals didn't think that there was room for SDI's entry into the market. But the market did expand and contracted and there was more room. Now there is not much room for the imports to contract, market’s headed the wrong direction right now. So right now if I were to build new capacity, we wouldn't be focused on that arena. Obviously we've done so with the expansion of Columbia City, but that project was in the work a couple of years. But we don't see any further growth there, we're focused on opportunities now in the flat-rolled segment of our business plan and with the kind of... with the dollar being what it is and it may not see the kind of strength that it had in the past, there may well be opportunities for domestic growth in the flat-rolled arena in the years to come, although given equipment deliveries again, that's going to be sometime in the making.

Aldo Mazzaferro - Goldman Sachs

Great. And could I ask one more question on the scrap market, maybe for Danny? If you look at some of the big players around, Nucor is obviously trying to buy... Sims Metal Management is looking to buy… from what we hear exports are very strong and I am just wondering could you give us an idea of what the… what you see is the size of the market today and whether OmniSource is looking to grow beyond its current volume? Or do you… I mean ultimately, do you see OmniSource as a long scrap growth of the Steel Dynamic's consumption?

Keith Busse - Chairman and Chief Executive Officer

That's our vision and as we look at opportunities, we expect to continue to grow our processing business domestically. We may not have moved as quickly lately as some others but I would assure you that we are in the game.

Aldo Mazzaferro - Goldman Sachs

So other than yourselves, Metal Management or Sims Metal Management and then Nucor’s processing side, how much scrap processing capacity do you see left in the US market?

Keith Busse - Chairman and Chief Executive Officer

I think there are still some... the scrap industry is still quite fragmented and there are some very sizeable players other than those that you've have mentioned. I think our current view of the domestic scrap market is somewhere around 6.5 million tons to 6.75 million tons per month and so there is still quite a bit available in terms of consolidation opportunity and geographic expansion as well as perhaps longer-term involvement in more international business.

Aldo Mazzaferro - Goldman Sachs

Great. That 6.5 to 6.75, that includes the export market?

Keith Busse - Chairman and Chief Executive Officer

That’s half.

Aldo Mazzaferro - Goldman Sachs

That's domestic to including export, right?

Keith Busse - Chairman and Chief Executive Officer

Yes.

Aldo Mazzaferro - Goldman Sachs

Okay, thanks very much.

Keith Busse - Chairman and Chief Executive Officer

Aldo, we do plan to grow processing, both by greenfield growth as well as additional M&A activity as opportunity presents itself. So there are plans to specifically you might say outrun our capability to consume as a company.

Aldo Mazzaferro - Goldman Sachs

Right. I see. And that would not be the case if you built another flat-rolled mill there, right?

Keith Busse - Chairman and Chief Executive Officer

That’s correct.

Aldo Mazzaferro - Goldman Sachs

Okay. Thanks, Keith.

Keith Busse - Chairman and Chief Executive Officer

Thank you, Aldo. Peter, I think we've lost, where do we lose that webcast? They’re having trouble with the static on the webcast. Peter, are you there?

Operator

Yes. We'll check into that.

Keith Busse - Chairman and Chief Executive Officer

Okay.

Operator

We do have more questions in the queue.

Keith Busse - Chairman and Chief Executive Officer

Go ahead.

Operator

Mark Parr, KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

Hi, good morning, Keith.

Keith Busse - Chairman and Chief Executive Officer

Hi, Mark.

Mark Parr - KeyBanc Capital Markets

Congratulations to you and your team. A great quarter.

Keith Busse - Chairman and Chief Executive Officer

Had a good quarter. Thank you.

Mark Parr - KeyBanc Capital Markets

One part of the resource question that you haven't addressed is pig iron. I know what your long-term strategy is but over the next… what's your current situation on pig? I know there has been some supply constraints coming out of Brazil. Is that something that could hit your cost to a greater degree in the second half of the year?

Keith Busse - Chairman and Chief Executive Officer

Probably not so much this year, Mark. I think looking back on it, we wish that we would went out for a boat or two when it seemingly was very pricey at 500-some dollars a ton which we would have sagged another boat or two but we didn’t. But I think we have enough pig on the ground and with IDI operating at a higher level to get through this year, that will leave us some exposure into the unknown universe relative to the price of pig in '09.

Mark Parr - KeyBanc Capital Markets

Okay.

Keith Busse - Chairman and Chief Executive Officer

That obviously we’re very hopeful that [inaudible] gets cranked up by the middle of the year and could fill some of that gap that may exist between our stocks and our operating activity. So there could be a period where we have to go back into the market of market prices and it could impact to some small degree our input cost, but I don't think it would be all that large, we are not consuming all that much pig given the performance of IDI, they are operating at… we are probably consuming 2% to 3% [inaudible] liquids at about 6%.

Mark Parr - KeyBanc Capital Markets

Okay.

Keith Busse - Chairman and Chief Executive Officer

So we are getting up there in a comfort level with our own and currently generated iron plus substantial stocks on the grounds but those will be depleted by the end of the year and we’re certainly going to need to order a boat or two here later this year.

Mark Parr - KeyBanc Capital Markets

Okay. If I could ask is one more question on a different topic, on the M&A front, you have done a phenomenal job of growing the business in addition to all the organic momentum that you have built in the first decade of the company's existence and I was wondering how you're feeling right now about M&A or organic growth outside the 48 states, have you changed your view thinking more aggressively in moving outside the US?

Keith Busse - Chairman and Chief Executive Officer

Have not, really do not have a major focus in that regard at this point in time, Mark. As I said earlier, if world market prices remain in demand… world market demand and pricing remains high and the dollar does not strengthen substantially, I really think there is... it creates an opportunity to grow domestically.

Mark Parr - KeyBanc Capital Markets

Yes, just thinking that was one of the thoughts in the back of my head and I'll just close with this is, we are… if we’re going to export as a market 17 million tons of scrap, I mean wouldn’t the value to this country be better if we could convert that scrap into steel before we export it?

Keith Busse - Chairman and Chief Executive Officer

Well, yes, we would like to no see so much of it go offshore but obviously we're happy about exports in finished steel products and lack of imports which have been [inaudible] over the course of the last so many years. So, it's a two-edged sword. There have been a lot of people that have talked to me openly at conferences about, geez, they are going to form a coalition in trying to keep more scrap at home, it’s America’s strategic resources and we shouldn't be export… I mean those kind of activities are going to go virtually nowhere as I see it at this point in time. We still live in a globally competitive universe and a free country and I don't think we're going to see constraints there.

Mark Parr - KeyBanc Capital Markets

Okay, well, anyway, congratulations on the great execution and I look forward to talking with you again soon.

Keith Busse - Chairman and Chief Executive Officer

Thank you.

Operator

We will go next to Michelle Applebaum, Michelle Applebaum Research .

Nate Carruthers - Michelle Applebaum Research

Hi, guys. It's actually Nate filling in for Michelle. Great quarter.

Keith Busse - Chairman and Chief Executive Officer

Thanks, Nate.

Nate Carruthers - Chairman and Chief Executive Officer

I was wondering if you could give us the quantity of steel exports in the first quarter, if you could provide a breakdown of the products that you shipped and then your plans, what products you plan to ship in the second quarter? And then if you can give us an idea of export margins versus domestic margins?

Keith Busse - Chairman and Chief Executive Officer

That’s not a subject we’ve addressed and I don't think we care to comment on it even if we could. Theresa may have something specific for you. But if such a small piece of what we do it tends to be rather irrelevant. Theresa?

Theresa Wagler - Vice President and Chief Financial Officer

Nate, as I mentioned earlier, we had less than 5% approaching $90 million of net sales for exports, that’s very small. Of that, approximately 45% went to what’s related to non-ferrous materials that went predominantly to Asian countries and then the rest probably another fourth of that came from the long mills and the structural mill actually and that was more in line of Canada and Mexico. There is nothing of great substance.

Nate Carruthers - Chairman and Chief Executive Officer

Okay. And so I mean billet prices are over $860 a ton in the world market, is that something that you had planned to export in the future?

Keith Busse - Chairman and Chief Executive Officer

We… with the continued weakness in the dollar, I think Pittsboro especially will export, I won’t say a substantial quality, but a decent quantity of billets abroad. We are... just for the color on that, we currently are shipping billets to Scandinavia, Germany and it will be in this current plan out of Pittsboro.

Nate Carruthers - Chairman and Chief Executive Officer

All right. Great, thanks. Thanks, guys. And then also I just had a quick question about SBQ demand and the new capacity that Nucor is bringing on. They said they are going to start casting in June. Do you think that that new capacity will be able to be absorbed by the market? And then, if you can give any color on any impact the American Axle strike is having on the SBQ market right now.

Keith Busse - Chairman and Chief Executive Officer

Well, needless to say, anytime someone brings additional capacity on to the market, we’ll have to readjust, they are already out, kind of needless to say, making their preliminary sales calls and so forth, and we recognize that that’s going to happen. We do have in that market an extended qualification period, anyone who would go through it. So we expect that to apply some pressure to the market but we're not overly concerned but we have to recognize that it’s back to life but again, given the export opportunities, there will be some adjustments made by all of us as to percentage of products out but that’s domestically consumed versus an export. The American Axle strike, we are not… we haven’t been affected by it, we were supplying some material to AMN, but they took all the product that they have on the books. We have a backlog from them and they’ve told not to reduce any. And so we aren’t in any way held up with products struck in inventory, either semifinished or finished due to that. So I think it’s business as usual and when they get back to work, we expect to go back to supplying them and hopefully grow that a little bit as we had intended to prior to the strike. I think if the dollar remains weak, and I don't see it strengthening in the short run, there will be considerable opportunity not just for billet export activity but finished tonnage, we are talking to several trading houses about exporting greater quantities of SBQ abroad. So it’s not going to open up some market opportunities for all of us that aren’t there perhaps with the weak economy right now.

Nate Carruthers - Chairman and Chief Executive Officer

All right. Thank you very much.

Operator

[Operator Instructions]. And we have a follow up from Timna Tanners.

Timna Tanners - UBS

Hi, just quick question for Keith. I followed your math on the guidance discussion for the full year. But any particular reason why you wouldn't want to revise your outlook for 2008 at this time?

Keith Busse - Chairman and Chief Executive Officer

I think we've said enough about it. I think the approach… who knows what could happen by the fourth quarter, Timna. So I think we’d rather be a little cautious right now. We’ve more than once said that we probably are in the… on the old basis, the high fives; on the new basis, that would be approaching $3. And we’re not trying to send a negative message, we believe we have very positive message about the second quarter. I don't know the third quarter results will be any worse. And you have to draw your own conclusions. I think we actually modeled a tighter fourth quarter just to be conservative, but it's… we still continue to see us in the $3 zip code on a split basis which I think is extraordinarily good performance. I hope you were listening when I said earlier our scarp input costs should be up at least $130, could be a little higher than that, could be $140, $145 but somewhere between $130 and $140 a ton is where I would expect the increase on a quarter-over-quarter basis to fall out.

Timna Tanners - UBS

Okay. That was really helpful. Thank you.

Operator

There are no further questions. At this time, I would like to turn the call back over to management for any additional or closing remarks.

Keith Busse - Chairman and Chief Executive Officer

Thank you, Peter. I'm sorry, we lost a few of the people in the webcast, I hope that’s returned. As always, very good questions from the audience. We certainly appreciate the following we have. So I want to take this opportunity to thank 6,000 employees of Steel Dynamics who are just doing a bang-up job, a terrific job. Thank you for your efforts and we will be there supporting you every step of the way. Thanks, Peter.

Operator: This does conclude today's conference. Thank you for your participation.

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Source: Steel Dynamics, Inc. Q1 2008 Earnings Call Transcript
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