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Executives

Mario Longhi – President and CEO

Barbara Smith – VP and CFO

Analysts

Paul D'Amico – TD Newcrest

Michael Gambardella – JPMorgan

Sal Tharani – Goldman Sachs

John Hughes – Desjardins Securities

Bob Richard – Longbow Research

Mark Parr – KeyBanc Capital Markets

Michael Willemse – CIBC World Markets

Tina Prentiss [ph] – UBS

Charles Bradford – Bradford Research

Gerdau AmeriSteel Corp. (GNA) Q2 2008 Earnings Call Transcript August 6, 2008 3:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Gerdau AmeriSteel Corp second quarter results conference call. At this time, all participants are in a listen-only mode. (Operator instructions)

The company would like to draw your attention to the Safe Harbor provisions in the company's press release regarding forward-looking statements and that EBITDA is a non-GAAP financial measure and that it certainly is not the only measure. Certain statements made on this call will be forward-looking statements. Actual results could differ materially from conclusions, forecasts, or projections, because certain assumptions were made in drawing those conclusions, or making these forecasts or projections. You should refer to the company's August 6, 2008 press release for additional information about the material factors that could cause the actual results to vary, and the assumptions used to draw a conclusion or make a forecast or projection. I would like to remind everyone that this conference call is being recorded on Wednesday, August 6, 2008 at 3:00 p.m. Eastern Time.

I will now turn the conference over to Mr. Mario Longhi, President and Chief Executive Officer, and Ms. Barbara Smith, Vice President and Chief Financial Officer. Please go ahead, Mr. Longhi.

Mario Longhi

Thank you, Maria. Ladies and gentlemen, good afternoon, and welcome to our second quarter 2008 conference call. We're very happy to be here to comment on our second quarter results, another record quarter, the third record in a row.

Net income was $262 million or $0.60 per share for our second quarter, and an 88% increase in comparison to the net income of $139 million, or $0.45 per share for the same quarter in the prior year. For the first half of 2008, net income was $425 million, or $0.98 per share, an increase of 56% compared to net income of $273 million, or $0.89 per share for the first six months of 2007. As expected, we will pay our normal quarterly dividend of $0.02 per share September 4, 2008, to shareholders of record as of August 20, 2008.

The average metals spread was $499 per ton for the second quarter, and EBITDA margin was 19%, as we generated $521 million in MPDA in the quarter, another new quarterly record. We shipped 2.5 million tons, revenue of $2.5 billion for the quarter.

Before commenting further on the business results and the outlook for the coming quarter, we must make a few remarks about safety. In spite of the fact that our lost time accident rate, more than 30% better than it was in 2007, we regret to inform you that we have had two fatalities at our Jackson, Tennessee facility earlier this year. I want to ensure our employees and our stakeholders that we place safety above all of our core values. We have conducted a thorough review of our safety processes as a result of these two incidents. We have found our processes to remain very, very sound. However, we believe opportunities do exist to improve the behavioral aspect of safety compliance. We are examining additional ways to improve in this area.

I would now like to make a few comments about our progress towards executing on our strategy. Over the past several years, Gerdau AmeriSteel's strategic focus has included diversifying our product mix, balancing our investments between upstream raw materials operations, yield mills and downstream value-added operations, as well as expanding our geographic footprint. These factors were instrumental in the company delivering the record levels of shipments, revenue, cash generation, and earnings that you have seen during the quarter.

Starting with the upstream, we have captive control of approximately 40% of our scrap raw material needs, through our 19 collection yards and 9 shredders. Our product mix is not dependent upon scarce prime grades and we continue to see a solid flow of in fee to our collection yards. In terms of product mix, the addition of structural steel into our product portfolio has allowed us to increase our EBITDA margins. Looking at the downstream, our most recent acquisition of Century Steel, which we completed in April, adds an additional 300,000 tons of rebar fabricating and placing capability, bringing our total fabricating capability to 1.4 million tons.

Previously-announced plans to increase the rolling capacity of our Jacksonville, Florida steel mill to over 1 million tons per year will position us to cost effectively serve customers in the southeast markets, as well as our growing export customer base. Our diverse product offerings reduce our dependence on any one single industry segment, and help us better support our customer base.

On the economic front, the U.S. economy continues to show mixed indicators. On the other hand, the steel business as a whole continues to perform well. Strong global demand creating a condition where imports into the U.S. have moderated historical highs has resulted in a favorable environment for the North American steel sector. Billet prices are keeping pace with rising input costs for ferrous scrap, and other raw materials, thus enabling us to preserve our margins. North American demand remains solid across our main product lines, including rebar, merchant, structural, and wire rod. We continue to see resilience in industrial and infrastructure segments, while the housing sector works through the excess inventory. We're also starting to see a shift in highway construction from asphalt to concrete.

Compared to asphalt, concrete lasts longer and is now more economical due to the effect of increased oil prices, which more significantly impacts asphalt costs. The power factor is also expected to develop well. We are already seeing in the Midwest the wind power generation and alternative fuel facilities underway. During the third quarter of 2008, our production levels compared to the second quarter may likely be reduced a bit as a consequence of normally scheduled seasonal maintenance shutdowns in certain locations. We continue to see good export opportunities. These exports should help our mills operate at near capacity levels. We have been exporting billets, structural, merchants and rebar to markets such as Central America, Mexico, the Caribbean, Asia, Europe, South America. For the second quarter of 2008, we exported approximately 113,000 tons compared to 85,000 tons in the first quarter of '08, which leads us to believe that export volumes could be nearing in the half a million tons mark in 2008.

Our order backlog remains solid and new contract activity continues in our downstream business, which is a leading indicator for our mill demand. Expect imports to remain around current levels. Our customers continue to run with low inventory levels, and they report they are comfortable in our ability to support them. We remain positive regarding the outlook for the coming months.

In summary, we believe we are well positioned to continue to achieve strong results in our methods. With this, I conclude my comments and I'll turn it over to Barbara to comment on our financial results.

Barbara Smith

Thank you, Mario. Good afternoon, everyone. As Mario indicated earlier, net income for the second quarter 2008 of $262 million, or $0.60 per share compares to $139 million earned in the second quarter of 2007. Looking at EBITDA in the second quarter, we had another record quarter of $521 million, which exceeded the former record set in the previous quarter by approximately $134 million. For the first six months of 2008, we generated $909 million of EBITDA, nearly as much as the $1 billion we generated for the full year 2007. Total shipments for the quarter were 2.5 million tons, which were up about 5% from the prior quarter, and 47% greater than the second quarter of 2007.

The year-over-year increase in shipments was largely attributable to the increase in shipments from Midlothian and Petersburg. The weighted average selling price per ton, net of freight, of our mill shipments to external customers in the second quarter was $882 per ton, up from $735 per ton in the first quarter of 2008. Our downstream steel fabricating prices of $1098 per ton in the second quarter compared with $960 per ton in the prior quarter. The average cost of scrap charge for the second quarter was $383 per ton compared to $277 in the previous quarter. Metal spreads, the difference between mill selling prices, and the cost of scrap charged, remained high and we believe these levels are sustainable in the near term. The average metal spread from mill products during the second quarter was $499 per ton, compared to $458 per ton in the first quarter of 2008. Manufacturing costs in the quarter were $332 per ton, an increase from 298 in the first quarter of 2008. Our manufacturing costs increased as a result of significant inflationary pressures on alloys and energy, as well as the higher scrap costs effecting manufacturing yields.

With respect to our 50% owned joint ventures, primarily Gallatin flat rolled sheet operation, our share of net income was $42 million in the second quarter, up from $18 million in the first quarter of 2008. Gallatin's margins improved significantly through March and throughout the second quarter as we anticipated when commenting on our first quarter results.

Net interest expense was $33 million in the second quarter, compared to $45 million in the first quarter 2008. Most of this reduction comes from the impact of the Federal Reserve rate cuts on the floating rate term loans we had put in place for the financing of the Chaparral acquisition. Capital expenditures were approximately $35 million during the quarter.

In the quarter, we announced that our Board approved the first two phases of the previously announced expansion of Jacksonville, Florida steel mill. The entire expansion project is planned to result in melting and rolling capacity in excess of 1 million tons per year.

Depreciation and amortization of intangibles for the quarter was $78 million compared with $77 million in the previous quarter. The balance sheet at the end of June for cash, cash equivalents, and short-term investments was $312 million, down from $641 million at the end of March, mainly as a result of the acquisition of Century Steel for $149 million, $82 million for the increase in our equity participation in Pacific Coast Steel, dividends of $9 million and $54 million related to option rate securities that were reclassified from short-term investments to long-term investments. Short and long-term debt was $3.1 billion at the end of the quarter. Our net debt to total book capitalization is at approximately 39%, which is in line with our intention to bring our capital structure back to our target of 35% net debt to total cap.

In the second quarter, we took the opportunity to exercise the accordion feature of our asset-backed loan facility. We exercised the accordion in full and enjoyed an oversubscribed deal. As a result, our ABL was upsized from $650 million to $950 million. The ABL, which is currently undrawn, provides the liquidity level that we think is more appropriate considering the size of our business today.

The market for some of our short-term investments, option rate securities remain challenging due to the current issues facing the U.S. capital markets. We took a write-down of $17 million on our cash investments in the second quarter, in addition to the $32 million adjustment previously booked. Because of our strong liquidity, we plan to hold these investments until the market improves.

Looking forward, we expect the third quarter market conditions to provide continued strong metal spreads and margins. We believe inventory levels are low throughout the system when compared to historical levels. The weak dollar, high ocean transportation rates, and existing trade orders should continue to discourage imports. Our focus will remain on the successful integration of our newly acquired companies, ongoing cost improvement initiatives and balance sheet discipline.

We thank you again for your continued interest in Gerdau AmeriSteel. I would also like to thank the employees of Gerdau AmeriSteel for their dedication and commitment to serving our customers and stakeholders.

And with that, Mario and I are open to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) First question comes from Paul D'Amico from TD Newcrest. Please go ahead.

Paul D'Amico – TD Newcrest

Hi, Barbara. Hi, Mario. First off, real quick, on the working capital, you sort of caught me off guard. I don't know if it was addressed earlier, I missed the beginning of the call, or if it's something very simple that I'm just missing here. It just struck me as being large. Can you help us think it through?

Barbara Smith

Yes, Paul, it's all related to the increase in raw material and prices in general. If you look at our days working capital, it's actually coming down. And of course payables are up because of the increases in raw materials.

Paul D'Amico – TD Newcrest

Okay. Was there anything – sorry if I'm belaboring this, but was there anything out of the ordinary that was sort of one-step markup, or is this – like this is not something that's going to get repeated, I imagine, but how should we think of this going forward in terms of what happened?

Barbara Smith

If you continue to see rising prices, you're going to see higher receivables and if scrap prices continue up, you're going to see higher costs of inventory. If you see moderation, then I think you're going to see those level out.

Paul D'Amico – TD Newcrest

Okay. So, so–

Barbara Smith

If you do a turns on, say three-month sales, you're going to see the days have come down about five or six days since January.

Paul D'Amico – TD Newcrest

Got it. And in terms of – you've mentioned about metal spreads, Barbara, especially with respect to Q3 and the reasons why in terms of your outlook. These are pretty high levels on the metal spreads. Would you be expecting them plus or minus, or is it something like – like right now we've got the most recent scrap purchases coming off in terms of pricing, and finished steel pricing from what I gather has not been marked down to reconcile with the lower scrap. So one, would that be correct, and two, if so, do we have a situation where metal spreads can actually spread further from the Q2 level?

Barbara Smith

I believe metal spreads can expand further from the second quarter level. The metal spreads were increasing throughout the quarter, so we exited the quarter higher than that average that you see, and based upon what we're seeing for the balance of the quarter, I think you could expect spreads to expand.

Paul D'Amico – TD Newcrest

Just roughly, Barbara, would you have a gauge as to like the four-day average, where do you think you exited the quarter? How much higher than that?

Barbara Smith

Well, as you know, we don't give specific guidance.

Paul D'Amico – TD Newcrest

Okay.

Barbara Smith

That's the best I can give you for now.

Paul D'Amico – TD Newcrest

Okay, and Mario, in terms of the volume outlook for the different products, it sounded like when you were mentioning the different products, it sounded like basically there wasn't really one weak spot that sort of stood out, so one, would that be correct? And two, if so, is there like a generic lift expected in volume in Q3, given the seasonal shutdowns, or would it be flat?

Mario Longhi

I would expect it to be flat. We were exporting a little more, so if we do a good job here, we can maybe offset some of the shutdown impacts that we'll have added to the seasonality.

Paul D'Amico – TD Newcrest

Okay, and would that be across the board, you were talking?

Mario Longhi

Pretty much.

Paul D'Amico – TD Newcrest

Pretty much, okay. And last one, Barbara, getting back to the idea – on the per tonnage, the new manufacturing costs and the idea of raw material costs, is this something that we should be considered plateauing, or is this sort of going to be in lock step with respect to the other finished products that we're seeing?

Barbara Smith

Well, just to give you an idea, Paul, the price of scrap impacts yield in our operations, which we include in manufacturing costs. And the increase in scrap prices from first quarter to second quarter took manufacturing costs up $17 per ton, this due to the price of scrap. Nothing to do with the efficiency of our operations. As you know, we continue to work on operational improvements, and our yield percentage is not changing. It's just directly a function of the price of the scrap, so if there's a view that scrap prices are going to moderate, then you're certainly not going to see that impact. Gas prices have come off a little bit of late, so there's a little easing there. However, we do have a number of outages in the third quarter. We normally take advantage of – some of the manufacturing sector takes time down during the Fourth of July holiday. We had a number of outages in July, and so that will have some effect on our costs.

Paul D'Amico – TD Newcrest

Okay, so maybe net – net it might actually be flat. I mean are you benefiting from lower scrap, lower gas, but the outages might offset that, is that fair?

Barbara Smith

I don't know that you're necessarily going to see lower scrap in the third quarter compared to the second quarter, but I think I should remind you that we can no longer accrue for maintenance outages throughout the year. You have to take them in the period in which they occur. So I think you are going to see some increase in costs in the third quarter. It's certainly not going to be as dramatic, because I wouldn't expect scrap to escalate like it did between second – first and second quarter.

Paul D'Amico – TD Newcrest

Okay. I was under the impression that scrap was actually experiencing some weakness recently.

Barbara Smith

Well, the August buy is not done. I mean, I think that, you know, we have a view that the August buy could be down a little bit, maybe $30 per ton, and then level in September and increasing – increasing in the fourth quarter. But I think you need – I need to remind you that throughout the second quarter, scrap prices were rising and some of that is what we're going to be consuming in the third quarter.

Paul D'Amico – TD Newcrest

Got it, okay. Thank you.

Mario Longhi

You're welcome.

Operator

Your next question comes from Michael Gambardella from JPMorgan. Please go ahead.

Michael Gambardella – JPMorgan

Yes, good afternoon, Mario and Barbara, and congratulations on such good results, even with the surge in scrap prices to be able to really expand your spreads. That's great. I have a question about the, the billet pricing in the marketplace you're seeing. I know you don't do a tremendous amount of it, but there's been a lot of it publicized recently about billet prices coming down overseas. Now, I looked at the LME, started trading steel billets, I think it was on May 8, and the pricing of the LME billets; and this is on a metric ton basis, hit a high of 12 – I think it was around $1250 on June 26. It just seems like an outrageously high number. And when I went back and looked at the rebar pricing in the same region, the billet price was actually a 44% premium to the rebar price in that same region in Europe, where they quote the billet pricing. Now, the billet price has come down 24%, but it is still at a premium to the rebar price. Can you explain what's going on with the billet pricing overseas? It was certainly – the billet pricing was certainly higher than your average finished steel price in the quarter.

Mario Longhi

Well, a lot depends also on the amount of volumes and the way it was traded, Mike. And there were some very volatile needs on the part of some people, especially in that European region, that impacted that. The other thing is, I believe there is – there were some opportunities for shipping that were empty cargoes, not necessarily empty, but opportunities to fill in a void and so people had them available and could put on that cargo and benefit for quicker deliveries. So that's as good as I can tell you, while on the rebar side there has been a more – more of a steady set of deals that were made for more regular shipments.

Michael Gambardella – JPMorgan

Okay. Are you – another question, are you seeing any cancellations of big projects, infrastructure projects that you would be feeding steel into?

Mario Longhi

Not necessarily infrastructure, Mike. What we're seeing is more on some, for example, we've seen one large – one casino in Las Vegas and things of that nature have occurred, more on stuff that is still on the engineering side, but we're beginning to see it.

Michael Gambardella – JPMorgan

Right.

Mario Longhi

I would offer at this moment, though, our bookings remain pretty good, Mike, in spite of that.

Michael Gambardella – JPMorgan

How about, have you heard anything overseas particularly in China? Maybe through the SAIs?

Mario Longhi

Well, there is in China a lot of discussion about what has been the true impact of the Olympics in some levels of construction, but I would offer to you that sometimes on a quarterly basis you may see something. I think China still has to remain focused on providing for improvements to occur so that they don't have a social issue; and I think that will remain in place for years to come. So even though we may see a little bit of a blip here and there, I think it will still have to remain robust.

Michael Gambardella – JPMorgan

Okay. Thanks a lot, Mario and Barbara.

Mario Longhi

Thanks, Mike.

Operator

Your next question comes from Sal Tharani from Goldman Sachs. Please go ahead.

Sal Tharani – Goldman Sachs

Thank you. Hey, Mario, hey, Barbara, how are you?

Barbara Smith

Hi, Sal.

Sal Tharani – Goldman Sachs

On the exports side, the prices you are getting, are they equivalent to the U.S., or are they better prices?

Mario Longhi

They are better prices. The U.S. market still remains cheaper than anywhere else in the world. So –

Sal Tharani – Goldman Sachs

They are better even – I mean, you sell them generally including freight, is that the way export markets work?

Mario Longhi

It goes both ways. I can't precisely tell you exactly what percentage it is, but it goes both ways.

Sal Tharani – Goldman Sachs

Okay, and on the scrap – you mentioned – Barbara mentioned that the August buy is about $30 below July.

Mario Longhi

Could be.

Barbara Smith

Could be. It's not done yet.

Sal Tharani – Goldman Sachs

Okay. Do you think that there will be a price decline in the surcharge, which you guys don't do it, but your competitors do it; and the rebar and other prices may come down, or do you think there is enough demand out there to hold the prices at the current level?

Mario Longhi

Well, I think there is enough of inflationary pressure on some of the other consumables, Sal, that are not significant, so people sometimes tend to look at this variability with scrap, but depending on how you're figuring out your new buys for electrodes and alloys and all that stuff, I don't think necessarily a reduction in scrap price may mean reductions in product pricing.

Barbara Smith

And we believe the scrap is a seasonal third quarter and that you're going to see rising prices again in the fourth quarter as supply gets tighter again.

Sal Tharani – Goldman Sachs

No question about it. Actually it was unusual that scrap prices continued to rise in between May, June, and July, generally they soften up. On the downstream business, how are your margins? I mean, we have heard from some people that currently they are getting squeezed because these are six to nine month lead times, booking time.

Mario Longhi

They have been squeezed already, Sal, and, some of the deals, like I said, that were done, were actually deals where they were done during the engineering side and some of those have been postponed, so they didn't actually fully materialize. But the squeeze has been real, but it has already materialized. I think everything we're quoting right now has a dimension of escalation, of course the times that we give for the offer to be valid are significantly shorter than they used to be, so that is the situation right now.

Sal Tharani – Goldman Sachs

New orders you're booking are based on the current or your expected input subset price of steel?

Mario Longhi

Yes, and if they have an escalation formula for some of the deals that actually materialize.

Sal Tharani – Goldman Sachs

Are these formulas new in this business, or –?

Mario Longhi

Somewhat, Sal. This is not something that has been naturally a practice, but it is so obvious that the situation requires some form of engagement in this regard that I will not be surprised if the wisdom prevails and people begin to use that as a normal practice.

Sal Tharani – Goldman Sachs

Got it; and last question on option rate securities, Barbara, you said that you have moved some of these to the long-term debt, so you're not going to be taking any more charges?

Barbara Smith

Well, no. I'm not saying that necessarily, although they are now written down to about 50% of the face value, so I would hope there wouldn't be any further write-down necessary. The fact that it is not a liquid market really caused us to reclassify them from short-term to long-term, and certainly, we hope that this is the last of it. And, you know, the securities, the underlying securities, they are all investment grade quality and we haven't seen deterioration in the credit ratings of the underlying securities and we continue to be able to collect the interest due and we're not having any problems there. So we're taking a bit of a wait and see.

Sal Tharani – Goldman Sachs

Have you been able to sell any of these?

Barbara Smith

We liquidated a little bit back in – I mean if I back up, we had almost $700 million in option rates and we liquidated down to just over $100 million. And since the market for these has frozen, we've liquidated, I don't know, $1.5 million. But the way they work is the interest rates reset to higher amounts when they – when there's no buyer for them. So the issuers, at some point, they are paying much higher interest rates. The issuers may decide to liquidate them or find other financing, which is what happened with one of the papers earlier this year that was liquidated and we got the full face amount.

Sal Tharani – Goldman Sachs

Okay, great. Thank you very much.

Mario Longhi

You're welcome.

Operator

Your next question comes from John Hughes from Desjardins Securities. Please go ahead.

John Hughes – Desjardins Securities

Thank you, operator. Just three quick questions. First, as noted in Q3, the scheduled maintenance shutdowns, relative to the 2.5 million tons of shipments in the Q2 period, would you expect – are you indicating any material change from that number?

Mario Longhi

No, not, not material, John.

John Hughes – Desjardins Securities

Perfect.

Mario Longhi

But it will be slightly lower potentially.

John Hughes – Desjardins Securities

I got you. On the second quarter, can you tell me; was 100% of the results to Century Steel in the quarter?

Mario Longhi

Yes, they were, John.

John Hughes – Desjardins Securities

Okay, and third quarter, again third question, auction rates securities, were they written to the fair market value at the end of June?

Barbara Smith

Yes, we evaluate them each month, but they were mark-to-market at the end of June.

John Hughes – Desjardins Securities

That's great. Thank you very much, indeed.

Barbara Smith

Thank you, John.

Operator

Your next question comes from Bob Richard from Longbow Research. Please go ahead.

Bob Richard – Longbow Research

Good afternoon. Thanks for taking our call.

Mario Longhi

Thanks Bob.

Bob Richard – Longbow Research

To beat the outage question to death; is it more focused on your structural mills or your long products mills, just qualitatively?

Mario Longhi

No, no, no, all of the shutdowns, they have a schedule. So this is not something that has been heavily skewed toward one or another product line at all.

Barbara Smith

And Bob, we try to time them during the year, based upon the need and the equipment that you need to do it. But also what is going on in the market, and typically third quarter is a good opportunistic time, as well as fourth quarter when you have holiday time out in November and December. So in the third quarter as an example, we had some outages that would be Perth Amboy, Manitoba, Beaumont, so it's normal scheduled outages and then in the fourth quarter, we do have a fairly sizable one scheduled for Midlothian. Petersburg took theirs back in February, I believe.

Mario Longhi

February.

Bob Richard – Longbow Research

Okay, great. I appreciate that detail. The SG&A expenses for the month, is that representative of a going-forward run rate?

Barbara Smith

Yes, as you can see there, it is up quite a bit from the prior quarter I think about $20 million, and about half of the increase was related to the mark-to-market of our stars, which was higher in the quarter than it was the prior. And then there was about a $4 million that was related to Century Steel and that certainly would be ongoing. I think probably for modeling purposes, you should look at it on a percentage basis. I think historically, we've been around 4% and that is now around 3% – just under 3%, and I think if you do that on a percentage basis as kind of where it is at, that would be appropriate.

Bob Richard – Longbow Research

Okay, and thank you, and last follow-up, the asset-based lending agreement expanded to about $1 billion. That's pretty formidable. Looking to maybe backward integrate any more scrap assets or any insight there?

Mario Longhi

Strategy doesn't change, Bob. We've been focusing on all three dimensions of our business, which is raw materials, mills, and downstream. We keep looking at it all.

Bob Richard – Longbow Research

Okay, thanks again, and great quarter.

Mario Longhi

Thank you very much.

Barbara Smith

Thanks Bob.

Operator

Your next question comes from Mark Parr from KeyBanc Capital Markets. Please go ahead.

Mark Parr – KeyBanc Capital Markets

Thanks very much. Good afternoon.

Mario Longhi

How are you doing, Mark?

Barbara Smith

Hey, Mark.

Mark Parr – KeyBanc Capital Markets

I'm doing all right. It's a nice sunny day in Cleveland. I hope the Florida weather is treating you well.

Mario Longhi

It normally does.

Mark Parr – KeyBanc Capital Markets

Yes. I had a couple of questions. First of all, Mario, I think you had increased your synergy expectations on Chaparral. I was just wondering if you could just give us in general a qualitative update on how that integration is proceeding and where you think we are in the process and what do you see as far as the structural business' outlook over the next six months or so?

Mario Longhi

Well, first, the integration couldn't be going any better. We're really – this is one of the things that we're really proud, as we continue to solidify our views on how integrations should occur. I think we have achieved a condition net core capability. That is very pleasing to see. It is a two-way street. We've benefited from knowledge that the new organizations have brought to us. They have benefited from what we've been able to provide them. On the people side of the cultural fit has been pretty incredible. It's very, very rewarding. Matter of fact, we do have executives now that have taken new positions in the organization that came from new organizations. I think it's been very, very good.

We did have a set of identified projects when we began that led to the belief that around $50 million, $55 million was the synergy that could be acquired, and we had several projects that we are working on. So along the way, we were able to materialize the value of addressing some opportunities appropriately that doubled that number to a very large degree and we're very happy to see that. We are about one quarter or a little more to completely close projects that we had identified. So there may be a little more opportunity that may come about, and – but in general, I think we are more than pleased with what the organization was able to deliver from a synergy standpoint.

Your last question on the outlook, I mean we remain pretty robustly positioned with orders on that particular business. We're very happy with the conditions, given everything that's going on in the market and the economy. That particular arena has remained pretty robust. We still see a lot of manufacturing investment going on, still see in the industry in general, opportunities that are very, very solid. As you know, some of those folks are not – they are generating enough cash that they can carry on with their projects, so we're happy with what we're seeing, Mark.

Mark Parr – KeyBanc Capital Markets

Okay. All right. I had an accounting question, Barbara, if I could ask about the amortization of intangibles. I'm just wondering are there any shorter-term intangibles in there that could roll off in 2009 or 2010 that could bring that number down from $100 million annualized run rate.

Barbara Smith

Nothing material.

Mark Parr – KeyBanc Capital Markets

Okay. Lastly, one last question, Mario, I know you had mentioned that concrete was making some inroads versus asphalt. I mean is there any order of magnitude, is there any more color you can share on that in terms of what you're seeing, in terms of, you know, markets where you're participating and changes in market share?

Mario Longhi

Well, infrastructure is where we see it the most. If you look at the amount of increase that we're receiving where they have shifted a more intense request for us to quote concrete, pavement of roads and things like that rather than using asphalt, it was, it was enough to call our attention to what is going on. So at this point, we're seeing that there is, there is attention being paid to the dynamics and fundamentals that have driven decisions, and if things remain as they are, they may materialize in an interesting way.

Mark Parr – KeyBanc Capital Markets

Okay. Terrific. Thanks for all that color. Congratulations on fantastic results. Great work.

Mario Longhi

Thanks, Mark. Appreciate it.

Barbara Smith

Mark, before you sign off before you sign off, if you go to our filings, we've put an amortization schedule in there for '09 and '10. It is an accelerated amortization schedule, so, for example, this year it will be around 100 and next year it will drop down to about 65.

Mark Parr – KeyBanc Capital Markets

Okay.

Barbara Smith

All right.

Mark Parr – KeyBanc Capital Markets

All right. So those are basically noncash charges. I mean so your true underlying earnings power is being masked by all these intangibles right now, is that fair?

Barbara Smith

Yes.

Mark Parr – KeyBanc Capital Markets

Okay, thanks. That's what I was trying to get at. Thank you.

Operator

Your next question comes from Michael Willemse from CIBC World Markets. Please go ahead.

Michael Willemse – CIBC World Markets

Thank you, good afternoon. Mario, just wondering if you could just give us a sense on, if you could rank your products, which ones would be best positioned to least positioned right now.

Mario Longhi

Well, I think that I wouldn't be exaggerating if I felt pretty good about where we're positioned in all those main lines at this point. I would make a caveat on our smaller volume business, which is our participation in Gallatin, that is where we still feel a little bit of volatility inflect. But on the other markets, I think we're pretty good at this point.

Michael Willemse – CIBC World Markets

Okay; and going back to your backlog, how far out does your backlog extend to?

Mario Longhi

It is still depending on the lines between four and six months, Mike.

Michael Willemse – CIBC World Markets

And is that for your fabricated backlog as well?

Mario Longhi

Yes.

Michael Willemse – CIBC World Markets

Okay.

Mario Longhi

Mostly for the downstream.

Michael Willemse – CIBC World Markets

Okay; and that hasn't changed much since the beginning of the year?

Mario Longhi

No, and if you include the areas where we have placing that can go out almost a year.

Michael Willemse – CIBC World Markets

Okay, okay. And are you still putting in price increases on new orders in the fabricated business?

Mario Longhi

Yes, we are.

Michael Willemse – CIBC World Markets

Okay. And then I might have missed this earlier. Did you give a sense of I guess what your export tons shipments would likely be in the second half of the year and how that compares to the first half of the year?

Mario Longhi

Yes, I mean I briefly mentioned we shipped about 80,000 tons first quarter, about 115,000 second, and I think we – by the end of the year the mark of about half million tons.

Michael Willemse – CIBC World Markets

Half million in total for the year?

Mario Longhi

Yes, in total for the year.

Michael Willemse – CIBC World Markets

Okay, okay. All right. Thank you very much.

Mario Longhi

You're welcome.

Barbara Smith

Thanks, Mike.

Operator

Your next question comes from Tina Prentiss [ph] from UBS Investment Bank.

Tina Prentiss – UBS

Thanks for the great detail. Just had a few questions on the CapEx numbers, you're a little behind your run rate expectation for full year. Can you remind us if that is because of Jacksonville, maybe you'll play catch up, so you're still sticking to CapEx, is that right?

Mario Longhi

Well, we were a little bit catching up in there, but the reality is that different than what we perceive to be opportunities at the very early stages of this year, Tina, as we continue to integrate our new businesses, we begin to see that there were some really interesting approaches in rebalancing where what was made throughout the locations, and that gave us an interesting opportunity to reconsider some of the, some of the investments that we had thought about early on. So I think that we've just been doing a better job at using the assets as we learn more about the two opportunities we have. Obviously this for the coming year will come back up and – but it will go into a few other directions as opportunities arise. We should be able to end this year, to be comfortable, give you a comfortable number; we might end it up with about $150 million.

Tina Prentiss – UBS

Okay, so down from $175 million you talked about on the Q1 call?

Mario Longhi

Yes.

Tina Prentiss – UBS

Okay, got you. Maybe going forward, any thoughts, run rate, CapEx could maybe be a little lower given the use of existing assets, is that what you're saying?

Mario Longhi

No, I don't think so. We're reconsidering some other, we're shifting where it is going to go, but I would believe that the $200 million, $200-plus million is still the figure to consider.

Tina Prentiss – UBS

Okay, thank you. I'm stuck on the scrap price and I know you discussed it a little bit. But when you talk about a $383 realized scrap price in the quarter, can you help me understand how that compares to, if you look at the Purchasing Magazine pricing, for example, for number one heavy metals, we're looking at an average for the quarter of about $500. Can you tell us if there's anything I am missing there in terms of when you buy your scrap or how to think about it?

Barbara Smith

Well, I'll jump in and Mario can add his remarks as well. There has been a divergent in prime grades versus the obsolete grades and that was sort of magnified in the second quarter, and some of it does relate to our network of collection yards and our relationships and because we have captive scrap, we don't have to take the high spot prices necessarily and we've worked really, really hard to maximize that captive scrap position.

Mario Longhi

And prime has been the leading guidance for some of the references, which does not necessarily represent what we use.

Tina Prentiss – UBS

Not even number one heavy – which I think is one of the lower end grades?

Mario Longhi

Yes, that's true, but, on the balance, I don't think we'll see anywhere near the magnitude of impact as the ones that do depend on prime.

Tina Prentiss – UBS

Sure.

Barbara Smith

You have a lot of difference in your scrap prices, depending on the location and the regional supply.

Tina Prentiss – UBS

Okay. Just a bigger increase than what we've seen historically from your numbers, but is there anything to derive from the accounting method of when you buy scrap and how it's priced that way maybe?

Mario Longhi

No.

Barbara Smith

No.

Tina Prentiss – UBS

Not FIFO accounting, doesn't factor in at all?

Mario Longhi

No.

Tina Prentiss – UBS

Okay, thank you.

Mario Longhi

Welcome.

Operator

(Operator instructions) Your next question comes from Charles Bradford from Bradford Research. Please go ahead.

Charles Bradford – Bradford Research

Hi, good afternoon.

Mario Longhi

How are you doing?

Barbara Smith

Hi, Charles.

Charles Bradford – Bradford Research

Hi. Just a question about this Wall Street Journal piece I guess it was a couple weeks ago about the highway trust fund. The implication pretty clearly is, and I've been hearing this actually for a few months, that the trust fund was running low, that because people are driving less, they are not generating as much tax revenue. Do you hear – first of all, what do you hear as opposed to what the "Wall Street Journal" happens to say? Is there a problem?

Mario Longhi

Yes, what was mentioned was a true statement, Charles, but I think there is an overriding principle here that in spite of the fact that some of those processes may generate less revenue to support those investments, the full reality remains unchanged, the decay and deterioration of the current infrastructure is more severe than people have portrayed and the more I talk to officials, they are looking hard at what are they going to do to maybe shift some funds to make sure that this doesn't turn out into a pretty bad affair. What do we need, another bridge falling down? They are very aware of that, so I think if you look mid- to long-term, this is a program that I don't see fading.

Charles Bradford – Bradford Research

Well, each of the presidential candidates have clearly said they want to emphasize infrastructure building. The question is where are they going to get the money? I don't think they are going to be raising the gasoline tax any time soon.

Mario Longhi

Your guess as to how they are going to diverge funds is as good as mine, but I tell you that this is something that even from an economic standpoint is one of the things that boosts recovery sooner than some other measures.

Charles Bradford – Bradford Research

Thank you.

Mario Longhi

Welcome.

Barbara Smith

Thanks, Charles.

Operator

Mr. Longhi, there are no further questions at this time. Please continue.

Mario Longhi

I just want to thank everyone for the interest and participating on the call and we certainly look forward to meeting with you again a quarter from now. All the best to everyone. Thanks.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.

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