Steel Dynamics, Inc. (STLD) Q1 2011 Earnings Report, Transcript and Summary

Keith Busse - Co-Founder, Executive Chairman, Chief Executive Officer, Chief Executive Officer of Iron Dynamics Inc, President of Iron Dynamics Inc and Director of Iron Dynamics Inc Richard Teets - Co-Founder, Executive Vice President for Steelmaking, Executive Director, President of Steel Operations and Chief Operating Officer of Steel Operations Gary Heasley - Executive Vice President of Business Development and President of New Millennium Building Systems Mark Millett - Co-Founder, President, Chief Operating Officer, Executive Vice President for Metals Recycling & Ferrous Resources, Executive Director, President of OmniSource Corporation, Chief Operating Officer of OmniSource Corporation and Director of Iron Dynamics Theresa Wagler - Chief Financial Officer and Executive Vice President Fred Warner - Manager of Investor Relations

David Olkovetsky Mark Parr - KeyBanc Capital Markets Inc. David Katz - JP Morgan Chase & Co Charles Bradford - Bradford Research Michelle Applebaum - Michelle Applebaum Research Sal Tharani - Goldman Sachs Group Inc. Michael Gambardella - JP Morgan Chase & Co

Good day, everyone, and welcome to today's Steel Dynamics First Quarter 2011 Earnings Conference Call. [Operator Instructions] Joining us today are Keith Busse, Chairman and Chief Executive Officer; Mark Millet, President and Chief Operating Officer of Steel Dynamics Inc.; Richard Teets, Executive Vice President of Steel Dynamics, Inc. and President and Chief Operating Officer of Steel Operations; Gary Heasley, Executive Vice President of Steel Dynamics, Inc. and President of New Millennium Building Systems; Theresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics, Inc.; and Fred Warner, Investor Relations Manager. For opening remarks, I will now turn the call over to Mr. Fred Warner. Please go ahead, sir.

Thank you. Welcome to the Steel Dynamics First Quarter 2011 Conference Call. The call is being webcast live, April 19, 2011, from Fort Wayne, Indiana. Later today, you will be able to replay the call from our website or download the call to listen to a podcast. During today's call, our management will be making some statements that are forward-looking. All statements regarding anticipated future results or expectations are intended to be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements which, by their nature, are predictive and are not statements of historical fact, are often preceded by such words as believe, anticipate, estimate, expect or other conditional words. These statements are not intended as guarantees of future performance. We caution that actual future events and results may differ materially from such forward-looking statements or projections that may be made today. Some factors that could cause actual results to differ include general economic conditions; governmental, monetary and fiscal policy; industrial production levels; changes in market supply and demand for our products; foreign imports; conditions in the credit markets; the price and availability of scrap and other raw materials; equipment performance or failures; or litigation outcomes. You may find additional information concerning a variety of factors and risks that could cause actual results to differ materially from today's forward-looking statements. Refer to sections entitled Forward-Looking Statements and Risk Factors in our most recent annual report on Form 10-K and in our quarterly reports on Form 10-Q, as well as in other reports we file from time to time with the Securities and Exchange Commission. These reports are all publicly available on the SEC website, www.sec.gov, and on our website, www.steeldynamics.com. Before we begin today's discussion, I'd like to mention that our annual meeting is coming up in Fort Wayne a month from today at 9 a.m. on May 19. We do plan a live webcast of the meeting, and more details are available on our website. Now let's start today's discussion with introductory comments from our Chairman and Chief Executive Officer, Keith Busse.

Thank you, Fred. Thank you, Carla. Good morning, ladies and gentlemen. One of the first things I'd like to do is have you join me in congratulating Mark Millett on his new responsibilities as the President and Chief Operating Officer of Steel Dynamics, so congratulations, Mark.

Thank you.

We obviously had a good quarter. At least, I think you'll conclude that we did. A little bit better than the estimate that was out there from the analysts by a few cents a share. A good solid quarter. You can look at it through many different portals, but it's certainly a new benchmark on the long road back that the economy faces. But as you benchmark it against the fourth quarter it was -- our earnings increased by better than 10-fold, which I think is significant in and of itself. We had first quarter net income of $106 million on net sales of $2 billion. And I might point out that as you annualize -- if you annualize $2 billion, you're getting back to somewhere in the vicinity of the 2008 revenue highs that we achieved in that year before the economy tanked. But as you compare it to the first quarter of 2010, it's $41 million better than the $61 million -- $65 million we reported in the first quarter of the previous year. And of course, our net income in the fourth quarter of 2010 was only $8 million or $0.04. As reported, very positive trend in pricing. Pricing was up about $154 and scrap in the quarter increased by $86. Thus, the difference represents the increase in the operating margin quarter-over-quarter or very nearly accounts for it all. OmniSource. It's significant to note that when you analyze ferrous shipments at 1.5 million tons, it's not quite at capacity. I think the company's capacity is well over 7 million tons now, but getting back into an area of normality, if you will, at an annual shipping rate of 6 million tons, which I think really confirms to a large extent what we've been saying about the impact of volume on the bottom line. This was certainly, as we pointed out in the next paragraph, one of Omni's strongest quarters since we acquired Omni in late 2007. So congratulations to the entire Omni team. You all did a terrific job in the first quarter of 2011 and keep up the good work. On a whole, our Steel Operations also achieved very high operating income of $196 million during the quarter or $138 per ton shipped, which was 114% increase in operating income over fourth quarter results. And you can obviously get at that by dividing $196 million by $91 million. That's how you calculate the 114%. And as we noted earlier, Omni was a significant contributor to earnings in this quarter. We also note in the press release that Engineered Bar Products -- well, I should mention the Flat Roll division and Engineered Bar Products continue to operate essentially at full capacity and were significant breadwinners inside the gates of the Steel family, if you will. We are, though, planning to have a 10-day outage at Bar Products in April. And although we make the statement that we do not believe this will meaningfully impact second quarter volumes, it will have some impact on their earnings in the second quarter, because in the month they take that outage they will not spin off, against standard, as positive a variance as they had been averaging the past 3 months. So it will have some impact on the month of April but after that, everything should be working very smoothly again, if not even better. So we're very pleased there. As we noted, there's strength in many of the sectors that we serve. Strength in automotive, transportation, energy, industrial, agricultural, construction equipment, but there's not -- unfortunately all that great momentum has, with regard -- nonresidential construction products of the nonresidential construction market as they remain fairly weak. Although I would call to your attention, on one of the pages where we report volume, that the Structural and Rail division's volume year-over-year increased by 23% and quarter-over-quarter increased by 22%. So we are making some progress and right now, the Structural division has one of the largest backlogs it's had in some time. Nowhere near approaching the backlogs we had in 2008 but certainly marching in the right direction. You'll probably also note, as you look at that page, that the volumes were down at our Flat Roll division somewhat quarter-over-quarter -- They were up quarter-over-quarter, I guess, but down as you compare it to the 3 months ended in 2010. We were impacted slightly this quarter by the weather. And in early February this year, a very bad wind and ice storm came through the upper Midwest and caused some significant damage to our static bar systems, which are under repair as we speak today, yet we are not impacted any longer with volume issues. But initially, when that occurred, certainly it turned out the lights at Butler, and it took us a few days, you might say, to get the lights back on and still be up and running. So we did lose some production in February, which probably impacted the quarter slightly. But wanted to note there will be an outage at Engineered Bar Products in April. As it regards Mesabi Nugget, we talked quite a bit about that in our opening comments on the first page. And I think one of the things that's significant to know is that Nugget has been running better. And in April, keep our fingers crossed, it's -- so far it's running at about a 20,000 ton production and shipping rate, which for most of you that follow it statistically would represent 50% of its capacity or capability. So certainly nice progress, I think, is being made at Nugget today. Iron Dynamics, by the way, continues to perform very well and provides anywhere from 17,000 to 20,000 tons of liquid iron to our steel banking operations in Butler each and every month. And so very smooth running operation that has been in the black for some time and making a very positive contribution to the bottom line. As it regards Fabrication, we might say a few words about that. The operating loss was $3 million, but there were a lot of renovation work that was going on at the acquired facilities. The facilities we acquired from Commercial Metals that might have moved that needle more towards a breakeven had we not been involved in renovating those facilities. There was an impact there, but it certainly -- as we look ahead, we still see some strength out there. We think the economy is still going to move forward throughout the year 2011, 2012 and beyond and I think that the utilization rates from the industry will continue to surge forward. They're not going to get back to 100% tomorrow morning, but they're going to continue to improve, and the drivers there, as I said earlier, are really automotive, transportation, energy, industrial, agriculture and construction equipment. I would note that pricing in the Flat Roll sector has moved off of the $900 level and is in the mid-8s. And I think there's been a lot written about that. That's been talked about. But we should also realize that the margins that we achieved were just being achieved, and we had not yet really achieved margins that will be reflective of a $900 selling value, but we hadn't really seen that yet. So I don't think it's any big surprise that the market has tempered itself a little bit. If they have more future movement in it, but right now it's paused in the mid-8s, and there's good likelihood as the economy continues to grow that, that could move forward somewhat. As it regards scrap, I don't know that anybody has a crystal ball. There's been a lot written about that. Mark will have a few comments because Mark's going to not only continue to -- well, he will continue to report on the Ferrous Resources segment of our business, but certainly welcome him to make a few comments as the new COO of the company. But as it regards scrap, again, there's a variety of opinions out there anywhere from 0 to down 40. I suspect the market's going be off somewhat, and it may well be off in the cut grades a little more than it is in the prime grades. But I think it -- for May delivery that is, it's probably too early to make that call. So that really concludes my comments. The company had a, I think, a terrific quarter. It's going to have another solid quarter, and we will define that for you in June as we have been in the habit of doing. So at this point in time, I'd like to turn it over to Mark for his comments and have him report on the Resource segment of our company.

Super. Thanks, Steve, I appreciate that. Relative to OmniSource, despite difficult weather conditions which tended to pressure scrap flow in the quarter, I think our strategy, as implemented by the OmniSource recycling teams, to increase both the retail and industrial scrap flow have shown a lot of success. These initiatives, coupled with continued recovery in the metals sector, resulted in a near-record shipment level for ferrous scrap and a record level for nonferrous scrap. I think when you consider -- I think it is an excellent volume performance when you consider an economy that is far from recovery, and it's a reflection, I do believe, of the advantages of a steel company and a recycle company combining together. The quarter, ferrous shipments increased 23% over Q4 to about 1.5 million metric tons. Further enhancements have been made to several of our shredder operations, along with feeder yard additions to further increase volume capability to assure a secure, consistent scrap supply, not only to our own mills, but also to our other customers. As stated, non-ferrous shipments were very, very strong. Volume gain has been seen in all metals. For aluminum, they remained strong in both volume and pricing, a result of strength in all areas of aluminum consumption, secondary mills or positive pressure with auto build pickup. Extrusion billet mills are running very, very strong and with strong buyers. This extrusion scrap remains in short supply, and aluminum sheet mills were recently busy also. Stainless had a great month. Mill's demand was pretty strong, although the bull market seems to have lost steam little bit. Demand for copper was also good as consumers took advantage of a market dip, particularly midmonth, and bought considerable amount of metal. So volumes flowed extremely well. Collectively, nonferrous shipments increased from 230 million pounds to 287 million pounds, a 20% gain quarter-over-quarter. Great job by the nonferrous teams. The increased volumes and associated with improved margin, particularly in nonferrous, drove an operating profit of $49 million. This was our best quarter since the fall of 2008 and well above the $9 million operating profit we experienced last quarter. In the nonferrous arena, we did recently announce a partnership with LaFarga Group. It's a copper-metals company located near Barcelona, Spain. We will hold 55% ownership, and they 45%. And our intent is to construct the semi-finished copper rod mill having an annualized capacity of about 180 million pounds of copper rod for sale into the electrical cable industry. Subject to environmental permitting, construction of the $40 million facility should commence by this summer. The technology developed by LaFarga, and also Italian equipment supplier Continuous Perpertsy [ph], allows the refinement of number 2 copper scrap into electrical-grade metal, which is subsequently continuously cast and rolled into high-quality rod suitable for drawing down to very, very fine electrical wire. Some 20-plus plants are operating worldwide, utilizing this equipment and their refinement process, but currently none operate in the U.S. based on scrap. I think the partnership essentially leverages OmniSource's broad supply base for number 2 copper scrap, providing a dense, green, value-added opportunity by reducing our dependence on foreign markets, particularly China. Today, there are very, very few outlets to number 2 scrap domestically. Most of the kit's exported. As Keith suggested, Iron Dynamics continues to operate quite smoothly. It shipped a record 55,000 metric tons of liquid pig iron, in addition to 6,000 metric tons of HBI to the Butler sheet mill. The combination of improving cost structure and a rise in pig iron market allowed them to make an operating profit of $11.4 million for the quarter. The strong production level at IDI, combined with metrics coming down from Minnesota, has allowed us to be self-sufficient in our iron needs today. At Mesabi Nugget, we resumed continuous operations in January and it's showed considerable improvement since, shipping 36,000 metric tons for the quarter as compared to 18,000 tons in Q4 of last year. Each successive month through the quarter showed improvement, 17,600 metric tons being shipped in March. The recent installation of redundant conveying systems has provided much greater reliability. At 90% feed-on time to the rotary-hearth furnace was achieved during the first 10 days of April with uninterrupted feed recurring for 6 of those days. So uptime of the equipment is dramatically improved. Further equipment improvements are planned to be installed in July. In the meantime, the team is focused on process improvements to bring the feed rate up to capacity. For the quarter, start-up losses negatively impacted our pretax earnings by $11 million. I think the second quarter should show improvement, given improved volumes somewhat offset a little with our higher cost break [ph] costs, but perhaps a $9 million loss for the quarter. And from an operational perspective, we would hope to break even on a monthly basis in the second half of this year. Regarding the southern mining, we are continuing the permitting process. It's slow but ongoing, and we're having constructive conversation with the agencies and also the tribal organizations up there. Thank you. Dick?

Thank you, Mark, and good morning, everyone. I'd like to add a few additional, brief comments to what's been expressed by Keith and in the press release about each of the Steel operations. Our Flat Roll division in Butler and Jeffersonville has earned their best ranking ever for quality, service and on-time delivery from an independent industry survey. Congratulations to the entire Flat Roll team for the focus applied to these metrics. In the first quarter of the year, the Butler plant operated basically full capacity, achieving their third-highest production quarter in the history, in spite of the fact that, as Keith stated, they had to curtail metal production at the beginning of February and on a limited basis throughout the balance of the quarter. Also, the quarter was our second-best shipping quarter ever. Again, congratulations for a fabulous job done by all in the division. We're talking about flat products that we added to Techs, operated during the quarter at 85% to 90% capacity. This slightly lower operating range is due to the historical concentration in the construction industry by those lines. Our shipments were negatively impacted, slightly, at the end of the quarter, by truck availability, and this has been noticed at other divisions also. At the Structural and Rail division, our focus in rail production, welding and shipments has continued to be their priority. They achieved over 30,000 tons of rail shipments in the quarter, continued to expand their list of satisfied customers. Also enlarged, they had the best wide-flange production and shipping months since December of 2008. This is still far below historical numbers, but continuing to focus our product availability and service has been their mission and appears to be paying dividends. At Pittsboro, the sales order rate continues to be basically incredible. The current lead time for most as-rolled bars is December and the 2012 order book has been opened. The strength of the backlog has allowed for improved scheduling, and as a result was the best first quarter production and the second-best shipping quarter ever. We are currently in our annual maintenance outage in Pittsboro and will aim to minimize the impact on our production and shipments. Some of the projects included a major reheat furnace rebuild, a roughing mill gearbox replacement and de-bottlenecking of the bundling area. The Roanoke Bar division, like the Structural and Rail division, continues to be hampered by the lack of construction activities. They operated at a capacity utilization rate of approximately 90% in both the melting and rolling departments. They took their annual maintenance shutdown at the end of March and through the beginning of April and had no increase due to SDI employees or contractors. Congratulations to Roanoke team for these efforts and the resulting performance. In Huntington, Steel of West Virginia's core transportation markets, including truck, trailer and port-truck industries, continue to improve. Total tons shipped increased quarter-over-quarter by 16.7%. This was made possible by the team's efforts and capital improvements. Melt shop production in the quarter increased by 6% over the 2010 annual tons per hour rate, as did production in both rolling mills by at least that amount, a great job by all. And lastly, I'd like to point out that on April 11, we recognized the fifth anniversary of the addition of Roanoke and Steel of West Virginia to the SDI family and continue to be excited about their accomplishments and the possibilities at both divisions.

Before we get to Gary, Dick, I might note that Steel of West Virginia's operating rate has dramatically increased. It was up 30-some percent, operating very well with full capacity. And as you commented on Pittsboro, under the guidance of, early on, Glenn Pushis, and certainly the management team under Barry Schneider -- you all might remember that in the early days of Qualitech, that mill struggled to achieve 20% of its capacity and has now achieved 125% of its capacity. An extraordinary achievement by that team, so great job. Gary?

Thanks, Keith. For the first quarter, production of joist was up 58% over the first quarter of 2010. Deck was up 68% from the first quarter of 2010, reflecting a slight improvement in demand and New Millennium's increased market share. Doweling [ph] values also improved, dealing better spreads over first quarter of '10. Spreads tightened a bit from Q4 of 2010 and steel cost increases outpaced price increases during the first quarter. Our joist backlog was up 24% and our deck backlog is up 12% from the end of 2010, and March was our best month for order inquiry since 2008. Given the scope of the reconstruction that we've been doing, and then the sort of the reconfigurations of the company and the industry, we continue to look at operating results for the 3 operating units separate from some of the construction costs. In the fourth quarter, the 3 operating units generated a positive operating income, given that there's tightened spreads in the first quarter. The 3 operating units generated a $23,000 operating loss. Not a significant loss, but nonetheless you want to turn those numbers back to black. Through the quarter we completed dismantling 4 former CMC joint facilities in 2 months -- 2 New Millennium facilities. That was done in March. Those costs are now behind us and should help with earnings going forward. We continue to ramp up the joist plant in Juarez, taking advantage of its aggressive cost structure and its good location in terms of servicing the West and Southwest markets. We have small crews in place in the plants we acquired in Arkansas and Nevada, and those plants are being reconfigured with equipment that we relocated from the 6 plants we dismantled in the first quarter, and then Arkansas and Nevada will then re-start as demand grows. And as we further penetrate the Western and Southwestern markets we could not particularly serve. As of March 31, then, we have eliminated about 230,000 tons of joist capacity, with about 95,000 tons of capacity offline, which, as I said, we'll restart as demand grows as we further penetrate those 2 markets. As a result of the elimination of this capacity and the slight improvement in demand, industry capacity is now more aligned with demand, and we think we're positioned very well to increase that capacity as demand grows, and the whole group is now in a much better positioned than it was prior to the economic crisis. So things are looking much better, Keith, and we'll continue to move forward.

Thank you. Theresa?

Thank you. Good morning, everyone. During the first quarter, both our gross margin percentage and our operating income margin increased 6% in comparison to the sequential quarter, and also improved off the very strong quarter of first quarter of 2010 as well. The overall increase primarily resulted from both increased volumes and metal spreads for our Steel Operations and our Mills Recycling operation. The financial performance of our nonferrous operations were impacted by a change in our non-cash unrealized mark-to-market adjustment. In the first quarter, we recognized an unrealized gain of $9.5 million or about $0.03 per share as compared to the fourth quarter of last year, which we had a $6.9 million loss. Cash flows from operations were substantially used for working capital purposes during both the fourth quarter of 2010 and the first quarter of 2011. Other operating activity increased with better demand. We believe our working capital position is currently sufficient and we don't expect a meaningful use of funds in the near-term. During the first quarter, our cash reserves decreased $26 million as working capital increased $240 million, most significantly in accounts receivable as both volumes and products pricing rose during the quarter. Most notably, these increases were at the Flat Roll division, because of their increased operational activity, and at OmniSource. The quality of our receivables remains very strong in terms of days outstanding. And as in terms of our accounts aging, all accounts are actually under 60 days, which I'm not sure that we've been at that point before. Inventory increases of $72 million were primarily related to increased costs at our ferrous materials versus meaningful volume increases, and that was in our Steel Operations as well. Availability on our revolver was $908 million at the end of March and our liquidity remained very strong at $1.1 billion. We remain well within compliance of our financial covenant. Our ratio of total debt to trailing EBITDA improved during the quarter to a current level of 3.4x. Our first-lien leverage improved to 0.02x and our interest coverage is at 4.1x. During the first quarter, our capital expenditures totaled $19 million and depreciation was $44 million. Our current outlook regarding capital expenditures for the remainder of the year is in the range of $155 million to $180 million. These investments are currently expected to be made fairly evenly throughout the year, and depreciation for 2011 is expected to be in the range of $200 million. Gross interest expense was $43.7 million in the quarter, with an effective interest rate of 7.3%. This is a slight decrease over gross interest in the fourth quarter of 2010, and was related to a prepayment of just over $7 million of a municipal bond, and also due to conversion of a portion of Mesabi Nugget's debt from debt to equity by the partners. At March 31, we had 218.3 million shares of common stock outstanding. Additionally, the converts remain outstanding at 16.4 million shares and we had 6.7 million shares of outstanding stock options. Our current estimates for the second quarter dilutive share count would be between 236.5 million and 237 million shares. Finally, I know there are several of you that like to track the detail of our Flat Roll shipments, so for the first quarter, the Flat Roll division shipped 314,000 tons of hot-rolled coils, 85,000 tons of P&L [ph], 48,000 tons of cold rolls, 95,000 tons of hot-rolled galvanized, 52,000 tons of cold-rolled galvanized, 88,000 tons of painted product and finally, 28,000 tons of Galvalume. Keith?

Thank you, Theresa. Carla, I think it's time to open up the airways to the Q&A piece of the presentation.

[Operator Instructions] We'll take our first question from Michelle Applebaum with Steel Market Intelligence.

Second thing I wanted to ask about, the flat-rolled mill, and you might say, "What flat-rolled mill?" but the flat-rolled mill you were going to talk about at your board meeting in February and I want to see where that stands. Anything to say on that?

Well, I think the engineering phase is -- we've pretty much worked our way through it. I think the team's done a very good job of analyzing market opportunities and reporting on any potential impact on current businesses that we operate, which I think we've concluded the impact would be de minimis. I think the larger question probably revolves around the healing economy and timing. I think, certainly, there's a good opportunity and we will be discussing it at the next board meeting. I can't guarantee anybody that we'll have anything more to report, but then again we might. But I think the team is very positively predisposed about moving forward with the growth plans at Steel Dynamics, and I think one of the things that I read about a lot recently over the air was the steel sector is being beat up a little bit because it wasn't perceived that it could or would grow. Certainly that's not the case at Steel Dynamics and our plans. We are a growth company. Our plans are to grow. We think there's a good opportunity there, certainly in an economy that gains a head of steam, so there may be more to report on later, Michelle, but nothing new right now.

Okay on that. Would you contemplate doing this on a joint-venture basis for obvious risk-sharing purposes? Is that something you're looking at actively?

It's not something we're looking at actively. I would never say that, that would be out of the question and consideration, but it is not something we're currently pursuing.

And remind me again what you were saying in terms of tonnage.

Well, the mill would probably have a capability of about 1.7 million. It would certainly have a broader array or product portfolio than Butler. We would not focus as much on ultra-light-gauge material, and would have more of a focus on heavy, wall-thickness material that might be of great value to the pipe and tube-making community, would be one of the target markets. But with the application of active de-gassing and introduction of more iron and a tandem mill, certainly it opens up a whole, broad array of market opportunities to the company that we currently don't have an opportunity to look at or quote today. So I think in terms of the value-added chain, it gives the company a very broad opportunity to quote markets today and value added -- and again, that we can't quote. So a lot of positives about this mill. It would certainly have the potential of putting us in the light plate business, but not the heavy plate business. But again, our focus would be on downstream, and our focus would be on rates like x60, x70, and think Dick and his team are even looking at perhaps x80. So we'd have a pretty broad array of product capability.

Okay, that sounds great. I have about 3 more but I'll go back into the queue.

Thank you.

Moving on, we'll take a question from Michael Gambardella with JPMorgan. Michael Gambardella - JP Morgan Chase & Co: Keith, just have a question on your comments on non-res construction, and also your comment on the rising backlog on the structural beam business. If you think about the non-res part of your business, how much is it off, say today versus 2005 to 2007 period? Would you say it's down more than 50%?

I would say it is, Michael, down more than 50%. Some of that backlog we have that's certainly a brighter position to be in than where we were is related to our successes in rail and welded rail. Probably 40% of our backlog today, somewhere in that neighborhood, 35% to 40% is dedicated to rail. And certainly, we're introducing other products such as large channels and things like that. But wide-flange is still off markedly, although improving. And when your backlog is that low, to be up 20% is not a great feat. I mean if you have a 40,000 ton backlog, 20% is 8,000 tons or 48 by examples. So. therefore, the backlogs are up. The good news is they are up. Momentum is okay, but I think from everything we see here read, it would still suggest that 2011 is going to be a tough year in non-res, maybe improving into 2012 with certainly a lot better future forecasting -- however solid the forecasting, that remains a question mark. But by the time you get to '13, '14 -- the years '13 and '14, a lot better picture emerges for a wide variety of reasons but right now, the non-res market is still fairly weak. But I would -- I'm pleased to report that Columbia City is making money at these ultra -low operating rates, and that is with a full allocation of costs such as interest load, depreciation, things like that. It is a fully loaded cost structure and they're in the black, and that's a very positive thing. Michael Gambardella - JP Morgan Chase & Co: Would you say your non-res-related businesses span more than 50% from that '05 to '07 period?

I would say it is. Michael Gambardella - JP Morgan Chase & Co: I mean, I was talking to a big distributor of non-res steels recently. He was saying that they were looking at it down 70% to 75% actually from that '05 to '07. So as long as -- like you're saying, as long as things aren't getting worse and actually improving a little bit off of the base, it's pretty positive. One last question, can you give us kind of a...

I would tell you that Dick Teets shook his head. I looked at him. He believes he's down more than -- whether it's 70% or not, that may be starting to stretch it at 75%, certainly down 60%, 65%. Down 2/3. Michael Gambardella - JP Morgan Chase & Co: Just one last question. Can you just give us, kind, of your feelings on imported material, what you're looking at for imports are at going forward?

Well, as it relates to construction products, specifically beams, it's not been a major factor in a rather depressed market. I don't know the global opportunities are much better so everybody's probably in the same boat, if you will, and most of the wide-flange beams are out in the world remain electrically. And given the cost of raw materials here and abroad with the conversion costs, it's certainly not in other producers' best interests or the best interest of their bottom line to bring those goods here, right? They clearly stood -- dynamics in a new core of low-cost global producers of wide-flange beams. I believe they are -- be very tough. So we're not seeing a lot of activity from abroad in wide-flange product at this point in time. Obviously imports have been up a little bit recently in flat-roll and other arenas, probably due to the weakness of the dollar and better economic opportunities that may be here as opposed to, any given point in time, elsewhere in the global universe. But they're not up that dramatically. We're not -- I wouldn't tell you, today, we're being radically threatened by imports, but all of us keep a very diligent eye on those initiatives every day of the week. Michael Gambardella - JP Morgan Chase & Co: Thanks a lot, Keith.

[Operator Instructions] And now we'll hear from Sal Tharani with Goldman Sachs.

Thank you. I have a question on the copper rod mill, Mark. We heard 80 million pounds. Would you be a buyer of scrap for that? Or do you collect that much copper scrap that you can source it internally?

We have the ability to provide that through our own flow currently. However, we would anticipate making moves and expanding our volumes there.

But you do collect more than -- around that kind of copper scrap at the moment?

Yes.

Keith, have you seen any impact or any initial impact on you from customers about the Sparrows Point opening? Are the markets selling it or offering the -- and are they cutting any prices?

Well, I've heard that they're looking at mid-June delivery on the Sparrows, potentially, is what I hear. I think it's going to have relatively little impact directly on the second quarter, but if that reality is reached in that timeframe, it may be a more significant note in the second quarter, whatever that might be. But if the economy continues to move forward, I don't want to say it's going to go unnoticed, but it may not be as much of a factor and a ramp up as some people are anticipating.

And last question. How has the order flow been if you go month-over-month? I mean, the service center shipment data shows that January was extremely good, February a little down and then March data came out today, again up. Have you been following the same pattern? And how does April shaping up so far?

Well the -- historically, usually the third month of the quarter is always seemingly our strongest shipping month, so we would have followed that pattern, but order entry has not been as frenzied as it was. Backlogs have remained about the same, out 4 or 5 weeks. We don't generally let them -- we either attempt to control it or the market flow rates slows and it controls itself. But the order entry rate has not been bad. We're not at all worried that we're not going to build. I think we're going to be able to operate, from a Flat Roll perspective, at capacity through the quarter. We're not into June yet. Having said that, I guess the world could change but I don't see -- especially if we could put some of the interruptions of flow of materials from Japan behind us and continue to help our economy surge forward, we may not see a very big impact to the second quarter. But right now we're anticipating that we're going to get through. Based on rate of order entry we see, we're going to get through the second quarter without any hiccups on Flat Roll. I think volumes at our Structure division continue to slightly improve and, therefore, they shouldn't operate in any lesser of a rate in the second quarter, perhaps even stronger rate in the second quarter. Engineered Bar, our SBQ division. Shipments will be off slightly and, like I said, their earnings might be off slightly due to the outage but not significantly. So there might be a small volume decline there related to their outage only. As you heard Dick already testifying, we're clear out into December if you let everybody place those orders. We tend to control that, too, but we put them into queue, if you will, out that far. Price yet to be determined, obviously. Still, West Virginia is very strong. Backlogs had approved at Roanoke and continue to remain in about the same operating arena as they have been for many, many months. So overall, probably not a lot of volumetric change in Q2 is anticipated.

And now we'll go to KeyBanc Capital Markets' Mark Parr.

Thanks very much. One thing, Keith, I had a question, or Mark, the outage you're taking at Pittsboro is -- could you give a little more color on that? And any -- given the really strong backlog momentum -- I know even Timken has recently announced a capacity upgrade to its steel operations. Are you looking to add more capacity out of Pittsboro? Or, I mean, what are you trying to get with this outage?

The outage is driven by maintenance requirements. It's our annual outage. As I said, some of the things that we're probably -- the melt shop is already done and it's started back up and we're building inventory at Boons [ph], which was actually a little bit of an issue in the first quarter because we were running tight hand-to-mouth, and that didn't give them as much flexibility in scheduling the mill as they would like. From a rolling perspective we had a cracked year in number –- in the roughing mill. And our expansion of the 2 extra stands that are going in as we speak -- one of the gearboxes was an identical gear set with same ratios and so it was an opportune time to make the switch out, and that'll delay slightly the opportunity to utilize the expanded -- rolling those stands. But it was a requirement for maintenance purposes. And we also had some brick work that was worse than we had expected. Once we got in and the furnace cooled off, the reheat furnace, and so that's what we're currently finishing up. I would tell you that, as I mentioned, we are, from a capital perspective, improving the throughput at the rolling mill by de-bottlenecking in the bundling area, so some improvements going on there. And we continue to look at other capital projects both during the outage and in the future to increase throughput, but we're going to try to minimize and make some pickups through the second quarter and onward, based on what we've accomplished in this maintenance outage.

Mark, Barry and his team, as I dubbed earlier, has done a very good job on an annualized basis: 600,000, 625,000 tons of capability at that mill now, and they should be running a little better with these improvements. I think the ultimate goal is to get up over 700,000 tons. How fast can we get there is anybody's guess.

Okay. I appreciate that. I had another question on the Flat Roll business. Was looking at the MSCI data from March that came out today, looks like inventory levels year-to-date -- kind of looking at January, February March, there's very little change. Industry, at least the service center industry continues to do, at least on the surface, what looks like an excellent job of managing inventories and relative to shipments. And Keith, I was just curious, and maybe, Dick, you may have some comments on this. You think the Flat Roll market in the U.S. right now is running pretty flat out? I mean, are the service center is really doing that good of a job of controlling inventories? Or is it just hard to find incremental tons to put on the shelf, given the current capacity constraints in the U.S. market?

Well, Mark, there's some capacity still offline that hasn't returned, so flat-out is kind of a tough thing to get your arms around for the capacity that's out there. I can't speak for everyone. We're certainly running at capacity there. The news about the service center inventory is actually good news. They're doing a good job of managing those inventories which, I think, it bodes well for a continuing positive rate of steady order entry. The pauses we see are sometimes related to, "Oops, what's going to happen to scrap?" If it's going to backup at all, you get into these wait-and-see things that tend not to last all too long, and then you're back with your pencil in hand writing orders. So we're not at all alarmed about the rate of order entry. As I said, expect to get through the second quarter at capacity.

Okay. Thanks for that color.

And now we'll open the floor up to Dave Katz with JPMorgan. David Katz - JP Morgan Chase & Co: Coming back to your comment on pricing and what you were just talking about with capacity. With some capacity still offline and with the expectation that you guys at least will be able to run them through the quarter at capacity, how do you balance that into Y pricing? And has it been moving down a little bit over the last couple of months? And in terms of what you see pricing perhaps doing over the next couple of months.

Well, I think a lot of that was related to where resource cost's going and sometimes people get a little bit ahead of themselves and there are these periods of pause. But I think with scrap remaining in the same vicinity, whether it went up a little bit recently, probably going to go down a little bit recently. There could have been a little pause in buying, but I don't know that any of it's related to concerns about the economy regressing. Maybe some concerns about the amount of supply needed, relative to certain market sectors where there could be an interruption in supply from Japan of electronic component. If you're missing a gizmo or 2 for the dash, the dash doesn't get assembled. If the dash doesn't get assembled, the car doesn't get assembled, so. To watch that Japan has slowed economic activity temporarily, I don't know, but I think that will be short-lived as well, if it's having any impact at all.

And now we'll hear from Brett Levy from Jefferies & Company.

It's actually David Olkovetsky for Brett. You spoke about a 20,000-ton per month operating rate at the Mesabi Nugget, which is obviously substantially better than where it had been last year. Can we extrapolate that into a 200,000 to 250,000-ton shipment rate this year? And how soon do you think until you get to that 500,000-ton capacity?

Well, I don't think you can extrapolate it. It's one piece of good news. It's a data point on the chart and when we report on the second quarter, I hope to be able to tell you that they operated at 20, 20 and 20, or 60, and then you could multiply that by 4 and have a little bit more comfort in 200,000 tons. But right now, it's a little too early to say that.

Yes, I think you should just take it as a huge sort of a confidence boost in the process of the technology and also the team-up there. We do have an outage plan in July for some more equipment modifications, which will hopefully jumpstart the productivity, yet again, midsummer.

I think we'd all feel pretty good if by -- after the equipment modifications and by the fourth quarter we're operating at 3/4 speed. I think that would be a fairly good progress made within a 12-month period.

And then within the Rail segment, you shipped 31,000 tons this quarter, which is the best you've ever done. What are your goals for 2011 in terms of shipments? And can you also speak a little bit about the head-hardening technology and any progress that you're making there?

Well, again, if you multiply 30,000 by 4, 120,000 would be an all-time high. We had on our target between 150,000 and 180,000 at different times we've had our models. A lot of it has to do with the acceptance of our welded-rail products. We just added another crew to rail welding, because we have approved a $70 million expansion for de-bottlenecking the finishing area of the rail that occurs and comes into play when you're cutting shorts, 80-footers and 39-, 40-footers. And so the more welded rail that we are getting accepted the better. The throughput will be on the same number of hours of production that we've allotted. As far as head-hardening, that's one of the missions of the organization over there. But I'd like to point out that our standard rail is being used in a high-speed application that, again, depends on what the ultimate rail owner has in mind for the rail application, whether it'd be a coal line that's being on a grade or through a curved area that is also being used by high-speed application. Then you would have high -- head-hardened requirements. But on minimal-grade requirements and on straight-line client runs, a standard product is more than acceptable. So, we're working on it. We have technologies under review, but we're not banking on a head-hardened product to be a short-term opportunity. We're looking at that from a long-term perspective.

And now we'll go to Charles Bradford with Bradford Research.

I'd like to talk a bit about the SBQ bar market, because my understanding is that, that's mostly -- at least, industry-wide, an automotive market, yet your business is a lot stronger and even the improvement we are hearing about in automotive and especially with the earthquake and all that. Where are you selling most of yours?

Large bars go into transportation here versus -- well, it doesn't have to be an automobile. It could be the class A vehicle universe. But large bars also go into yellow iron, into forgings. We're pretty big, I think, in the forging market.

Chuck, I would tell you that we've had a great reception and expansion of -- across the board. I would say that automotive off-road applications, energy sector -- we really have a very unique and balanced order backlog and we are capitalizing on that.

Can you [Audio Gap] a little bit about the automotive side. I know it's not one of your key businesses, but we keep seeing, day-by-day, an announcement from one producer or another that they're going to slow down production. And that has to have some impacts rolling through the system that maybe somebody else who might have sold auto grade suddenly goes after the service centers, which is typically what's happened in the past. Are you seeing any of that kind of activity yet?

We have not experienced any order cancellation or reduction in targets by our customers. We are attentive to it, but I can tell you that we have not seen that as of yet.

And I think GM and Ford and Chrysler are a little less impacted than some of the transplants, perhaps, are impacted by the Japanese crisis.

And we'll take a follow-up from Mark Parr with KeyBanc Capital Markets.

One thing just as a point of clarification, Keith. I wasn't sure when you were talking about the anticipated profit progression for Mesabi in '11 -- did you say you thought you could reach a breakeven level at some point during the second half? Or were you thinking maybe breakeven was achievable for the entire second half? Could you just state again what you said so I can get a clarification?

I don't think we said anything about, in this call, our breakeven. But I think Mark has said he'd be pleased if later in the year, definition that likely being the fourth quarter, that we could get to a breakeven.

We'd be very disappointed if we didn't, Mark, to be honest, on a monthly basis.

Okay, terrific. Thank you.

And Mark, that would be progressive. I mean, you're going to do better, hopefully, each quarter, but it doesn't mean the fourth quarter necessarily would be a break even. But you might achieve a month or so in there that is, which should be great news. And maybe have a break-even quarters. It's really too far out to tell.

And there are no further questions in the queue. However, I would like to give another final opportunity. [Operator Instructions]

Well, Carla, we thank you, and we thank everyone for your continued interest in the company and its progress. And it really does feel good to have a nice, solid quarter under our belt. Thank you for all of your support. We look forward to speaking with you in the June time frame or July time frame. Thanks. Thanks again.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation.