Jan 27, 2009
Executives
Fred Warner – Manager, IR Keith Busse – Chairman & CEO Dick Teets – President & COO, Steel Operations Mark Millett – President & COO, OmniSource Corporation Gary Heasley – EVP, Strategic Planning and Business Development Theresa Wagler – VP & CFO
Analysts
Charles Bradford – Bradford Research Bob Richard – Longbow Research John Hamidos [ph] Mark Parr – Keybanc Capital Markets Salfarani [ph] – Goldman Sachs Brad Lagie [ph] – Jefferies & Company Bakuni Ten [ph] – Bank of America Securities Timna Tanners – UBS Dave Katz – JP Morgan
Operator
Good day, everyone, and welcome to today's Steel Dynamics Fourth Quarter 2008 Earnings Conference Call. Today's conference is being recorded.
Joining us today are Keith Busse, Chairman and Chief Executive Officer, Richard Teets, President and Chief Operating Officer of Steel Operations, Mark Millett, President and Chief Operating Officer of OmniSource Corporation, Gary Heasley, Executive Vice President, Theresa Wagler, Chief Financial Officer, and Fred Warner, Manager of Investor Relations. For opening remarks, I'll now turn the call over to Mr.
Fred Warner. Please go ahead, sir.
Fred Warner
Welcome to the Steel Dynamics conference call being webcast today, January 27, 2009 from Fort Wayne, Indiana. Note that to listen there are links on our Web site to two separate services.
If you have any trouble with one feed, please try the other. Also a replay of this call can be downloaded as a podcast from our Web site www.steeldynamics.com.
Today's management discussion includes forward-looking statements. We question that actual future results and events may differ materially from statements or projections that are made today.
You may obtain additional information concerning a variety of factors and risks that could cause actual results to differ materially from today's forward-looking statements by referring to reports we file with the Securities and Exchange Commission. Specifically, please refer to those sections in our Form 10-K and 10-Q reports entitled forward-looking statements and risk factors.
These reports can be found on the SEC Web site www.sec.gov and our Web site steeldynamics.com. After our management discussion this morning, we'll open the call for questions from participants who have informed us they wish to ask questions.
Today's call will be limited to one hour. Keith Busse, Steel Dynamics Chairman and Chief Executive Officer will now lead off the discussion.
Keith Busse
Thank you, Fred. Good morning, ladies and gentlemen.
I think I'll probably lead off with the opening statement in the fifth paragraph of our press release which says it's strange to be reporting the best year in the company's history and at the same time the company's worst quarter and we're thankful to have that quarter behind us. That quarter obviously was full of pain and agony.
Most of which was felt in our scrap and scrap processing divisions where substantial losses as you can read in the operating segment data were incurred which would tell you the most of the loss we're reporting was at this point in time in that segment. And as expected I think and much of it was operating in nature when scrap goes from $875 a ton for prime goods down to $175 a ton.
Month-by-month-by-month until it reached its bottom, you could imagine the losses were substantial. And I'm happy to be able to report that we think that the processing division will be back in the black in the first quarter and we'll have an operating profit during the quarter.
So we're pleased about that. I won't go over all the details of the data that's in the press release, but rather just highlight the fact that it was a record year for Steel Dynamics, up about 18% versus $2.38.
Up about 18% from the $2.01 earned in the year 2007. Also, we're doting was cash flow for operating activities was up substantially year-over-year about better than $300 million.
We had – early in the year, I thought we could reach about 6.2 million tons of shipments but obviously with the horrific declines that we and others experienced during this quarter, unprecedented drops, we did not achieve our shipping goals and shipped about 5.6 million tons where we had earlier in the year forecast about 6.2 million tons. During the quarter, we lost $0.45 for those of you who are wondering why not the $0.40 we had indicated we'd be at.
We had some additional losses in other pockets of the company that were we had not contemplated probably one of the more significant ones was inventory write-downs in the nonferrous arena, again contributing to the $118 million operating loss that we had in the resource segment of our business. I think also worth noting would be the fact that our debt was reduced by $226 million in the fourth quarter, leaving us over $500 million of unborrowed revolver.
From a forecasting perspective, we've tried to be cautious – as cautious as one can be and in reading the other announcements this morning, no one has good visibility going forward since our backlogs are not that extended. But we should return to profitability in our best guess at this time is that we would achieve somewhere between $0.05 and $0.15 in diluted earnings, and as we said, we would provide further guidance if needed as visibility improves and that guidance would likely come in the March time frame.
The other statement I think most people probably are interested in is that we continue to believe that earnings for the full year 2009 could underscore under somewhat improved circumstances be comparable to those achieved in 2008. What are those assumptions?
I think that's what everybody would like to know and they're not very good in the first quarter. The assumptions is that we will run our flat rolled divisions at about 60% in the first quarter that are having reached bottom in the November, December time frame and showing some signs of improvement.
We booked about 20,000 tons a week in orders during the month of – months of October and November hardly enough to sustain profitable operating rates in a declining environment from a pricing perspective. But the bottom was reached I do believe in the December time frame or late November time frame in order entry in December was roughly 30,000 tons a week and has remained at that level going into the fourth quarter early on.
Now that's not real exciting, but it is, it is probably about a 60% operating rate from our perspective or somewhere in that area, 55% to 60% thus the forecast that we would continue to operate at that level in the first quarter. We assumed about an 80% operating rate in the second quarter with destocking having bottomed out, if you will, and some of that's based on the fact that the economy is we think still operating somewhere between 2/3 speed and 70% speed.
One of the large indicators is automotive units predict – predicted to be built, that's still operating at about 70%, not good news, but not horrible news. The housing starts are obviously down substantially which does impact flat rolled steel as well.
But generally speaking, as a spot player, we think given our cost structure that we can perform as well as anyone in this environment and we believe our operating activities will, at the flat roll division anyway go into the 80s as the year progresses eventually reach 90% as we only have one flat roll mill to feed. Different set of assumptions though for heavy structural sections.
That market remained in pretty good shape through October and November and is now reaching its bottom as we speak in the December, January, perhaps even February time frame. Substantial destocking going on in that arena and one has to consider when we talk about operating rates that we have a new mill that will not operate anywhere near capacity in this kind of economic climate, thus our capability at this point in time although in time it may be two million tons of production from structural perspective is probably at best, 1.5 million tons today as we continue our learning curve and operating the second mill.
Thus, since our – the order entry rate, shipping rate is down around 50,000 tons. One could conclude that we're operating at about 33% of our capability and not forecasting that's going to improve all that substantially, but it will improve we think as the year goes along, structure steel especially could benefit from the stimulus package later in the year.
So we've modeled some improvement in capacity, in structural as the year moves forward. I might also point out that any stimulus package could also have a positive effect on flat rolled as it could on SBQ bars and small shapes from a rebar perspective and/or if stimulus package should have any impact on the automobile community we see any improvement at all that would be good for most SBQ bar producers.
Probably the steel decision that's in the worst shape is steel of West Virginia which continues to operate at about 45% of capacity and probably will reach a peek of only 50% during the year. It's going to be a tough year there.
We think that as we look at the first quarter, all of our steel divisions with the exception of Steel of West Virginia will be profitable. That will include the Texas as well.
So we will generate decent earnings – not decent, but given the fourth quarter climate, rebounding earnings. Let's put it that way.
We had earnings in the fourth quarter but offset by other issues. From a total company perspective, but we should generate earnings in the first quarter in almost all of our steel divisions.
We should continue to be profitable in fabrication. And in fabrication, I might point out that small unit of our company had the highest operating profit of any report in the fourth quarter.
So but business conditions they are still deplorable, but we're well-positioned to surge forward in fabrication should we get any rebound in economy activity although we're not modeling any strong rebound in light commercial construction on a go-forward basis. And as I said the scrap division will be profitable.
And those profits we think will improve throughout the course of '09 quarter-by-quarter and thus it certainly won't be a record year or anything like that, but it should be a solid year. One must remember in the scrap universe, we are principally a processor and not a broker whereas some of our competition – some of our competition in the steel community, much of their scrap, scraps sales activities are a brokerage in nature so there's a built-in margin there without the fixed costs or boots on the ground type issues that we as a probably 90% of what we do is processing.
So therefore we're going to get hit a little harder in times like this because we're mostly all processing as opposed to brokerage. I won't go through the segment data, I'll let Mark and Dick talk about those issues with you as we walk through their report today.
We'll try and keep our comments brief, respectful to the fact that there are other conference calls going on today. We'll try to stay within a one hour timeframe if we can and allow time for the appropriate questions.
But on a broad basis, we operated at about 86% of capacity or thereabouts in the year 2008. And those are just rough numbers, 85, somewhere in that area and we'll probably operate, we think, that's how we modeled the statement that we'll operate at about 2/3 to 70% of our capacity throughout the year '09.
Pretty bleak year, but nonetheless if the modeling predictions relative to volume come true even without much of an improvement in pricing and continued drilling down on our cost structures, and we are in excellent shape now with regard to raw materials going into the furnaces and all our operating units we should be able to generate a reasonable operating profit and have a year that as I said earlier could be comparable to the year that, that we had in the year 2008. So I'll conclude my remarks with those comments and I'll turn it over to Dick Teets at this point in time to let him talk about the steel operations.
Dick Teets
Thank you, Keith. Good morning, everyone.
Despite the fourth quarter slow down in production and shipments I'm proud to say that steel operations did not lose their focus on safety. During 2008, Butler earned a recognition for two IOSHA for the VPP program, which is diverse for an Indiana steel mill.
Both Butler and Pittsboro ended the year with their best safety performances ever. Roanoke had only one reportable in the fourth quarter while for 2008 steel of West Virginia had a record low of vast prime injuries with only five for the year.
And noteworthy of course is Nextech which had no recordables at all for 2008. Tremendous job by all.
Recognizing that improvement is necessary. Each division has a 2009 goal of even better safety performance.
As far as capital projects and operations go, Honduras [ph] completed the expansion of the first of the two DAS [ph] and preliminary work is completed on the second one. This project along with the new baghouse installed in 2008 will allow for the goal of 3 million tons per year of hot rolled coils to be achieved.
At Columbia City, the commissioning of the number two rolling mill continues. Yesterday, they rolled 15 inch channels for the first time and later this week or next, 6 inch wide flanges and 12-inch channels are scheduled to be rolled.
Work continues on closing in of the building for the number two caster and completing the foundation in Inbed [ph] for that facility. And Pittsboro, work on the foundations for the number two – for the two new rolling mill stands is complete.
(inaudible) is ongoing as is planning for the castor reheat furnace expansion. Mill has expanded their product offerings with the addition of number five and number six rebar sections.
Roanoke work continues on the installation of in baghouse, corresponding modification (inaudible). Scrap yard improvements to improve logistical efficiencies have essentially been completed.
Steel of West Virginia is also continuing with the installation of new straighteners. One, three inch of the two rolling mill.
These straighteners will not only improve yields and costs but are also segue to more products require entire tolerance performance. At all of our plants, we continue to reduce inventories, control our capital and operational spending and schedule our maintenance and project work to eliminate any impact on operations.
Keith?
Keith Busse
Thank you, Dick. Next we'll hear a report from Mark Millett.
Mark Millett
Thank you, Keith. And as Keith articulated, it's been sort of a dichotomy in markets in many respects this past year.
Although in late summer we could see an upcoming market softness and started to draw down inventories in August and September we did not anticipate the speed of descent to which the commodity markets would fall. I think you know that in the ferrous world, American metal mart bundle pricing early in the year, $900, the ton, gross ton.
September is 510, November has dipped to 125 and recovered somewhat in December to about 230. Similarly in nonferrous, copper dropped in the average coal met in September, was about $3.14, dropping to $1.38 in December, a 56% decline.
And in the other nonferrous markets, aluminum and nickel, we saw similar declines of about 41% and 46% respectively. These dramatic market declines obviously created a little bit of a dilemma as higher priced inventories chased the market down in both our ferrous and nonferrous businesses.
For our ferrous business, further margin compression was forced by lower volumes as the steel industry utilization rates plummeted to 35% in December. For example, December 1st sales for us approached 160,000 tons as compared to over 500,000 tons early in the year.
Specifically, we experienced negative gross margins in October and November, recovering to positive territory in December as the higher priced inventories grew down, selling values recovered, and buy-in prices dropped to more normalized levels. In our nonferrous segment we achieved positive gross margins through the quarter, only to be offset by a $10 million or low cost market adjustment at year-end.
In combination, we essentially achieved a zero gross margin for the quarter. And although our operations team did a tremendous job reducing expenses by $35 million quarter-over-quarter, we still incurred approximately $87 million in operating SG&A and other expenses.
Additionally, an unrealized non-cash hedging loss of approximately $35 million was reported as the nonferrous commodity markets dropped. These financial contracts to utilized the minimize margin risk for long-term fixed price and volume contracts associated with long standing credit worthy customers.
Looking forward, having inventories at reasonable levels and evaluation and based on the positive gross margin experienced in December, we project a return to profitability assuming markets do not retract significantly through the first quarter. Turning to Mesabi Nugget in mining, the construction is proceeding well.
Although they are having a formidable weather has taken its toll and prevented the total and closure of many of the buildings as we've hoped, we still anticipate start-up of the 500,000 ton mega plan during the third quarter of this year. With engineering essentially complete and 73% of procurement committed, we have a more concise project cost.
Unfortunately this has grown from the original $225 million, $230 million to $260 million. The increase is related principally to increased structural steel and equipment costs associated with the inflation of commodities as much of this was purchased last summer at the height of the market.
Higher than anticipated labor costs for construction and an underestimation, principally on my part the size, scope of the off cast system. Fermenting of the mine is currently on schedule.
The environmental impact statement scoping study has been completed and permit issuance is expected for December of this year. Assuming Q1 2010 construction start we'd anticipate mining, concentrate production by year-end 2010.
For Iron Dynamics, it saw – an actual it's best year ever in 2008. It was the most productive, most profitable and safest year in its history.
The capital and process improvements made through the year achieved significant gains in operational performance. DRI production was a record 286,000 net tons, liquid pig iron at a 70% rate for a total of 180,000 net tons of liquid iron shipments and a further 75,000 tons of HBI shipments.
The improved production rate capitalized on strong market conditions earlier in the year obviously providing $19 million in pretax earnings and $29 million in EBITDA for the year. And I would congratulate the team.
Their persistence finally paid off and they've done a phenomenal job. The plant was shut down for 24 days during the fourth quarter for extensive cattle modifications to the rotary hearth furnace off gas system which negatively impacted production in the quarter.
However the plant restart went extremely well. And the improvements are demonstrating a potential for 30% increase in DRI production, and a 10% decrease in natural gas usage.
So Iron Dynamics is including and very consistent today. Keith?
Keith Busse
Thank you, Mark. Gary?
Gary Heasley
Thanks, Keith. For New Millennium this quarter, shipments were up about 10% versus the fourth quarter 2007, but overall the industry shipments were down about 27%.
So the team has done fairly well. Our shipments for the year up nearly 5% shipments (inaudible) up 17% versus '07 shipments.
So it's clear that the New Millennium team had done a great job for the quarter and for the year, both pursuing market opportunities, building and shipping product and controlling expenses. And congratulations to the team for leading the company to profitability although I think we look forward to the resurgence of the steel and scrap operations.
As we look forward, nonresidential construction remains weak compared to recent years and as a result order entry for Joist & Deck operations are falling across the industry, we're no exception, but we are over there, out there overturning every stone looking for opportunities. We did close one facility this quarter.
We closed our production facility in Florence, South Carolina and consolidated those operations in our Salem, Virginia and Lake City Florida facilities. That giving us better utilization of those facilities overall better earnings and no interruption in customer relationships.
The market that we're served by Florence will now be served by Lake City and Salem with no interruptions. We continue to work hard to control costs and I think remain very well positioned with regard to very efficient operations, very flexible cost structure.
We got a great team in place and we'll continue to get out there and pursue the market.
Keith Busse
Thank you, Gary. Before we go to Theresa's report, I'd just my comment that we've worked extensively with our employees, we've I think done a very good job of educating them throughout the years.
They understand income statements, balance sheets and need for profitability. And when tough times like this come along, they really, really have rolled up their sleeves and went to work and dramatically reduced our fixed costs which are probably world class in the industry at any rate.
But they understand the economic circumstances that exist. And I think they appreciate the environment in which we operate which is a no layoff type environment where everybody shares the pain, there is no cadre of families that are laid off experiencing all the pain, but it's rather a shared pain with everyone.
So having said that, I think that the team spirits are really in pretty good shape as are the fixed assets to this company and capable of responding at a moment's notice to improving business conditions. Again I want to tip my hat to all of our employees.
They've done just a great job throughout the year 2008. Theresa?
Theresa Wagler
Thank you, Keith. Briefly go through some fourth quarter highlights and some directional comments for the first quarter of 2009.
And to begin with from a working capital perspective, we decreased working capital over $400 million during the quarter, obviously based primarily on volume and pricing decreases. Our accounts receivable debt outstanding remained unchanged at 45 days and a very positive comments still over 95% of our accounts remain current less than 60 days past due.
We actively monitor our customer base and we've been very fortunate in that regard. From an inventory perspective, our finished goods and with inventory volumes decreased over 30% during the quarter and our values decreased almost 45%.
Again due to some of the lower cost or market adjustments we talked about earlier. That approximate $36 million in losses for the quarter.
$26 million related to our steel operations primarily in the flat rolled arena and $10 million again as Mark mentioned was due to nonferrous write-downs. In contrast, our scrap inventory volumes actually increased during the quarter but also the values decreased.
From the capital investment perspective, during the year, most notably we invested $412 million, of which $115 million related to our structural division, for the completion of the second rolling mill and beginning the second caster. We also invested $80 million in our metals recycling operations.
Almost 50% of that was due to new site and shredder installation in Indianapolis, Indiana. An $85 million was spent on (inaudible) project with additional $20 million on the mining project up in Minnesota as well as $45 million was invested for the EAF expansion and new bag house at the flat roll mill that Dick mentioned earlier.
Our preliminary thought for 2009 capital investments total between $250 million and $275 million obviously based on availability of funds. Most significant portion of that would be $125 million associated with Mesabi Nugget project.
For completion start-up as Mark mentioned in September or third quarter 2009 and $45 million for the completion of the second caster at the structural division. In addition, there's a $100 million that's not committed, approximately half of that would be related to maintenance investment efficiency upgrades and another half of that would be more related to potential improvement projects that as the year goes on and more visibility, in what our liquidity platform is will be able to make those decisions.
Our effective tax rate for 2008 was 37.7%. We expect that to be maintained throughout the first quarter as well.
Our gross interest expense was $43 million at an effective interest rate of 6% and our capitalized interest related to our construction projects was $2.5 million. At the end of the year, we had 181 million shares outstanding and for our estimate for the first quarter would be diluted shares of $182 million to $183 million.
Finally, I'll just comment on our capital structure and liquidity outlook. During the quarter again as Keith mentioned, we reduced our debt by $226 million and increased our availability of funds by over $500 million.
Our current debt trailing EBITDA which is our restrictive covenant that we have is currently 2.4 times compared to 2.5 times at the end of 2007 and 2.2 times at the end of the third quarter. Our total debt-to-equity remained unchanged at 62%.
And again which reiterate we plan to manage for maximum cash flow and focus on debt reduction.
Keith Busse
Thank you, Theresa. I might just briefly comment on our inventories.
As Mark said earlier, the inventories at the scrap processing units are in pretty good shape but flow is running at what would you say? Half speed or thereabouts.
Flow is down due to the industrial environment. And we operate – for the most part in a winter climate where flows are impacted seasonally as well.
So – and of course, flows would be down because of the automotive shutdowns that occurred throughout – in late December and have continued throughout the month of January. Inventories at our steel divisions are really not in bad shape at four of the five.
The pricing is in good shape now at five of the five, you might say, but we have a lot of inventory at Butler. We probably – when you look at it all collectively, if push come to shove, we could probably bring $75 million to $100 million of cash out of those inventories by allowing them to decline.
It's tough to get them to decline when you're operating at only about 50% thus they've remained high and flat rolled throughout the quarter. But as I said, it really in pretty good shape elsewhere throughout the company.
So we still could flush some cash out of inventory if it were necessary, but don't believe that, that will, will be necessary. So I will now conclude.
That will conclude the remarks that everyone has. And I think, Elizabeth, will just open it up at this point in time to the Q&A.
Operator
(Operator instructions). We'll take our first question from Charles Bradford with Bradford Research.
Charles Bradford
Hi, good morning.
Bradford Research
Hi, good morning.
Keith Busse
Good morning, Chuck.
Charles Bradford
I understand that you guys have dropped out of the AISI. What's that mean as far as your data?
Are you going to continue to supply information?
Bradford Research
I understand that you guys have dropped out of the AISI. What's that mean as far as your data?
Are you going to continue to supply information?
Keith Busse
Chuck, I really don't know whether we're obligated. I don't think we're obligated to supply information, but then again we're still members of the steel manufacturers association.
And I don't know whether or not we report that data at all. I know they at least report our products data, but I imagine they report flat roll data as well.
So it will get reported and/or consolidated I do believe.
Charles Bradford
Because we're always interested in the quality of the data we receive and with you guys, about 5% of the industry, if the AISI who has most of the data doesn't get it, I think we all have to question the validity we are getting.
Bradford Research
Because we're always interested in the quality of the data we receive and with you guys, about 5% of the industry, if the AISI who has most of the data doesn't get it, I think we all have to question the validity we are getting.
Keith Busse
Yes, I don't think we have any real problem providing that data. They're just numbers.
We incorporate which everybody can best assimilate that data.
Charles Bradford
Thank you.
Bradford Research
Thank you.
Operator
And we'll take our next question from Bob Richard of Longbow Research.
Bob Richard – Longbow Research
Good morning, and thanks for taking the call.
Keith Busse
Good morning, Bob.
Bob Richard – Longbow Research
Last summer in recycling, operating profit margins around 7%, I realize ferrous pricing was going up all through that time frame of course before everything cramps up in the fourth quarter. But with inventories written down to such a low market and scrap price probably more up and down what kind of operating profit margins do you expect in recycling here especially since you have – I think you said you have a little more inventory volume and what you expect so you have a pretty low cost base there.
What kind of margins are you looking for in recycling here maybe through the first half of 09? Are you able to share that?
Keith Busse
Well, let me say that I did make a comment. I'll let Mark comment as well.
The flows at this time really very, very weak. I think the inventories – what he was saying was inventories in the yards are not high, let's put it that way certainly because flows have been down, but with the shutdowns in December and January, the flows are really pretty bad during that time frame so the rate at which they're operating is probably at best 50% of where they would have been earlier this year or the previous year for that matter.
Mark?
Mark Millett
I don't necessarily have the – not any sort of a margin percentage, but I think it's now principally influenced by volume and depending on how the volume comes back over the next six months will obviously depend on profitability. In the fourth quarter, we were, we sort of had a two point shift.
Not only did we have lower volumes, as already indicated, but we had just higher priced inventories.
Bob Richard – Longbow Research
So we should expect a lesser, year-over-year lesser margin at least through the first half of '09.
Mark Millett
Yes, again, it all depends on what the market does. First have '09, plant appreciation in most of the commodity pricing it's a flat six months, earnings will be down year-over-year.
Bob Richard – Longbow Research
Okay. Thanks very much.
Operator
And we will go next to John Hamidos [ph]
John Hamidos
Good morning.
Keith Busse
Hi John.
John Hamidos
Some companies, I guess, apply different standards differently. Worthington in their November fiscal second quarter and interim quarter wrote off all of the goodwill related to pass metal framing acquisitions, I guess in the mid-90s.
Whether the tests related to your goodwill particularly concerning the scrap acquisitions? And do you visit them each quarter?
And just aside on the nonferrous side, the six LME inventories last week averaged 0.2% of annual demand increases or as though the market were 10% out of balance. Now in late January and aluminum inventories at a record and copper inventories at the highest in six years, et cetera.
Theresa Wagler
John, this is Theresa. The way that we apply the test for a goodwill and intangibles, if you have a – have to set a measurement date.
And for us, OmniSource's measurement date was actually November 1st. At that point we looked at their net assets to make sure that their forward-looking discounted cash flows what we expect to have are actually greater than that net asset value which includes the goodwill and intangible asset.
That we met the planners where there was no impairment now because there was a loss in December, we looked at it again because that would have been an indicator that there could have been impairment and again it was clear there was no impairment based on what we expect to meet the cash flows to be. We do that with all the entities that have goodwill which will include the test and then OmniSource and Recycle sell.
John Hamidos
So is it every November 1 that you would make the test?
Theresa Wagler
It's at least every November 1. If there's an indicator impairment that happens before that, which, John, could be, if the markets go down even further, if there's actually significant losses being established at the metals recycling operations, then we'd need to look at it during that quarter as well.
John Hamidos
And is it basically each financial acquisition package that are the baskets as opposed to a sub basket for ferrous or nonferrous within OmniSource or Recycle South.
Theresa Wagler
We do not dedicate goodwill down to level nonferrous to ferrous, we saw there is one metals recycling operation and in fact, OmniSource and Recycle South are modeled together. Because they're of the same nature in business and they're operated as one unit.
So on go-forward basis, Recycle South and OmniSource will be evaluated as one entity.
John Hamidos
Thank you.
Operator
We'll take our next question from Mark Parr from Keybanc Capital Markets.
Mark Parr
Hey, thanks very much. Good morning.
Keybanc Capital Markets
Hey, thanks very much. Good morning.
Keith Busse
Good morning, Mark.
Mark Parr
Just, Keith, I don't know if you addressed this, I might have missed this. But can you give us you or Mark give us your best thoughts on where scrap prices might be heading for the February auction?
Keybanc Capital Markets
Just, Keith, I don't know if you addressed this, I might have missed this. But can you give us you or Mark give us your best thoughts on where scrap prices might be heading for the February auction?
Keith Busse
I think we're probably both in sync. Let's put it this way.
The marketing guys they said that they thought that probably the market would move sideways again potentially at the end of January for February delivery. Whether or not that's a reality or not remains to be seen, but as bad as flows are, equally as bad is demand and high levels of inventory that exist not just in some of our steel operations, notably Butler, but in probably the competitions as well.
So the good news from a scrap promoters perspective is that flows are down. You would think which would cause some concern, but equally bad news is demand is still in the arena of 50%.
So it's probably a pretty good match and it's probably a pretty good assumption that it won't have any strong movement in one direction or another for some time. Mark?
Mark Millett
I prefer not to project –
Mark Parr
That's easy for you to say.
Keybanc Capital Markets
That's easy for you to say.
Mark Millett
Again, flows on the retail wholesale side for strata pie is kind of stable quarter-over-quarter – month over month anyway. Industrial scrap obviously, prep is down given catering communities on its tail.
But who knows where demand might be? So the market will shake out as it normally does.
Mark Parr
Are you seeing any – I think you guys have probably got a, you still got adequate supply of pig iron, but I was just wondering if your intelligence would suggest that there's, there's any shift in momentum on pig from a negative trend toward upside.
Keybanc Capital Markets
Are you seeing any – I think you guys have probably got a, you still got adequate supply of pig iron, but I was just wondering if your intelligence would suggest that there's, there's any shift in momentum on pig from a negative trend toward upside.
Mark Millett
We haven't necessarily seen it. Obviously we've been out of the market.
We've got a good level of inventory at a very good valuation right now. Obviously, Brazilian pig is constrained.
They ended about 40% of their output currently. Yet demand is also down.
So again, it's just a balance and who knows where the balance is going to find light.
Mark Parr
Just if I could ask just one last question, no one is really seeing much in the way of demand pick-up at this point. Maybe the service centers are doing a little bit of replenishment of inventories as they ship product out as opposed to losing so much inventory.
But just wondering, where do you, Keith, where do you think you'd expect to see demand pick-up first, given your understanding of the markets? Where should we be looking?
Both on the positive side and where – if things are going to move in the other direction, where would you expect they might take another step down first?
Keybanc Capital Markets
Just if I could ask just one last question, no one is really seeing much in the way of demand pick-up at this point. Maybe the service centers are doing a little bit of replenishment of inventories as they ship product out as opposed to losing so much inventory.
But just wondering, where do you, Keith, where do you think you'd expect to see demand pick-up first, given your understanding of the markets? Where should we be looking?
Both on the positive side and where – if things are going to move in the other direction, where would you expect they might take another step down first?
Keith Busse
Well, it would be hard for us to envision that could get a lot worse structurally, it's, we're operating there at under 50% capacity and substantial destocking being reported, but then again, there is no – there's not a lot of activity out there right now at this point in time. But as I said, the stimulus package could probably have as much impact in the structural arena as in almost anywhere in the market basket of products that we offer.
Obviously, the stimulus package could also affect flat roll, but a lot of the more transparent markets, automotive as you know, in terms of projections and units built, 10.5 million units to 11.5 million units versus whatever 15.5, it's operating at about 67% of its capability which is indicative or I think our general economy is. I think the energy sector is operating at a higher rate of its capability or more money is going into the infrastructure spending for energy so I suspect that will operate at better than the average economy operates at, but on the other side of the equation is, is light commercial construction, residential, things of that nature, which could operate at below 67%.
Yet, the balance could be 67% or we hope it doesn't worsen obviously. If it worsens, it's going to impact every segment of our business as it will our competitions.
But I think it's reasonable to assume that structural until a stimulus package arrives. And by the way my comment about that I was horribly disappointed with the amount of hard dollars going into infrastructure spending.
Out of $850 billion package the rumors of $90 to $100, $110 billion of worth of spending is pathetically low. I think the economy is going to get the biggest bang for its buck in GDP turns out of infrastructure spending.
Whether it's roads, bridges, schools and hospitals or energy projects or wind mills for that matter. But lot of steel will be used.
But basic industry, it isn't just steel that's going to benefit. All basic industry will benefit.
Whether it's concrete, plastics, aluminum or what have you. So rather disappointing numbers.
I was really expecting to see a stimulus package that perhaps was in the $300 billion to $500 billion range because I think that's where, that's where you'd get the – as I said earlier get the most bang for the buck, giving everybody $500 rebate checks is not going to have a profound impact especially if that money is spent at Wal-Mart and helps Chinese producers with Chinese jobs, so, I like to see more hard dollars spent in the stimulus package on hard infrastructure. Obviously some shoring up of the banking environment, lending environment is necessary at this point in time.
It's hard to grow and expand unless you have access to capital. We read a lot about small banks that have access to – that are lending money, but there's a big difference between $80,000 home loan or small commercial loan of $100,000 to $200,000 and huge basic industry needs of hundreds of millions of dollars.
In high yield instruments and things of that nature that are not available at competitive rates today. So lot of work ahead of us as a nation that that's my best guess right now.
Mark Parr
Thanks, Keith.
Keybanc Capital Markets
Thanks, Keith.
Operator
And we'll go next to Salfarani [ph] with Goldman Sachs.
Salfarani – Goldman Sachs
Good morning, guys.
Keith Busse
Good morning, Sal.
Salfarani – Goldman Sachs
First, some housekeeping. Theresa, would you mind providing us the details of your hot roll – or sorry flat roll shipments, the way you always give us?
Theresa Wagler
Sure, Sal. Hot roll was $124,000.
Pickle and oil was $30,000. Cold roll $36,000.
Hot roll galvanized $51,000. Cold roll galvanized $64,000.
Tainage [ph] 49,000 and Gavaloon [ph] 17,000.
Salfarani – Goldman Sachs
Thank you very much. On your CapEx guidance, it's slightly lower than what you had given us in December 12 press release.
And I see the missing item is the $75 million on the iron ore mining project. Is that something you're delaying or is it something that's been pushed out into 2010?
Theresa Wagler
No. There's a $125 million, still expected for Mesabi Nugget and the mining would be part of that, $60 million, identified potential improvement projects if you intend to do that.
But it wasn't 75. I think it's somewhere between 45, maybe 30 and 40, something like that.
We've already spent 20 million of that in 2008.
Salfarani – Goldman Sachs
In 2009, the press releases that you put out on December 12 does mention 125 of Mesabi Nugget and some were separately 10 75 million for iron ore project.
Theresa Wagler
Out of 75, we spent 20 million or 22 million that's the exactly in 2008. We should have just updated that.
Salfarani – Goldman Sachs
Got you. Okay.
On the pricing side, Keith, what are you seeing in the flat roll side right now?
Keith Busse
We prefer not to comment specifically about pricing, Sal, but would tell you that we think certainly, the bottoms have been achieved and right now today – I said I wouldn't comment, but I will to some extent. Flat roll is all over the place.
I think the bottom is about $500 and the tops about 575 right now, current market conditions.
Salfarani – Goldman Sachs
And in terms of –
Keith Busse
That would be plus extras and what not, Sal. .
Salfarani – Goldman Sachs
Okay, also any more comments? I know there are probably some comments on the accounts receivable, but anymore color on further risk to the counterparty risk in terms of some of your large buyers?
Theresa Wagler
Sal, I would say that we're very comfortable with where we're at from a reserve perspective. And even especially at the mills recycling side, we worked down some exposures we had.
It's a very, very acceptable level. So we're very comfortable with where we're at today.
Salfarani – Goldman Sachs
Great. Thank you very much.
Operator
We'll take our next question from Brad Lagie [ph] with Jefferies & Company.
Brad Lagie
Hey, guys. With respect to the hedges that you guys have talked about in the previous quarter, can you talk about what hedges exist as we go into this quarter?
Jefferies & Company
Hey, guys. With respect to the hedges that you guys have talked about in the previous quarter, can you talk about what hedges exist as we go into this quarter?
Theresa Wagler
We still have – the futures contracts related to copper positions that Mark mentioned earlier about in the fall or in September. We're into long-term sales contracts with very significant customers in mill recycling arena.
And those futures contracts are for fixed volume contracts for 2009 and fixed pricing. We've got homes for the copper that will be delivered.
It's a matter of when we'll be unwinding those futures. Mark?
Mark Millett
They imagine about 25 million pounds.
Brad Lagie
What price?
Jefferies & Company
What price?
Mark Millett
They've been marked from an – let's say we'll provide.
Brad Lagie
Really I want to get a sense as to what the impacts going to be on the next few quarters earnings.
Jefferies & Company
Really I want to get a sense as to what the impacts going to be on the next few quarters earnings.
Theresa Wagler
Actually, if you look at when the deliveries and the coppers supposed to take place during the first half of the year, we're seeing the market at today, is that we're going to be realizing the targeted margins that we anticipated back in the fall. That's why we entered into futures contracts and tried to protect that targeted margin.
It'll be positive impact.
Keith Busse
I think throughout the course of '09, by the time you get to the end of '09, that all will have been unwound without any realized loss. That'll all come back to you and will be a zero.
Brad Lagie
Got it. And then I'll ask the bond guys question, are you guys able to, under your covenants or inclined to at this point think about using some of your debt reduction in open market repurchases of bonds?
Jefferies & Company
Got it. And then I'll ask the bond guys question, are you guys able to, under your covenants or inclined to at this point think about using some of your debt reduction in open market repurchases of bonds?
Theresa Wagler
We are able to, and right now we're more focused on repaying our revolver and maintaining our liquidity and availability of funds until we see some more clarity in 2009 and see more strengthening in the credit markets themselves.
Brad Lagie
Thanks much, guys.
Jefferies & Company
Thanks much, guys.
Operator
We'll go next to Bakuni Ten [ph] with Bank of America Securities.
Bakuni Ten
Hi, good day, everybody.
Bank of America Securities
Hi, good day, everybody.
Keith Busse
Hi, Ten.
Bakuni Ten
How are you doing, Keith?
Bank of America Securities
How are you doing, Keith?
Keith Busse
Fine.
Bakuni Ten
Good. Just to clarify on the CapEx.
The 250 to 275, that includes about $100 million of discretionary. So certainly in a tighter liquidity environment that 250 could be really 150 for the year?
Bank of America Securities
Good. Just to clarify on the CapEx.
The 250 to 275, that includes about $100 million of discretionary. So certainly in a tighter liquidity environment that 250 could be really 150 for the year?
Theresa Wagler
That's correct.
Bakuni Ten
Okay. And then just as far as working capital, it didn't seem like there's going to be a lot of movement over the next quarter or two, potentially you could ring some extra cash there, but can you just clarify over the next let's say two quarters?
Do you expect a source or use of cash out of working cap?
Bank of America Securities
Okay. And then just as far as working capital, it didn't seem like there's going to be a lot of movement over the next quarter or two, potentially you could ring some extra cash there, but can you just clarify over the next let's say two quarters?
Do you expect a source or use of cash out of working cap?
Theresa Wagler
Out of working capital, in the first quarter, we could have – it's probably going to be net neutral pretty much in the first half of the year. As Keith mentioned earlier, if things don't turn around from a market perspective, we might bring some of the inventories down in scrap or we could be generating funds from working capital, but otherwise, we probably be building working capital but only slightly.
I really see it as a neutral event.
Bakuni Ten
Okay. Then just lastly as far as your bank covenants go, I think the covenant test is a trailing four quarter calculation.
So if you include the certainly weaker results in the fourth quarter and the first quarter, do you kind of get close to that covenant level as you look out toward the third quarter of '09 and kind of what are you doing proactively about that?
Bank of America Securities
Okay. Then just lastly as far as your bank covenants go, I think the covenant test is a trailing four quarter calculation.
So if you include the certainly weaker results in the fourth quarter and the first quarter, do you kind of get close to that covenant level as you look out toward the third quarter of '09 and kind of what are you doing proactively about that?
Theresa Wagler
Well, actually, where our current models show us, we're not getting close to that, it's a five time trailing EBITDA. The EBITDA is on an adjusted basis.
So for an instance the unrealized loss associated with the hedging contracts are not included in that. That's actually a net neutral to the EBITDA or the trailing EBITDA.
We're monitoring it very closely, but currently we don't see that's approaching us at all. There is also a three-time EBITDA covenant that has to do with dividend payments and share repurchases.
But for the five time which can pass acceleration we're not concerned with that today.
Bakuni Ten
So no discussions with your bank group at this time and any, can you talk about any other potential avenues of liquidity that you may look into later in the year?
Bank of America Securities
So no discussions with your bank group at this time and any, can you talk about any other potential avenues of liquidity that you may look into later in the year?
Theresa Wagler
Certainly, actually we're talking to our bank group all the time like most companies are I assume. We've been very fortunate to have a very strong group.
So we do have the availability to go out and get high yield notes if we wish to. I believe the market would be there if we wish to.
Again the current pricing isn't very attractive. There's availability of those funds.
And we also have a negative fledge against our fixed assets. I believe it's 20% or 25% of those fixed assets.
We have the ability within the credit agreement to go obtain financing on. So we also have that additional availability of funds.
Bakuni Ten
Okay. Thanks for the clarification.
Bank of America Securities
Okay. Thanks for the clarification.
Operator
We'll take our next question from Timna Tanners with UBS.
Timna Tanners – UBS
Hi, good morning. Want to talk about where you think your break even utilization might be.
I know it's a tough question but if you could comment on that. And then specifically, wanted a little bit more color from Keith on how you think about the restarting of operations.
You mentioned that you're able to react quite nimbly to any change in market conditions. What's a take for you to think about restarting some of your operations specifically?
Keith Busse
I would tell you, Timna, on a go-forward basis, the break even at flat rolled would be something south of 40% of our ability to operate. Somewhere between 35 and 40.
We could still break even. Doesn't obviously, if every – if we broke even everywhere, we couldn't absorb some of the fixed costs at the corporate level.
Amortization, charge per quarter, interest charge (inaudible) per quarter corporate overhead and things like that. But at the division level, from pretax income, including an interest allocation, to those operating ends, they can, they can, in today's pricing environment, probably still flow to profit north of 40%.
And so break even somewhere south of that. And structural, it's probably not all that dissimilar.
They can still generate a profit in the 40% – 33% to 40% arena. So the two biggest operating units can operate well below 50% and still break even or make money.
Engineered bars probably would be around 50% and small shapes is probably around 45% to 50%, best guess and at 45% or 50%, we lose a small amount of money at steel to West Virginia.
Timna Tanners – UBS
Okay, and then on the restart question please? What kind of thought process you go through or what kind of indicators would you need to see to restarting operations?
Keith Busse
Steady, steady influx of higher level of order entry. Backlog rising.
At 30,000 tons a week order entry, we're only going to be able to operate, you can imagine, one caster. I guess you have to operate it for two or four, five weeks, you might be able to operate two casters for one week.
It's that kind of an operating rate. So if order entry, if the trend line went from 30,000 tons a week to 40,000 tons and then to 50,000 tons we'd certainly more write-in almost immediately and start producing that material.
So then you'd be in a situation where you're running 1.5 casters. We can turn them on and turn them off within hours, kind of thing.
It's not within weeks kind of thing or within months. So we'd be very responsive simply set to order entry rate activity.
The same really is true at every one of the operating divisions.
Timna Tanners – UBS
Thanks very much.
Operator
We will go next to Dave Katz with JP Morgan.
Dave Katz
Hi, most of my questions have been answered, but with regard to the working capital release, you talked about inventory and accounts receivable, but you haven't talked about accounts payable. I was hoping that you could go into little more detail there.
JP Morgan
Hi, most of my questions have been answered, but with regard to the working capital release, you talked about inventory and accounts receivable, but you haven't talked about accounts payable. I was hoping that you could go into little more detail there.
Theresa Wagler
During the quarter, excuse me –
Keith Busse
During the quarter, accounts payable came down substantially and probably won't change a lot in this environment going forward. I have a number here for in a second.
Theresa Wagler
No, Keith's correct actually. During the quarter, accounts payable would have come down about 300 million to 400 million and going into the first quarter, we see that increasing just slightly, but then being fairly stable throughout 2009 actually based on current estimates.
And not a lot of fluctuation.
Dave Katz
Okay and then with regard to the operating rate, you're saying that, if I understand correctly that you're looking for a 60% kind of capital utilization rate in first quarter, but the industry is running at a, kind of the mid-to-low 40s. I was just trying to kind of close the circle there between you and the rest of the industry wise, industry overall showing a lower rate than you are.
JP Morgan
Okay and then with regard to the operating rate, you're saying that, if I understand correctly that you're looking for a 60% kind of capital utilization rate in first quarter, but the industry is running at a, kind of the mid-to-low 40s. I was just trying to kind of close the circle there between you and the rest of the industry wise, industry overall showing a lower rate than you are.
Keith Busse
That was just in flat rolled, 60%. We're probably going to operate at about 33% to 40%, best case in structural, and probably somewhere around 60% best case in engineered bars, 50% to 60%, same way with small shape.
So the aggregate is something less than 60% for the quarter.
Dave Katz
Okay. Thank you very much.
JP Morgan
Okay. Thank you very much.
Operator
That does conclude today's question-and-answer session. I'd like to turn the call back over to Mr.
Keith Busse for any closing remarks.
Keith Busse
Thank you, Elizabeth. I don't really have any special prepared remarks other than I think all of us are glad the fourth quarter is behind us where you had severe drops in, in the price of raw materials and had to adjust to that climate as well as adjust our inventories to new standards.
I think the worst of that is behind us and we're well positioned to move forward at this point in time in a difficult market and certainly hopeful that the markets will turn positive and improve slightly throughout the course of '09 but more to report later on. I want to thank everybody for continuing to support the company and follow the company and I hope we've been responsive to all of your questions in the past and know that we will be in the future.
Thank you and we'll chat with everyone throughout the course of the quarter. Thank you.
Bye now.
Operator
That does conclude today's Steel Dynamics fourth quarter 2008 conference call. We thank you for your participation.
Have a wonderful day.