Oct 20, 2009
Executives
Fred Warner - IRM Keith Busse - Chairman and CEO Richard Teets - President and COO, Steel Operations Mark Millett - President and COO, Metals Recycling & Ferrous Resources Gary Heasley - EVP Theresa Wagler - EVP and CFO
Analysts
Timna Tanners - UBS Michelle Applebaum - Michelle Applebaum Research Mark Parr - KeyBanc Capital Markets Jeff Kramer - UBS Chris Daugherty - Oppenheimer & Company Sal Tharani - Goldman Sachs Luke Folta - Longbow Research Tony Rizzuto - Dahlman Rose
Operator
Good day, everyone and welcome to today's Steel Dynamics Third Quarter 2009 Earnings Call. Just as a reminder, today's call 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, Metals Recycling & Ferrous Resources; Gary Heasley, Executive Vice President; Theresa Wagler, Executive Vice President and Chief Financial Officer. And Fred Warner, Investor Relations Manager.
And now at this time, for opening remarks, I would like to turn the call over to Mr. Fred Warner.
Please go ahead, sir.
Fred Warner
Welcome to the Steel Dynamics third quarter 2009 conference call. The call is being webcast live, October 20, 2009 from Fort Wayne, Indiana.
Later today, you'll be able to replay the call from our website and download it as a podcast. Today, our management may make various 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 facts 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 question 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 or 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, litigation outcomes and equipment failures. 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 Forms 10-Q as well as in other reports we file from time-to-time with the Securities & Exchange Commission. These reports are publicly available on the SEC website, www.sec.gov and on our website steeldynamics.com.
After today's management discussion, we will open the call for questions from those who have informed us they desire to ask questions. Today's call begins with comments by Keith Busse, Chairman and Chief Executive Officer.
Keith?
Keith Busse
Thanks, Fred. Good morning ladies and gentlemen and thank you for joining us this morning.
It's certainly very refreshing to be reporting on some very positive results as it relates to third quarter earnings. As you all know, it’s been a trying past 12 month period of time to say the least and we reported losses for the last three quarters in a row, almost returning to profitability in Q2 but not quite getting there, but it’s certainly exciting to be reporting a $0.30 profit per share, that's diluted in the third quarter of '09.
Still remind all of us though that we have lost $0.18 on a year-to-date basis and $35 million on a year-to-date basis, but as we said in our press release, we expect to maintain a fairly consistent level of profitability and report a profit in Q4 and for that matter, a profit on a year-to-date basis. There might be some question as to the word profit in the fourth quarter.
What we meant to say is the net profit, after tax profit will occur, we do believe at this time, will occur in the fourth quarter and give us say well, we know it will occur in the fourth quarter, it will give us a year-to-date net diluted profit not only in dollars but in per share earnings. So, wanted to clarify that.
We had net sales during the quarter of $1.2 billion. Might point out that that's an annualized rate of nearly $5 billion up sharply from where we were in earlier quarters.
And our shipping volumes during the quarter were about 1.2 million tons significantly increasing from the second quarter and again annualizing it at near five million tons per annum in shipments. In the second paragraph, we talked about the average scrap cost per net ton charge increase $49 compared to the second quarter.
Might note that we still had very good scrap costs I think by comparison perhaps to our peers in the second quarter. But it was quarter-over-quarter.
It will, again rise. Need to be clear about that.
The scrap cost per net ton charge into our furnaces will increase during the fourth quarter in spite of the fact that the scrap prices are coming down now. We had increases in June, July, August, and September and those increases will be to some extent, reflected in the operating results for October and November with declining scrap cost being reflected in operating results for late November, December.
So, for those of you in your mind thinking about scrap going down, quarter-over-the-quarter, it certainly will, I think scrap this past month on primes declined about $30 a ton and on cut grades, it was $20-$25 a ton on shredded, it was about $30 a ton. I would expect in November that the price for industrial scrap will be down sharply again as will probably pricing for the cut grades and shredded materials.
At least that's what we see at this point in time is that the delivery cost in November will again be less than the delivery cost in October. So way too early to look at what delivery cost will be in December, but right now, scrap costs are trending down, and I would remind everyone they do impact the margins as a regard to Metals Recycling segment of our business.
Because what Mark and his team, in effect purchased in September at a higher price was being delivered to customers in October at a lower price etcetera, etcetera. So, when you're traveling down the hill, you always have that one month delay.
So, last month's purchase price is being reflected in next month's delivery price. So, there will be margin compression until that bottoms out or proceeds back up the hill, if you will.
As we noted, the scrap cost increased by $49 and the selling values increased on an average by only $33 during the quarter. That's the Steel segment.
Therefore, you would have to conclude that the margin compression we enjoyed with the significant increase in volume and with the cost control efforts that our employees have engaged in over the past nine months to a year have paid big dividends, because the bottom line increased sharply. In the fourth quarter, what we see prices going up on the whole quarter-over-quarter, the scrap cost will follow.
It's a matter of timing. The scrap then purchased in the fourth quarter will largely be reflected as I said in December-January type results.
I think it's also significant to note that the operating profit per ton returned to a very excellent level of $105 a ton in Q3. And it's also significant to note that OmniSource's operating profit was at about $50 million during the quarter that would not net to that because of the losses or breakeven or whereabouts at Iron Dynamics and the losses at Mesabi Nugget.
Business conditions, as I said, in the text of the press release remain relatively steady. Our flat-rolled backlogs are fairly stable.
Order entry week in for a two week period then gained ahead of steam again last week as we gathered about 50,000-55,000 tons of orders during the past week which is about our capability in terms of a run rate. So, but we did have order entry slacked for about a two-week period of time before it pick back up again.
Our outlook is that it flat-rolled may or could, would be the correct words, regressed just a little due to the seasonality, in terms of production shipments. Although, right now we don't see anything that would lead us to believe that is a substantial number.
Production will be down slightly. Shipments will probably up slightly as with regard Flat Roll.
Overall though, shipments quarter-over-quarter will likely go down from the 1,250,000 ton vicinity or range to something just north of 1,200,000 tons and that's probably 10,000 tons in the flat-rolled arena which would include the next 10,000 tons or thereabouts Structural 10,000 tons or thereabouts in merchant shape. So, we're reflecting fewer shipments for the entire segment as we go forward, during the fourth quarter, but not necessarily in Flat Roll.
As I said in the text of the statement, business conditions remain good and flat-rolled and with the text, we are running at about 60% to 70% in flat-rolled and with the text we are running at about 60-70% of our capacity and the merchant area as with regard to SBQ and the Structural and Rail Division although it seems a modest improvement, its modest with a capital m, with the utilization rates still in the low 30% range which is now being measured, I want to point out, against 1.8 million tons of annualized shipping capability or capacity. So, that's our current run rate there.
The outlook for Structural is not all that good in the fourth quarter and perhaps in Q1. We could see momentum again, by the spring of the year in the construction arena and the planning for that will go on early in the year, and we could see increased operating activity in that arena beginning sometime next year, but right now, it’s fairly dismal out there in terms of nonresidential construction activity.
In the last paragraph on the first page we talked about the fact that our earnings could be off slightly, off somewhat from quarter-to-quarter, and that's due to some seasonality coupled with the slight slowing in market momentum and margin compression and recycling and start-up costs related to Mesabi Nugget. But most of that from a modeling perspective, most of the regression if there is any, and operating results will come from recycling, whereas I said you're always delivering last month's purchases the following month.
So, during the months, in October and November, we're fairly sure that the markets are going to be down in recycling, too early to tell in December, but any backward regression in earnings per share momentum probably would be largely tied to recycling and to start-up costs to Mesabi Nugget and other sundry year-end expenses that might occur. So, that's really the crux of where we're at from where we were in the third quarter.
It’s a very, very good third quarter report. I do believe, and we're not seeing any substantial reduction in order entry in the Steel segment although, we are being cautious at this point in time.
At this point in time, I’ll turn the conversation over to Dick Teets who’ll give you more color in detail in the Steel segment arena.
Richard Teets
Thank you, Keith. Good morning, everyone.
I’d like to just add a few comments to what Keith in the press release have already stated. But first, I’d like to thank all of our employees for their continuing efforts to improve our safety performance.
I don't want to jinx anyone, but both the Roanoke Bar Division and Steel of West Virginia are on track to achieve the best reportables and lowest lost time performances in their history. Congratulations.
I’d also like to acknowledge our team's efforts that improving our costs. The top floor really has no control over our sales price but we do continue to receive great suggestions for continuing improvements in both production and maintenance practices.
Now to the products. Flat Roll at both the Texas as well as Butler continue to be well booked as Keith said, and we see incremental improvements in almost all of our markets except commercial and residential construction.
The automotive markets are yet to be determined for the full fourth quarter. At Butler, we did set production records in both the melting and casting as well as the hot strip mill departments.
Now, this is due to the completion of our furnace expansion projects. The Structural and Rail Division’s operating rate has continued to improve slightly as we add additional products from a Rail perspective.
We also have added channels to their product mix. Work continues on the number two castor, utilizing most of our employees and we continue to work there because of the differential casting sections that will be produced and they will give us an opportunity to continue to add even additional sections through the use of the medium-section mill at Columbia City.
In Pittsboro, we've continued to grow our market share in the automotive sector and we're anticipating that our off-road/construction equipment customers will begin seeing the benefits of economic improvements in developing countries. Pittsboro has also expanded their product diversity to now include merchant shapes by producing angle sections.
They are also expanding their rebar offerings. Improvements to their descaling and bundling areas have contributed to improved safety, quality, and cost.
At Roanoke, yeah they're probably the steadiest of our performance from an operating rate perspective as Keith mentioned. The flexibility toward deliveries and service are noted by the customers and continue to have a solid backlog as a result.
The Roanoke melt shop will be taking a two week shut down in November to tie in a new backhouse, but the rolling mill will not miss a beat as they plan to have the necessary inventory of (inaudible) on hand. Steel of West Virginia has continued to add sections to their product mix also.
Our new product solar panel support structures have proven to be a popular product this year, reflecting the attention to alternative energy sources. A new off-line straightener is being commissioned for the number one mill and during the November maintenance shutdown; a new in-line straightener for the number two mill will be installed.
Both of these projects will improve safety, quality and cost performance. Keith?
Keith Busse
Thanks, Dick. Mark?
Mark Millett
Good morning, everybody. Given the continued subdued steel economy through the quarter, I believe our OmniSource recycled Metals division provided a very, very strong performance, increased domestic steel mill utilization provided the opportunity for increased volumes, ferrous shipments being by 1.3 million tons for the quarter, a 54% increase over Q2.
First flow is currently about 75%, 80% of our normalized capability. Similarly, nonferrous shipments grew to 217 million pounds, a 28% increase from Q2.
That side of our business is running year-to-date about 20% behind in volume over 2008. But it's good to see volumes coming back.
The increased volume continued to focus on cost compression in combination with an appreciating transaction value through the quarter, both in ferrous and nonferrous, provided margin expansion with an associated $50 million of operating income. I think that’s a terrific performance by the whole OmniSource team.
Looking forward, as Keith suggested, the recent market softness would suggest margin compression is likely through the fourth quarter, as electric arc as well as mill utilization rates eased somewhat. Without any export pressure, scrap pricing will likely follow steel mill pricing in a downward trend.
Copper will probably have continued volatility due to fund activity and perceived supply and demand issues. Although we feel both domestic and global real, physical demand is flat.
Domestic consumers are keeping inventories low and are only buying against actual sales. Supply is abundant and increased warehouse stocks and surface of scrap flow relative to demand.
In contrast, in slight contrast with the aluminum markets continue to be relatively strong. Recent automotive demands increased the appetite of the secondary smelters.
Their orders are pushing forward into November and December, a far cry from past months. Chinese activity remains fair with good export opportunities for December and concurrently, with the market in contango whereas financial deals are locking out primary metal business, thus taking near supply out of the market.
These improved market conditions in aluminum have positively impacted our superior aluminum division, allowing it to be profitable through the recent quarter as the order book strengthens and margins expand. This business in particular has seen increased activity of late as customers are searching for secure material supply from financially stable providers.
Iron Dynamics continued to perform well through the third quarter with total shipments to the Butler sheet mill of about 59,000 tons. The liquid pig iron supply is truly integral to the recently realized three million ton annualized operating rates that the Butler team has so successfully achieved.
The crews have really done an absolute phenomenal job with the new furnaces. Mesabi Nugget construction commission in progress is progressing well.
Iron concentrate has been introduced to the system. It’s solidified.
It’s been dried to the required moisture content. We've mixed it with ground coal, ground limestone, cut to size it, make green balls and those green balls have been successfully dried.
So, the front end is being commissioned very, very well. The factory work to the rotary hot furnace is progressing and is near completion.
We expect dry air to stop as expected in November, and barring any unforeseen glitches, preliminary Nugget production is anticipated in December. And for the few that have actually seen the facility up there, it’s an absolute phenomenal achievement given the scale of the facility.
Commissioning activities will increase operating expenses for SDI to about $6 million projected for the Q4 relative to by $3 million incurred in the recent quarter. But progress is good.
Keith Busse
Thanks Mark. You and your team have done a great job with Mesabi Nugget and we held our third quarter board meeting up on the iron range and our Board of Directors had an opportunity to preview the facility and I can tell you they were impressed.
It’s an impressive facility. We're looking forward to a great start-up.
We’ve assembled a great team there, it’s been a long time in coming, but I think it’s going to be a very important part of our research activity in the electric arc arena.
Mark Millett
Team has done a phenomenal job.
Keith Busse
Gary, let's talk about fabrication, what little bit of fabrication is going on out there today.
Gary Heasley
Good point, Keith. There is not a lot out there.
Shipments for the quarter were 35,000 tons down slightly from second quarter shipments. Sales of $33 million down about 11% in the second quarter.
As Keith alluded to, industry conditions have become more difficult as nonresidential constructions continue to weaken and slow. Shipments of joist and deck remain off significantly from earlier years.
It’s a very tough market. Now, in the face of that weakening market, we've seen pricing soften significantly with some producers pricing joists well below costs in an effort to generate sales in regions where competition is particularly fierce.
Obviously, the nonresidential construction weakness is going to remain into 2010, the fourth quarter as well and into 2010. We are seeing projects being quoted several times.
What used to be quoted once or twice is now being quoted five or six times as projects are being delayed and millers seek to reduce project costs. We believe that kind of quote activity indicates there's some degree of pent-up demand that is waiting for financing to become readily available or for owners to become more confident in general business conditions before they move forward with project.
New millennium will continue to use its advantage as one of the most efficient joint producers to remain aggressive in the market and the New Millennium team remains very focused on reducing costs and returning the units profitability regardless of market conditions. I want to thank all the employees of New Millennium for their hard work and dedication and for going the extra mile in face of what are some pretty daunting conditions.
Thanks, Keith.
Keith Busse
Thank you, Gary. Theresa?
Theresa Wagler
Thank you, Keith. Good morning, everyone.
Notably in the third quarter, we increased our liquidity position from $650 million at the end of the second quarter to over $770 million at the end of September. Our first lean leverage covenant was actually 0.4 time and our interest coverage was 1.9 times.
We generate cash flows from operations of $138 million. Working capital increased $33 million during the quarter as well with trade receivables increasing 32%.
However, those receivables still are maintained at a very quality level as 95% are current or less than 60 days past due. Additionally, our inventories increased about $97 million.
Most of that increase was due to increased pricing in scrap, not necessarily volume-related. And finished goods increased about $26 million.
And that was a function of both volume and pricing. It was predominantly our (inaudible).
Capital investments during the quarter were $96 million. Over 65% of that was related to the completion of the Mesabi Nugget project.
Our current thoughts for the fourth quarter of 2009 are for investments between $70 and $80 million. And again, as Mark mentioned earlier, it will be for the start-up and completion of the Mesabi Nugget project, at least 50% of that.
I know many of you are interested in capital expenditures for 2010. We’re actually still in the preliminary planning stages for that.
I would just encourage you all to remember that we're going to continue to be incredibly disciplined with our capital investments. We would have some carryover from the Mesabi Nugget project.
Somewhere, between $10 to $20 million. Additionally, mining could be as much as $30 million.
But we're not anticipating that much. And there could be some carryover from the second caster project at the Structural mill in the magnitude of maybe $10 million.
The effective interest rate for the quarter was 40.7%. We're currently estimating the fourth quarter rate to be 41.5% but I caution you that could change as pretax earnings have a significant impact on that rate during an environment like we're currently in.
We have our income tax receivable of $93 million. We expect to receive $18 million of that in cash refunds during the fourth quarter of 2009.
However, the remaining $45 million, we wouldn't expect to receive in cash refunds until sometime in 2010 after we file our 2009 tax returns. Gross interest expense was $40.5 million with an effective rate just over 7% and capitalized interest with $6 million.
We're currently anticipating fourth quarter interest expense net of Cap I to be around $35 million and depreciation and amortization to be somewhere between $50 and $55 million. We currently have $215 million outstanding common shares.
And our underlying converts are $16.4 million shares. And finally, I know many of you are interested in our Flat Roll division shipment as they are broken down by products.
For the third quarter, our hot rolled shipments were 307,000 tons. Our pickle and the oil shipments were 46,000 tons.
Our cold-rolled shipments were 40,000 tons, hot rolled galvanized, 100,000 tons, cold-rolled galvanized, 58,000 tons. Painted steel, 81,000 tons, and Galvalume, 25,000 tons.
Keith?
Keith Busse
Theresa, are those numbers inclusive of the text? Or is that just (inaudible)?
Theresa Wagler
That’s just the Flat Roll division.
Keith Busse
(Inaudible). Thank you.
I want to note, too, that the receivables could likely rise as price activity gains momentum into the fourth quarter but they won't rise due to volume. And they will not go up significantly.
The inventories are at a level that we're comfortable with now and shouldn't be increasing volumetrically but could go up slightly in the early part of the quarter and go down by the end of the quarter reflecting the atmosphere and the recycling arena to a large degree. So, really don't see our working capital needs incurring assets changing all that significantly even as volume returns.
So, with those formal remarks, Sara, we'll turn it back over to you for the Q&A piece of the conference call.
Operator
Thank you. (Operator Instructions) First, we'll go to Timna Tanners of UBS.
Timna Tanners - UBS
Yes, hi, good morning.
Keith Busse
Good morning, Timna.
Timna Tanners - UBS
Wanted to know if you could give us a little more insight into how your November, December order books look, specifically for hot rolls and I guess across product lines?
Keith Busse
November hasn't been open all that long. It's building good momentum.
I think the major component of strength in November remains value added where we have the best margins, hot rolled tends to be lagging as it has been, Timna, throughout the entire previous quarter. But it's still steady activity in hot roll.
Right now, we would believe that we can get through October certainly at capacity 100% run rate. Something very near that November.
Although impacted by a day or two off at Thanksgiving and some project work perhaps here and there. Especially down at Steel of West Virginia and as Theresa mentioned earlier, we are putting the bag house in at Roanoke.
So, the backlog right now is off slightly but not materially. And we think we'll get through November just fine.
We really don't have an outlook, definitively going into December but believe we'll march through that month at a fairly high level of operating activity. We have our Christmas party during that period of time.
And we have the Christmas season outages, etcetera, etcetera. So, production and shipments could be off slightly in December, impacted by seasonality and other factors.
Too soon to tell whether or not we'll have the ability to run at full capacity. But we think it's probably fairly near full capacity and in the month of December.
And the merchant arena, I think as steady as you go in Roanoke as Dick said, I think clearly from our discussions with our general managers the other day, the lights getting brighter in the tunnel as regard to SPQ bars. We probably won't see that activity until late in the quarter, early fourth quarter but activity in that arena, at least for Steel Dynamics is picking up at this point in time.
As Dick said, Steel of West Virginia is increasing its product portfolio and doing much better than it had been in the past. And as I said earlier, Structural remains a pretty lousy market place but we're still keeping our head above water and generating a pretax income on a fully allocated basis.
That's a pretty amazing feature and operating rate is at about 30% of what we're capable of. As I said earlier, the health for Structural's probably isn't till next year.
We're not forecasting a real strong next year but enough to keep our head above water next year as well.
Timna Tanners - UBS
Okay. So, just to follow-up on the Flat Roll side, we're starting to hear some reports of real weakness in December on the pricing side.
Maybe, you know, you haven't seen December order book open yet. But I mean, does your forecast include any degradation maybe on the pricing side or maybe are you just looking at seasonal weakness and volumes?
Keith Busse
I think as it relates to Flat Roll.
Timna Tanners - UBS
Yes, sorry, flat-rolled.
Keith Busse
Pricing activity and our momentum, let's say has lost its zest at this point in time. I think we're going to be reflecting our shipments in October and November.
Be reflective of what was a few weeks ago, as opposed to what is. There are some quotes out on the street today, you know at $0.26 plus full extras, $0.27 plus full extras kind of activity which is not an all end type 575, 580, 590 type number as in much of the industry was focused on.
We never quite got to those levels or won't quite get to those levels on a shift basis. Because we had searched for backups and backlog that would just not permit us to get there.
Even though we marketed tons in that arena and at those dollars. But on an average, it's just not going to get there.
And could be impacted as you suggest in December. But likewise, the margin should change a lot because a scrap being marshaled into the furnace during that period of time ought to be down $30, $40 as well.
So, I think there is little margin impact there and maybe a volume impact as we were suggesting due to seasonality.
Timna Tanners - UBS
Okay, that’s really helpful. Thank you.
Operator
Now next from Michelle Applebaum Research, we'll go to Michelle Applebaum.
Michelle Applebaum -
Hi.
Michelle Applebaum Research
Hi.
Keith Busse
Good morning, Michelle.
Michelle Applebaum -
Good morning. Nice to see as optimistic or good news as you have.
It's been a while. And I think we all deserve it.
I wanted to ask you if you could talk about a little bit more strategic kind of stuff. I went to World Field Association last week in Beijing and the one thing I would notice this year compared to last year was there were so many more meetings between companies or there seemed to be people like going off together and I'm just wondering M&A was kind of frozen for awhile and do you get a sense that there is a thaw in that and if so, can you tell me what your thoughts are on where you guys might be on strategic kind of stuff?
Michelle Applebaum Research
Good morning. Nice to see as optimistic or good news as you have.
It's been a while. And I think we all deserve it.
I wanted to ask you if you could talk about a little bit more strategic kind of stuff. I went to World Field Association last week in Beijing and the one thing I would notice this year compared to last year was there were so many more meetings between companies or there seemed to be people like going off together and I'm just wondering M&A was kind of frozen for awhile and do you get a sense that there is a thaw in that and if so, can you tell me what your thoughts are on where you guys might be on strategic kind of stuff?
Keith Busse
Michelle, you know, I don't know that that isn't wishful thinking on the banker's part. There haven't been a lot of opportunities out there and I don't know that they're going to be a number of opportunities in the future at this point in time either.
A lot of speculation about what Severstal may be doing with some of their assets. None of us have really, other than chatter, have termed any of that.
I don't want to speak for them. We have no major M&A activity on our horizon at this point in time.
As we've said, in recycling, we're going to principally grow on a Greenfield basis; we'll have a tuck in here and there. We're heavily focused on results and performance at Mesabi Nugget.
Obviously, we've increased our capabilities at Pittsboro and Butler internally. And, at this time in time we're not looking at any M&A activity in that arena of any significance.
Michelle Applebaum -
Do you think there's any chance that anything that's going on with any of your competitors, I don't want to single out Severstal, could result in facility closure kind of things in North America? You've talked about that before.
Michelle Applebaum Research
Do you think there's any chance that anything that's going on with any of your competitors, I don't want to single out Severstal, could result in facility closure kind of things in North America? You've talked about that before.
Keith Busse
Well, I think the real issue is more about how fast supplies return to the market and will supply overpower gradually increasing demand needs. That's probably the more red hot issue.
I don't know that from an M&A perspective, I think that there have been some announcements in our peer group. People are shuttering capacity.
A lot of chatter about are they going to open it up or leave it shuttered. Both in flat-rolled and then shaped.
So, I imagine there is some capacity that will be permanently idled in that regard. But I can't speculate about what the other fellow is going to do.
Michelle Applebaum -
Okay. You have one of my favorite phrases.
That I hadn't heard for awhile. Desperate acts of dying men.
Remember that?
Michelle Applebaum Research
Okay. You have one of my favorite phrases.
That I hadn't heard for awhile. Desperate acts of dying men.
Remember that?
Keith Busse
I remember that well.
Michelle Applebaum -
The cycle, have you seen that? And do you anticipate seeing that?
Michelle Applebaum Research
The cycle, have you seen that? And do you anticipate seeing that?
Keith Busse
I don't think I anticipate seeing that. I don't think we will see that.
But producers protect and enjoy the cost compression that we and others are enjoying, will attempt to protect volume and at the expensive price. Historically, that's been the way of the world.
We'll continue to be and I think sometimes people believe that they're out in front leading and with price reductions and might garner some activity in the long run, at least in the short run. We know that's short-lived but I don't see anybody panicking out there.
I think prices have softened a little bit. Demand is probably slightly softer than it had been.
I think most people's outlook for GDP broke is for peaking in Q3. With GDP growth in Q4 being down 33%.
If you look at statistically, perhaps something north of 3 in Q3 and something around 2 or north of 2 in Q4. And a lot of people think we're not going to have anything much over 1% to 2% next year.
So, if GDP growth is indeed slowing, then I think demand activity has the potential to slow as well. But this has been one of those recessionary environments where, as whether we're in a W or an L, it has been ever so slow to recover.
But I think it will continue to recover ever so slightly. There will be positive momentum.
I think the destocking activities were severe. I think just about everybody overshot the runway and needed to rebuild those inventories and right at a critical time when that pipe was filling, along came cash for clunkers and probably emptied the pipe and so the pipe is still filling.
I can't tell you whether or not we're at the bottom of destocking and construction products (inaudible) planned specifically. We may not have reached the bottom yet but I think certainly, if we haven't, we will.
As I said earlier between reaching the bottom and some stimulus activity on the drawing boards throughout the winter, maybe becoming a reality in spring, you could see some increased momentum there. But I don't think there is any panic out there.
I think there are no imports are not a threat at this point in time. And Flat Roll, I think a realistic threat it means.
I think there had been some activity. The market place responded to that activity.
I don't think it is out there right now.
Michelle Applebaum -
That's terrific. Thank you.
Compliments on the new conservativism you know. It has been a couple of quarters now and I love it.
So, thanks.
Michelle Applebaum Research
That's terrific. Thank you.
Compliments on the new conservativism you know. It has been a couple of quarters now and I love it.
So, thanks.
Keith Busse
You're welcome.
Operator
From KeyBanc Capital Markets, we'll move next to Mark Parr.
Mark Parr - KeyBanc Capital Markets
Hey, Keith, good morning.
Keith Busse
Good morning, Mark.
Mark Parr - KeyBanc Capital Markets
I had a couple of questions and thanks for all the color, by the way. We really appreciate it.
Could you talk a little bit, Omni's terrific recovery in the third quarter compares to a period of time where you were doing a lot on the cost side and kind of refocusing the culture, more in line with Steel Dynamics and how do you feel about the profitability in OmniSource in the third quarter. Is that normalized or do you feel like there's more upside opportunity heading into next year.
What can you give us as far as how you feel the profitability of Omni should unfold over the next say year or so?
Keith Busse
I think it was a good glimpse of the future. You must remember that Omni's operating rates were probably as good as anyone's in the industry.
It's 75 or thereabout, 80% flow at a time when prices were rising, and that does have a very positive impact. And they were being positively impacted by all the cost cutting that they had done throughout the year.
So, it's a mixture of volume and terrific cost cutting efforts. I think Mark has a terrific team in place.
I'll let him talk about that. But I think you should go forward if we can reach 90% flow activity in a "healthy market".
I think there's earnings beyond the operating level of $50 million are certainly achievable on a quarterly basis. But in periods where momentum is slowing, like it is now and prices are declining and you're delivering last month's goods which were purchased at a higher price to your clients, this month, I mean, there is a compression until you've reached that bottom and stay there and if you stayed there forever, the margins would return very healthfully, especially with volume.
So, is there more juice in there in a healthy market? And 100% type volume?
Absolutely. I think you can deliver better earnings than $50 million in operating but Mark, why don't you attempt to answer that question as well.
Mark Millet
Well, I think you have done a pretty good job. Obviously, Mark, I think it was an incredible performance given the market that we've seen in the last three months.
Obviously when transaction values are appreciating, you get expansion of margin as chief of inventory flows through and we liquidated some of that in August and September. Well, if you compare that with the increase in transaction values compared to the markets over the last two, three, four years, it is pretty minimal.
So, I think it is phenomenal performance. I think Omni is with the teams reposition themselves.
Streamlined obviously that the organization, we took a lot of cost out of the operating, the cost structure. And both the non-ferrous and ferrous teams are poised to exploit great market conditions going forward.
The other issue I would highlight is the one for the obsolete flows when you have strength pricing in the $200 to $250 range, the margin is somewhat slow. But as transaction values pick up to 300 and 400 through the cycle possibly in the future, the gains are quite substantial, quite significant particularly on the Omni surface, tons or flow which tends to be predominantly obsolete shredded type grades.
Mark Parr - KeyBanc Capital Markets
Mark, do you think that given the seasonal situation that we're heading into here, do you think that the scrap yards will have a tendency to hold back some tons in November and maybe even December in anticipation to higher prices in the first quarter next year?
Mark Millet
For sure. I think as the price falls, people are going to as they've done historically; they're just going to accumulate.
Their bank accounts, they've had a reasonable good year. They had a great year in 2008.
This year has been a reasonably profitable year for some of the smaller yards. It is the bank account.
Mark Parr - KeyBanc Capital Markets
You're seeing a normal kind of activity then by the scrap yards at the present time.
Keith Busse
Yeah. Mark, this is Keith.
I would think there would be a tendency as well for them to lay material down if they don't like the price. Although, last month, a couple of dealers that actually did like the price said just we're not going to sell at these levels as the bulk started to wind down and the buying activity started to wind down and they realized that November could be even weaker, guess what, came back to the table.
So, it's their perception of the future.
Mark Parr - KeyBanc Capital Markets
Right.
Keith Busse
And if they perceive December is going to be weaker, they may sell tons in November. If they perceive that December and January are stronger, they may hold some tons in November.
Mark Parr - KeyBanc Capital Markets
Okay. All right.
Keith Busse
Either way, we're in good shape.
Mark Parr - KeyBanc Capital Markets
All right. Just one last question if I could.
The start-up cost at Mesabi, could you give us some color around how much that might be as far as the impact for the quarter?
Theresa Wagler
Yeah, certainly, Mark. We expect it to be somewhere around $6 million during the fourth quarter.
Mark Parr - KeyBanc Capital Markets
Okay. And is that, would that be a peak level of start-up at cost activity or you save it in the first half of 2010, would you look for that number to pick up some before it starts rolling over?
Theresa Wagler
I think you'll see an increase in the first quarter of 2010 somewhat.
Mark Parr - KeyBanc Capital Markets
Okay. Thanks, Theresa.
Thanks, guys.
Operator
We'll go next to Jeff Kramer of UBS.
Jeff Kramer - UBS
Hey, good morning, everyone.
Richard Teets
Hi, Jeff.
Jeff Kramer - UBS
Just wanted to touch on kind of where you see the stimulus right now and also vise-a-vis Rail demand. Is that, is Rail really waiting on stimulus as well?
And I guess at some point in time, tons you expect to ramp up to?
Richard Teets
I don't think Rail is waiting on stimulus in terms of replacement Rail at all. I think in terms of high-speed networks that are planned for the future, that have to do with (inaudible) projects or mostly (inaudible) projects, I think that activity may be yet to unfold.
Yes, I would tell you that the Rail market is probably off 10% to 15% due to maintenance pullbacks and so forth but nothing more than that. And actually, the United States is off may be higher percentage than most of the other countries.
Europe is seeing a pretty steady rail market. But as Keith said, the high-speed rails will be down the road.
It is about I saw a recent study that said if you're really going to put in high-speed rail applications, it is about a billion dollars a mile. So, when you look at how many billions of dollars.
It was $900 and some million when you're really doing all of the grades. Not improvements of existing tracks but if you were doing Greenfield,rail traffic, that takes, you can imagine how many months and years of studies and environmentals, land procurements and so forth.
That rail is in the pipeline.
Keith Busse
Jeff, I think the other part of your question had to do with cash for clunkers and I think that's been an over baked activity. Yes, did it have some impact?
It did but much too much is being written about it. I think what it did as I said earlier, we're in the process of refilling a pipeline that was empty, you can't shut automotive assembly plants down for ten weeks as many as we did with G.M.
and Chrysler. And with that shuttering, believe there's still steel in the system ready waiting on a new dawn or a new day.
I think when they hit the go button and ask for X number of vendors, the suppliers just didn't have the metal. And so, a lot of the activity was refilling the pipe.
I think what clunkers did is the pipe was starting to fill. It started to drain it more rapidly.
But that's gone by the wayside. I think clunkers was probably only about 20%.
Gary researched it, of automotive activity during that two-month period of time. So, I think it had an effect on drawing back down stocks which was still in the process of rebuilding.
But I think much too much has been written about that.
Jeff Kramer - UBS
Okay. Do you expect on the auto front to remain pretty strong going into the first quarter of next year?
Keith Busse
Well, this is generally the weaker quarter. But the pipe isn't full.
And I think there's going to be better than normal seasonal activity in the fourth quarter. Hopefully there will be more momentum in 2010 but you know, no one's writing about it.
Everybody is talking about 10, 10.5, 11 million units to build next year. Even though we may not have an opportunity because of the size and weight of cars to get back to 15 million units, or we may not have an opportunity to get back there because units are lasting longer.
We're doing a better job of building better cars. Its 11 units, it is still 11 million units is still a long way from 14 or 15 million units.
So, we're gaining on it. I hope conservatism, I think its conservative forecast, I think we are conservative and hopefully we will enjoy 12 or 13 next year before the dust settles but none of us know that.
Jeff Kramer - UBS
Okay. And do you think you've gained share here?
Given where operating rates are and this whole going forward and within the auto space or generally in collateral?
Keith Busse
Clearly, we gained some share. Question is can we hold the share?
Will customers return to other supply-based activity? You can't be sure about those things.
I wouldn't trade our position for anyone. Our inventories are low.
They're inexpensive by comparison to a year ago. And we're probably from a cost compression, cost control perspective as combat ready as we've ever been.
And so I think we can play well in this environment. And I don't think the ups and downs of scraps going up 20 or down 20, really, it cycles through.
There may be timing differences but the margins probably aren't going to change a lot.
Jeff Kramer - UBS
Okay. Thank you.
Operator
We'll go next to Oppenheimer & Company's Chris Daugherty.
Chris Daugherty - Oppenheimer & Company
Good morning. I just wanted to open up on a couple of things in more detail.
Theresa, can you give us the DNA breakdown by segment? Did it seem like the DNA came down this quarter?
Theresa Wagler
By segment, I actually don't have that by segment. If you look at our quarterly filings with our 10-Qs, you'll see it by segment.
I just don't have that with me.
Chris Daugherty - Oppenheimer & Company
And then, Keith just talk about where we stand in terms of profit sharing? I think it was about $400,000 this quarter.
Is that where it's going to stay for the year? Does that assume Q4 results or could that go up given that you now expect the full year to be positive?
Keith Busse
That’s going to go up. There’ll be more profit sharing booked in the fourth quarter.
Theresa Wagler
We don't book the profit sharing in anticipation. It’s actually as we have results, we book those results.
So, Keith’s you won’t see an increase in the fourth quarter.
Chris Daugherty - Oppenheimer & Company
And then, Theresa, just one last thing in terms of the timing of the registration for the (inaudible) quarter. I know that you know filed a registration there with that, but when do you expect that to go effective?
Theresa Wagler
We expect that to happen within the next couple of weeks.
Chris Daugherty - Oppenheimer & Company
That's it. Thank you.
Operator
Sal Tharani of Goldman Sachs has a next question.
Sal Tharani - Goldman Sachs
Hi, Keith, how are you?
Keith Busse
Great, Sal.
Sal Tharani - Goldman Sachs
Wanted to ask you about the scrap inventories both at the mill divisions and at the actual scrap yard, how is that right now?
Keith Busse
The inventories are generally three weeks to a month just on an average scrap in all of the Steel divisions. I think.
Well let Mark speak to it. I think his inventories are probably down a little bit.
Go ahead, Mark.
Mark Millett
Yes, the odds are about two weeks, two and a half weeks of shipments currently, Sal, which is [iron] as I said earlier, we liquidated inventory in August and September, recognizing that the market itself may wanted to take some building value off the table.
Sal Tharani - Goldman Sachs
Okay. On downside, Gary you mentioned the competition where some people are pricing it below costs.
Is this something new or it has happened prior to that, something you have been seeing in the past also?
Gary Heasley
No, that's new. In the last few months we've seen a much more aggressive pricing stance by a couple of competitors.
Mark Millett
Sal, the statement that we believe competition is pricing below costs, should not be relied on. We don't know what our competitors' costs are.
We can only suspect. We think we're below cost producer in fabrication and that arena and we certainly know some of the quotes we saw out there.
We couldn't, from a cost perspective, make any money on it. We couldn't get to those kind of numbers and make money.
So therefore, believing we are the most efficient, I guess we have to believe that our competitors [sign] below cost, but for us to make a statement like that is should and sort of, we need to clarify that. We can’t…
Sal Tharani - Goldman Sachs
I understand. But you are the lowest cost; I mean you are very low cost producer so you probably have a better idea of what the costs are out there.
Gary Heasley
Let me put it to you this way. We're seeing joist priced at the market price for the steel inputs, the raw material inputs for joist.
Sal Tharani - Goldman Sachs
Okay.
Gary Heasley
So, that's how we concluded that they may be pricing without regard to the conversion cost of producing joist, but Keith is right. There may be other factors like sourcing supply of materials or other things that affect their costs that we don't see.
Sal Tharani - Goldman Sachs
Got you. Keith, do you think that you might see something like that on the Flat Roll side also as we have a lot of capacity coming in as integrators are ramping up.
You may see that there might be some disruptive players doing so in the Flat Roll particularly.
Keith Busse
I think there is some legitimate worry out there that we may have cranked up too much capacity too soon. There is a big difference between what the steady state level of demand in our society realistically is and what your operating rate is at any moment in time as you're trying to refill the pipe and I think all that euphoria in Q3, a lot of that was pipe filling.
I think we're down on a more steady state kind of run rate. We still seeing some excellent input activity, order entry activity that we are all, I think maybe we've just all become a little skittish and worry a little more these days.
We just wonder whether or not that’s sustainable given the capacity that's come online. I hope that it is.
Sal Tharani - Goldman Sachs
And lastly, on the Structural business, just wanted to get your feel on, Structural prices came down $30 following the scrap price decline, but for you, scrap price may go up. Do you think you might be hardly banking even in the fourth quarter on the Structural this time?
Keith Busse
Repeat the last part of the question.
Sal Tharani - Goldman Sachs
Well, do you think you will be hardly breaking even or you may even have slightly negative earnings in just for the quarter in the Structural division because scrap is going against you? At least the scrap you’re flowing into the P&L.
Keith Busse
I think we commented and I'll get to Structural. We commented that recycling earnings will be down in the quarter.
I think scrap will, on a delivery basis, will be cheaper than it was on a delivered basis in October we don't know the extent of that. Clearly, there has been some impact from pricing activity in the Structural arena that has been related to the import issue, but I think everyone allows them at this point in time.
I don't see any import pressure there and I don't know that the prices are going to go down a lot. But profit goes down somewhat in Q4.
But, so will scrap. So, the question is can you maintain a pretax income?
Is a good question and it's a close call. It is hovering around zero.
Sal Tharani - Goldman Sachs
Okay. Last thing, on Mesabi Nugget, while you're opening it up, are you holding off on your purchases of pig iron or are you still buying just in case these delay in the Mesabi Nugget commissioning?
Keith Busse
Repeat that?
Sal Tharani - Goldman Sachs
On your Mesabi Nugget project is coming along early next year. You generally buy pig iron few months ahead of the time.
And I was wondering if you're holding off on pig iron purchases, are you being careful in buying it, so you don't have too much pig iron and Mesabi Nuggets at the same time?
Keith Busse
Right, we're not buying any pig iron. Currently we have adequate stocks of pig iron and are very hopeful that they ramp up, although you're not going to get to 100% of capacity overnight.
That there will be a decent amount of volume come out of Mesabi early on that will put us in good shape. If the run rate continues, at a good pace of ramp up, and the product we're confident is going to be of high quality, there is no need to go searching for pig iron.
Mark Millet
Yes to solve the that the consistency that they have been times up and the team has up its Iron Dynamics. We need quite a small amount of imported pig iron to add to that mix currently.
And so, the inventory we do have will last quite some time.
Sal Tharani - Goldman Sachs
Okay. Thank you very much.
Operator
From Longbow Research, we'll go to Luke Folta.
Luke Folta - Longbow Research
Hi, guys. Couple of questions quickly on recycling.
Just firstly, to the extent that there was any cycle inventory gains or gains relating to hedging in the quarter. Can you quantify that for us?
Theresa Wagler
Certainly from a net hedging perspective, we actually lost out just about $500,000 during the quarter. And they really were no means for lower cost or market adjustments if that was your second part of your question.
Luke Folta - Longbow Research
Okay. And then secondly, can you break out for us what the percentage of your scrap shipments for prime versus obsolete and how that changed versus last quarter.
Keith Busse
I don't think we have that data with us. I don't know that we accumulate it that way.
Luke Folta - Longbow Research
Okay. I guess I was just trying to understand there's been a lot of integrated facilities that have restarted recently and I'm just trying to get a feel for what the impact, the positive impact for you might be either in 3Q or you can further in 4Q.
Keith Busse
You must remember the integrated buyers don't just buy bundles anymore. They buy some busheling product, they buy bundles, they buy shredded and some of being throw heavy meld in there.
So, the practices of two decades ago are gone. It is more of a mix for them which probably better aligns with the flow mix that all of us experience.
So, I don't know that you're going to see these big up and down monstrous pressures on bundles because the mills were out of bundles and need bundles. I think there is more of a balanced inventory of products going into there be less today and than there has ever been historically.
Luke Folta - Longbow Research
Okay. And then just finally, just regarding the export market.
Have you been able to take advantage of some of the strength there over the summer and what's your outlook there going forward?
Keith Busse
Well, we're not exporters. We're landlocked generally speaking.
Mark exports some non-ferrous material to China. We don't export any ferrous material on the steel side.
We're not exporting any material with the exception of product coming out of Pittsboro building activity. We have some steady state business overseas there.
That's about the limit on our exports. It's too expensive in terms of Flat Roll to get the product to the coast.
Luke Folta - Longbow Research
I guess I was more talking scrap like out of your Recycle South facilities there in the southeast.
Keith Busse
Now, that's mostly nonferrous and (inaudible) things like it. Yes, they have exported some cargoes of shredded but it is not.
Mark Millet
It's been very incremental from the ferrous side.
Luke Folta - Longbow Research
Okay, thanks a lot.
Operator
From Dahlman Rose, we'll hear from Tony Rizzuto.
Tony Rizzuto - Dahlman Rose
Thank you very much. Hi, folks.
Got a couple of questions. My first question, Keith, is you've talked quite a bit about the prospects for construction and automotive and rail.
I was wondering if you could talk a little bit about that some of the other end markets you serve like the mining industry, energy and AG and what you see there. And then I've got a follow-up question, too.
Keith Busse
I think when you talk about heavy equipment manufacturers. That's a little bit brighter picture, flat to a little bit brighter for some yellow iron.
I think AG products; I could just kind of study as you go in most of our markets. We have done a better job of penetrating appliance.
And have a little bit of wind in our sail momentum there than we have historically. But as we've said earlier, a lot of our products go to service centers and then we don't know where they go after that in all cases.
So, it is kind of a difficult read for us. Clearly, activity in flat-rolled through our partner Heidtman into the automotive arena has picked up nicely.
And we're enjoying some brisk business on certain platforms with Chrysler and Ford there. And we're kind of grateful for it and well positioned in that arena.
Tony Rizzuto - Dahlman Rose
You guys are breaking up a little bit. I don't know if anyone else was affected by that.
But I think I heard you say a lot of the product, it's hard to tell where the end markets it ultimately goes but a lot of it does go through service centers. But those other markets sound to be a little more healthy, little bit more stable.
Keith Busse
I would say that's a fair statement.
Tony Rizzuto - Dahlman Rose
All right. And the follow-up question I have is if the economic conditions should falter, Keith.
Do you think that the industry in general will continue to have the resolve the flex production or were there lessons learned here that might cause some players maybe to not be as flexible the way come to market?
Keith Busse
I can't speak for everybody else. We generally attempt to run our facilities as close to capacity as we can.
And push very hard to do that. Sometimes it's just not activity out there and you can't have resilient order…
(Abrupt End)