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Edited Transcript of STLD earnings conference call or presentation 23-Jan-20 2:00pm GMT

Q4 2019 Steel Dynamics Inc Earnings Call

Fort Wayne Jan 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Steel Dynamics Inc earnings conference call or presentation Thursday, January 23, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry T. Schneider

Steel Dynamics, Inc. - SVP of Flat Roll Steel Group

* Christopher A. Graham

Steel Dynamics, Inc. - SVP of Long Products Steel Group

* Mark D. Millett

Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director

* Russel B. Rinn

Steel Dynamics, Inc. - EVP of Metals Recycling

* Theresa E. Wagler

Steel Dynamics, Inc. - Executive VP & CFO

* Tricia Meyers

Steel Dynamics, Inc. - IR Manager

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Conference Call Participants

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* Andreas Bokkenheuser

UBS Investment Bank, Research Division - Executive Director, Head of LatAm Mining & Basic Materials and Research Analyst

* Andrew Cosgrove

Bloomberg Intelligence - Senior Analyst

* Christopher Michael Terry

Deutsche Bank AG, Research Division - Research Analyst

* Martin John Englert

Jefferies LLC, Research Division - Equity Analyst

* Philip Ross Gibbs

KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Steel Dynamics Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) Please be advised, this call is being recorded today, January 23, 2020, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect.

At this time, I would like to turn the conference over to Tricia Meyers, Investor Relations manager. Please go ahead.

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Tricia Meyers, Steel Dynamics, Inc. - IR Manager [2]

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Thank you, Melissa. Good morning, everyone, and welcome to Steel Dynamics Fourth Quarter and Full Year 2019 Earnings Conference Call. As a reminder, today's call is being recorded and will be available on the company's website for replay later today. Leading today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and Theresa Wagler, Executive Vice President and Chief Financial Officer. We also have leaders for our operating platforms, including our metals recycling operations, Russ Rinn, Executive Vice President; our steel operations, Chris Graham, Senior Vice President, Long Products Steel Group; and Barry Schneider, Senior Vice President, Flat Roll Steel Group. For our Southwest strategy, we have Miguel Alvarez, Senior Vice President, Southwest U.S. and Mexico; and for our fabrication operations, Jim Anderson, Vice President, Steel Fabrication.

Some of today's statements, which speak only as of this date, may be forward-looking and predictive, typically preceded by believe, expect, anticipate or words of similar meaning. They are intended to be protected by the Private Securities Litigation Reform Act of 1995 should actual results turn out differently. Such statements involve risks and uncertainties related to our steel, metals recycling and fabrication businesses as well as the general business and economic conditions. Examples of these are described in the related press release as well as in our annually filed SEC Form 10-K under the headings Forward-looking Statements and Risk Factors found on the internet at www.sec.gov and, if applicable, in any later SEC Form 10-Q.

You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Fourth Quarter and Annual 2019 Results.

And now I'm pleased to turn the call over to Mark.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [3]

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Thank you, Tricia, and welcome. Good morning, everybody, and happy 2020. Thanks for joining us this morning for our fourth quarter and Full Year 2019 Earnings Conference Call. We certainly appreciate your time today. To begin, I would like to thank the entire SDI team and their families for their extraordinary dedication and passion. 2019 represented a period of market challenge, yet the team achieved numerous operational milestones as well as a strong financial performance, record steel shipments, record fabrication shipments, to name just 2.

2019 represented the third best year since our inception in 1993. It bears testament to the superior performance of our teams and our differentiated business model. And to impart clarity, Theresa will provide insights into our recent performance.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [4]

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Thank you. Good morning. I add my sincere appreciation and congratulations to the entire steel dynamics team. It was a strong year with many operational milestones, as well as being one of the best years financially.

Revenues of $10.5 billion derived from record steel and fabrication volumes represented our second highest annual performance. Operating income of $987 million and net income of $671 million or $3.04 per diluted share represented our third best annual performance.

Cash flow from operations of $1.4 billion and EBITDA of $1.3 billion represented our second and third best performances, respectively, and notably, the achievement of gaining an investment-grade credit rating designation in recognition of our capital foundation and capital allocation philosophy.

Regarding our fourth quarter 2019 performance, net income was $121 million or $0.56 per diluted share, which includes financing costs related to our December 2019 refinancing activities of approximately $0.01 per diluted share and lower earnings resulting from our 2 planned annual maintenance outages at our Butler and Columbus Flat Roll Divisions of approximately $0.05 per diluted share. The outages also impacted fourth quarter flat-rolled steel shipments by an estimated 70,000 tons to 80,000 tons.

Fourth quarter earnings were above our mid-quarter guidance of $0.49 per diluted share to $0.53 per diluted share, primarily due to stronger-than-anticipated December steel shipments. Excluding these items, fourth quarter 2019 adjusted net income would have been $0.62 per diluted share, above our adjusted guidance of $0.55 to $0.59 per diluted share.

Fourth quarter 2019 revenues were $2.4 billion, 18% lower than fourth quarter 2018 sales and 6% lower than sequential third quarter results, as average realized steel prices declined. Our fourth quarter 2019 operating income was $182 million, 50% lower than prior year fourth quarter earnings and 20% lower than sequential third quarter results due to lower realized flat-rolled steel pricing which more than offset the benefit of lower scrap costs.

As we discuss our business this morning, you will find we are constructive considering underlying steel demand and optimistic concerning our unique earnings catalysts.

Within our steel operations, fourth quarter shipments declined sequentially a modest 2% to 2.7 million tons. However, our steel volumes increased 3% compared to last year as value-added shipments from our flat roll operations grew. Our average quarterly realized external steel sales price decreased $45 per ton sequentially to $764 in the fourth quarter. And average scrap costs only declined $32 per ton, causing lower steel metal margins. The result was fourth quarter steel operating income of $201 million, 16% lower than third quarter results due to our planned flat roll outages, seasonally lower shipments and lower realized steel pricing.

For the full year 2019, our steel facilities achieved numerous production and shipment records. The platform's operating income was $1 billion, less than record 2018 results of $1.9 billion due to lower flat-rolled steel metal margin. Annual overall metal spread declined from the historical highs experienced in 2018. Everyone should be proud as 2019 was a challenging steel environment based on significant customer destocking. While we achieved record annual steel shipments of 10.8 million tons in 2019, we still have additional market opportunity with annual steel shipping capability of over 13 million tons.

We continued to grow our internal manufacturing capability during 2019. It's a powerful strategic advantage to have internal processing capability to sustain higher steel mill utilization during weaker demand environments, to create optionality of supply for our customers and to allow for value-added product upside in all market environments.

For our metals recycling platform, fourth quarter ferrous price indices declined approximately $35 per gross ton, and volumes were seasonally lower. This challenging market resulted in a fourth quarter operating loss of $5 million compared to operating income of $3 million sequentially. As spare scrap prices declined in 8 of 12 months during 2019, our metals recycling operations annual operating income decreased to $28 million in 2019, compared to $88 million in 2018. Approximately 65% of our metals recycling ferrous shipments serve our own steel mills, increasing scrap quality, melt efficiency and reducing company-wide working capital. Our vertically connected operating model benefits both platforms. As a company, we reintroduced over 11 million tons of recycled ferrous materials and 1.1 billion pounds of recycled nonferrous materials into the manufacturing life cycle in 2019.

For our fabrication business, fourth quarter 2019 operating income of $33 million remained aligned with sequential results and was our third best quarter. The team also achieved record quarterly shipments in what is traditionally a seasonally slower time frame, substantially offsetting a modest decline in prices. For full year 2019, our fabrication operations achieved record shipments of 644,000 tons and operating income of $119 million, almost double last year's earnings.

Order activity was strong throughout 2019, supporting higher average sales prices as average steel input costs declined, resulting in margin expansion. We continue to see strong order inquiry and customer optimism. We're beginning the year with a strong project backlog.

Our cash generation continues to be incredibly strong. During the fourth quarter 2019, we generated $409 million of cash flow from operations, and for the full year, $1.4 billion, our second best year.

2019 capital investments totaled $452 million, of which $205 million related to our new Sinton, Texas flat-rolled steel mill investment. We currently estimate 2020 full year capital investments to be in the range of $1.4 billion: $1.2 billion allocated to the Sinton, Texas steel mill; $60 million to complete Columbus's third galvanizing line, which should start operating mid-2020; and the remaining $140 million related to smaller growth projects or sustaining projects.

Regarding shareholder distributions, after a 28% increase in first quarter of 2019, we maintained our cash dividend for the fourth quarter at $0.24 per common share. We also repurchased $56 million of our common stock during the fourth quarter, totaling $349 million for the full year 2019, with $51 million remaining authorized for repurchase at the end of the year. Since 2016, we've invested $1.1 billion, repurchasing approximately 14% of our outstanding shares. We believe these actions reflect the strength of our capital structure, consistent cash flow capability and liquidity profile and a continued optimism and confidence in our future. We achieved record liquidity of $2.8 billion at December 31, 2019, representing $1.6 billion in cash and short-term investments and $1.2 billion of available funding under our unsecured revolving credit facility.

Regarding our new Sinton, Texas flat-rolled steel mill, the investment is still expected to be approximately $1.9 billion. We just received the required environmental permits last week allowing full construction efforts to begin, with a current expectation of operations beginning midyear 2021. Based on this time line, we estimate the remaining capital investment to be approximately $1.7 billion. Again, $1.2 billion to be funded in 2020, with the remaining $500 million to be funded in the first half of 2021. We've also been awarded approximately $155 million in state and local incentive benefits that will be received over time.

Collectively, our primary strategic growth investments provide an estimated incremental annual future EBITDA of over $425 million on a through-cycle historical spread basis. The estimate includes our planned Sinton, Texas steel mill and the third galvanizing line at Columbus, as well as our 2 operational rebar expansions.

In October, we received an investment-grade rating designation from 3 rating agencies. We followed this upgrade in December with the syndication of a new $1.2 billion unsecured revolving credit facility and the execution of our inaugural investment-grade notes offering. We issued $400 million of 2.8% notes and $600 million of 3.45% notes. We used the proceeds to repay $700 million of existing 5.125% notes and for other general corporate purposes.

We're very appreciative and excited concerning the incredible receptiveness of the investment-grade market. These transactions extended our debt maturity profile and will reduce annual interest costs. Receiving the designation of investment grade is a natural progression of our strategic growth and recognition of our strong balance sheet profile and sustainable through cash free -- sustainable through-cycle free cash flow generation capability.

Due to the strength and optionality within our capital structure and the free cash flow generating business model, we have the flexibility for continued growth and responsible shareholder distributions, while also being dedicated to preserving investment-grade credit ratings. Our capital allocation still prioritizes responsible strategic growth with appropriate shareholder distributions comprised of a base positive dividend profile that is complemented with a variable share repurchase program. We're squarely positioned for the continuation of sustainable growth and optimized long-term shareholder value creation.

For those of you that track more specifically our flat-rolled shipments, for the fourth quarter we had hot-rolled and pickled and oiled shipments of 838,000 tons; cold rolled shipments of 167,000 tons; and finally, coated shipments of 911,000 tons.

Thank you. Mark?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [5]

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Thank you, Theresa. Thanks for the detail. I think it profiles an incredible job by an incredible team.

As we've always suggested and execute upon, safety is always -- has been our #1 value and our first priority. Nothing surpasses the importance of creating and maintaining a safe environment for our people. Our 2019 incident rate crept up slightly, and our lost time rate ticked up a little above our 2018 record low. But most importantly, our severity rate continued to improve in 2019. While our safety performance remains significantly better than our industry averages, it's not enough. We all must be continuously aware of our surroundings and our team members around us. Safety must always be top of mind, and I challenge all of us to remain focused and to keep moving toward our ultimate goal of no injuries.

The fabrication platform delivered an outstanding performance, with the team achieving record annual earnings and shipments. Profit margins expanded as average 2019 product pricing rose and raw material steel input costs declined. Additionally, the fabrication platform provided increased utilization for our steel operations, purchasing over 438,000 tons of steel internally. The fabrication group is confident regarding 2020. Despite seasonality, they achieved record fourth quarter volumes. The order backlog is even stronger entering 2020 than it was this time last year, and the customer base is optimistic concerning nonresidential construction projects.

Our metals recycling team also supported our steel operations by supplying over 1/3 of our steel mill scrap requirements during the year. 2019 was particularly difficult in the metals recycling industry with ferrous scrap prices declining in each of 8 months. The combination of trade and uncertainty around China's environmental policies also pressured recycled nonferrous prices and demand. This month-over-month price drop decreased earnings during the year. But within this backdrop, the team continued to focus on efficiency gains, which yielded sustainable positive results.

Prime scrap prices have normalized, increasing approximately $80 per gross ton since October, recovering from the tepid demand environment caused by low middle utilization rates manifested by numerous maintenance outages and coupled with an uptick in export activity. A stable or rising market should return the recycling platform to more normalized earnings. Longer term, with steady scrap supply from the manufacturing base and the potential for additional scrap substitute production in the United States, we believe scrap supply will outpace demand, creating a positive steel mill -- steel margin environment.

The steel team delivered a strong performance with record 2019 shipments and numerous production records. Our steel processing and conversion locations also supported our steel mills. Including the fabrication platform, we transferred over 1.4 million tons of steel internally or about 13% of our total 2019 steel shipments. Our manufacturing businesses provide a powerful utilization level for our steel mills, increasing through-cycle utilization, thereby compressing fixed costs and supporting solid cash flow generation.

Even though 2019 was one of our best years, it was challenged by high customer steel inventories throughout the supply chain, as many customers purchased beyond normal demand levels in 2018. While domestic steel demand remained steady through the year, inventory destocking drove flat-rolled steel prices lower. As an example, average 2019 hot-rolled coil price indices decreased over $225 per ton. Fortunately, pricing firmed in the fourth quarter as destocking subsided and inventory levels were rightsized.

Long product steel pricing and shipments remain pressured by excess domestic supply and continued import competition. However, we are seeing the benefits from our recent investments in product diversification and supply chain differentiation, helping to offset some of these market pressures.

Underlying domestic steel demand remains intact for the primary steel consuming sectors, including automotive and construction. Additionally, steel consumed by the pipeline infrastructure for the collection and distribution of liquids and gases continues to be strong, and we expect it to remain so as the U.S. continues its energy independence journey. We believe North American steel consumption will continue to improve, with Mexican growth outpacing that of the U.S. based on meaningful increases in Mexico's manufacturing base. Furthermore, we believe the U.S. trade position will continue to support moderated steel imports, and when coupled with the increased domestic steel content requirements included in the recent USMCA for automotive producers, provides a positive landscape for domestic steel production.

We continue to competitively position Steel Dynamics for the future through optimization of our existing operations and differentiated growth investments. During 2019, we invested over $385 million in our steel platform. And specifically, in the first quarter, we completed a 240,000 ton rebar expansion in our Structural and Rail Division. This differentiated rebar supply chain model is expected to meaningfully enhance customer optionality and flexibility, providing significant logistics, yield and working capital benefits for our customers. Including our 2018 Roanoke Bar rebar investment, we now have 440,000 tons of rebar capability, shipping 40% of this volume in 2019. Market dependent, we plan to increase rebar shipments to over 375,000 tons in 2020.

Within the flat roll group, the 2018 acquisition of Heartland provides value-added product diversification. The Heartland team achieved record annual shipments with no additional staffing in 2019. Their 500,000-ton-plus shipping volume represented over 60% of their expected 800,000 ton planned run rate.

During 2020, we plan to hire additional team members to increase utilization to over 80%. Additionally, by allocating lighter-gauge flat roll production to Heartland, our Butler Flat Roll Division has increased its value-added production output, setting new volume records. I'd like to applaud the Heartland team for a highly successful integration into our family.

We're also in the process of value-added growth at our Columbus Flat Roll Division. Columbus has transformed its product offering through the addition of a paint line and the introduction of more complex grades of flat-rolled steel. The diversion of product to these diversified value-added outlets has reduced the volume of product available to our existing galvanized steel customers. To address this lack of sufficient galvanizing capability, we're building a third galvanizing line at Columbus. The $140 million 400,000-ton galvanizing line will begin operations mid-2020. While satisfying our customer demand, their product realignment will decrease Columbus's hot-rolled coil exposure, allowing for an existing customer base in the region to provide a good baseload for our new Texas steel facility. And we continue to become even more excited about the material growth the construction of this new next-generation Sinton, Texas flat roll steel mill will deliver. Our construction and start-up team has an incredible depth of experience in the construction, start-up and operation of large steel manufacturing assets. Collectively, we believe they have more experience than exists in any other company in the industry. The core group began site work in the second half of 2019, and we're excited to announce the recent receipt of the required environmental permitting to allow for full construction efforts to begin. The Texas mill will follow the same stringent sustainability model as our other steelmaking facilities, with state-of-the-art environmental processes. Our existing steel mills literally have a fraction of the energy intensity, about 11%, and greenhouse gas emission intensity, of average world steelmaking technology.

There's a tremendous amount of excitement, both internally at SDI and outside, as we continue to add engineers and professionals to the on-site team. We are moving fast in building our team. The new state-of-the-art 3 million ton steel mill will include value-added coating lines comprised of a 550,000-ton galvanizing line and a 250,000-ton paint line with Galvalume capability. The Texas mill will have capabilities beyond existing electric-arc-furnace flat roll steel producers, competing even more effectively with the integrated steel model and foreign competition. The mill will have the capability to produce higher-strength, tougher grades of flat-rolled steel for the energy and automotive markets. This is due to having a thicker cast section and a more conventional 2-stage hot rolling process which allows for thermomechanical rolling. The mill will be capable of 84-inch wide, 1-inch thick, 100 ksi hot-rolled coil, product that is unavailable in the United States today. Additionally, larger-weight coils will provide energy pipe producers intrinsic cost and yield savings. The configuration will also allow us to ship certain plate products on a limited basis, providing further product diversification.

The steel mill is strategically located in Sinton, Texas, which is adjacent to Corpus Christi. The site has significant competitive advantages, including geographic market position, power accessibility, freight benefits, water availability and constructability. The Sinton location provides a significant freight benefit to most of our intended customers relative to their current supply chain. Compared to their current domestic supply options, we expect the potential customer savings to be a minimum of $20 to $30 per ton, and for some, much higher. In addition, customers will be able to place orders with a much shorter lead time, providing significant delivery and working capital advantages. We have the opportunity to provide steel in terms of weeks versus months. These benefits provide a differentiated supply chain solution, allowing us to effectively compete with imports arriving in from Houston and the West Coast, which inherently have long lead times and speculative pricing risk. These advantages will also give the North American pipe producers a competitive supply chain to once again compete with the foreign pipe producers that have dominated their market.

Customers are excited to have a regional flat-rolled steel supplier, and we have several customers already committed to locate on-site with us, representing over 800,000 tons -- annual tons of local steel processing and consumption capability. From a raw materials perspective, our metals recycling operations already control a significant and growing scrap volume in Mexico through scrap management agreements, much of which is prime scrap. We also plan to cost-effectively source pig iron through the port system, so we are confident in our ability to procure high-quality raw materials in the region.

We have 3 targeted regional sales markets representing over 27 million tons of relevant flat-rolled steel consumption, and we believe this will increase in the coming years as Mexico continues to grow. We have 7 million tons from the 4-state region of Texas, Oklahoma, Louisiana and Arkansas, which has limited domestic regional supply and relies heavily on imports. Sinton lies in close proximity for both rail and truck delivery in this region.

There are 4 million tons of consumption from the underserved West Coast region, which also relies heavily on imports, and approximately 16 million tons from the growing Northern and mid-Central Mexican regions. In 2018, the Mexican market imported 7.5 million tons of flat-rolled steel. Based on their growing manufacturing base, we believe Mexican demand growth will continue to outpace supply, making this an even more attractive underserved market in the coming years. Sinton will have the most freight-advantaged shipments into this region from the U.S.

We've been developing a flat-rolled steel strategy for these regions and Mexico for several years. We've been cultivating both customer and scrap relationships, and we are confident in the long-term strategic value and investment profile this project provides. We thank the Sinton community for their continued enthusiastic support and truly look forward to growing together in the future. We believe our unique operating culture, coupled with our considerable experience in successfully constructing and operating cost-effective and highly profitable steel mills, positions us well to execute this strategic initiative.

To be clear, we're not just adding flat-rolled steel production capacity. We're expanding our whole SDI business model into the Southwest and into Mexico. We will have a differentiated product portfolio. We will have a significant geographic freight and lead time advantage. We will effectively compete with steel imports, and we have targeted regional markets.

In conclusion, our unique culture and the execution of our long-term strategy continues to strengthen our financial position through consistent strong cash flow generation and long-term value creation, differentiating us from our competition and demonstrating our sustainability, as recently recognized by our investment-grade rating designation.

Our exceptional team provides the foundation for our success. I am proud of our recent inclusion as one of the world's most admired companies by Fortune Magazine. It is a testament to our incredible team. Each one contributes. Each one has an impact. And I thank each and every one of you for your passion and commitment to excellence. Remember to be safe for yourselves, your team and your families.

We're committed to providing exemplary long-term value to our fellow colleagues, communities, customers and shareholders, and look forward to creating new opportunities for all. So again, thank you for your time today. Melissa, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Martin Englert with Jefferies.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [2]

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Within the release and prepared remarks, you noted expectations of modest demand growth in North America. What percentage growth do you think that implies? And perhaps if you can provide a little bit more detail maybe on specific end markets, puts and takes, whether you're expecting ongoing growth and perhaps contraction.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [3]

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Yes, certainly. I think we are incredibly constructive on the market in general going into 2020 and 2021 to be -- for that matter. Because again, underlying demand last year didn't dissipate. The whole price drop was the, sort of a drawdown or destocking of customer inventory, and that obviously is reversed here in the last couple of months of the year and going into 2020. And so it's a very positive market. You have the 2 principal markets -- flat roll markets -- automotive and construction, in great, great shape, and that represents 60%, 70% of the market. There's incredible optimism on the construction side. New Millennium Building Systems, our fabrication platform, has incredible business going into the year, and I think that bodes incredibly well for construction in general. And it also parallels with our prepaint building products on the flat roll side. So construction, we believe, is going to be very, very strong in the year.

The -- as I mentioned earlier, we think the energy sort of pipeline infrastructure is going to be strong for the year and for the next 2 or 3 years as we go down that path of energy independence and drawing all those energy products down to the Coast for export. Downhole energy is a little weak, perhaps. But again, the improving demand environment -- and if you look at our order books, generally they've been very, very strong. Pricing is very, very robust. Lead times have stretched out. The 232 tariffs have had their impact, but just the trade environment in general is very positive. And obviously, the passage of the USMCA is already garnering results. We're certainly seeing foreign sort of auto producers that were bringing material in from Asia and from Europe looking for domestic sourcing, and we've been the beneficiary, and we've been picking up a dramatic amount of market share there.

On the long product side, again, pretty bullish there. I think some of the cloud of uncertainty is lifting a little bit, and there's general optimism. And as I've said in the past calls, engineered bar is our sort of bellwether for the steel-consuming environment. And generally, they're seeing a pretty strong uptick. A lot of that -- or some of that could be just that customers overshot the destocking and they're restocking, but we truly believe underlying demand is robust. Automotive is strong there. We're seeing a very, very strong pickup in our supply to coat finishes. There's even a pickup in the seamless tube market. Trailers and yellow -- trailer is a little flat, but even yellow goods is picking up. So we're seeing good strong benefit there. And then obviously will benefit Pittsboro and our Structural and Rail Division as they send more [blooms] down to -- there for conversion.

Roanoke business, merchant shapes is okay. In Structural and Rail Division, I think we're seeing a little softness, a little softening in rail CapEx from the major railroads, but we seem to be picking up market share. The team has done a phenomenal job. We produce some of the highest-quality rail in the world. And we're penetrating the transit and high-speed rail environment. So that's a good business for us. And again, parallel flange in the structural arena, we see that being pretty solid through the year. So generally I think it's going to be a very good year, a much more positive year than 2019.

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Martin John Englert, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. I appreciate all the color there. And congratulations on the execution in challenging environment.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [5]

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I appreciate it. Thank you.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [6]

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Thanks, Martin.

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Operator [7]

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Our next question comes from the line of Chris Terry with Deutsche Bank.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [8]

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The main thing I wanted to ask you about, just in the shorter term, just trying to link together scrap imports and the recent strength in HFC pricing and your comments on more normalized inventory levels. Have you seen anything just recently with talk that scrap is going to be down in February on the customer behavior side that may change where people restock, destock, and just the outlook maybe for the next couple of months? If you could comment on that first.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [9]

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Russ, do you want to comment on the scrap?

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Russel B. Rinn, Steel Dynamics, Inc. - EVP of Metals Recycling [10]

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Sure. Thanks, Chris. Again, as we look at scrap in 2019, we certainly had a very, very tough environment. I think the pricing levels overshot where they probably should have been, and we've seen some of that come back in the last part of the year. I think as we start into 2020, we're anticipating a more normalized year, some ups, some downs, but no substantial moves like we had last year. And in the short term, I think we're looking at kind of a soft sideways. Certainly the offshore pricing has declined slightly, but part of that's going to be offset, we believe, with the increased steel mill utilization domestically. So we're not looking for any major changes. I think the trend would be down slightly, but not a significant pushdown.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [11]

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You know and I think the weather in the Midwest is pretty moderate. So flows are relatively strong on the absolute cut rates. We see very, very strong flow in prime grade still. Obviously industrial business, and most importantly automotive stamp plates -- plants are growing very, very strong. So the flow of scrap is good. And then during the year, I think you're going to see some additional sort of HBI alternative iron units, come online. So we see a pretty stable raw material environment with a strong product environment, and I think that bodes very, very well for spreads through the year.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [12]

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Okay. Just a follow-up. Maybe you could just discuss a little bit more your expectations on the imports for the year. Obviously, it came down a lot last year. Are your comments that they should come down further in 2020 predicated on the parity pricing? Or are there other factors at play there?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [13]

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Well, obviously between the Section 201 countervailing duty and antidumping trade cases that have been with us for some time and will remain with us for a good long time as well, and the 232, we saw a considerable moderation in imports through the year last year. I think that will continue. Obviously the arbitrage to European and Asian pricing is not totally attractive for folks to look offshore. So again, I think imports will be moderated.

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Operator [14]

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Our next question comes from the line of Andreas Bokkenheuser with UBS.

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Andreas Bokkenheuser, UBS Investment Bank, Research Division - Executive Director, Head of LatAm Mining & Basic Materials and Research Analyst [15]

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Yes. I'm kind of just staying within the same line of questions. Most of the rhetoric we're getting, especially from the service centers in downstream steel buyers, seems to be somewhat cautious, so I'm just wondering what you think the market is missing here. Because to Terry's point, scrap is probably going to come down. There's a lot of rhetoric suggesting that the steel price hike -- or hikes, as we've seen them over the last 3 months, have been mostly driven by higher scrap prices, whereas apparent U.S. steel demand as a whole has actually been declining. The futures price -- flat steel futures prices have taken a pretty meaningful step-down as well, suggesting that steel price could drop $30, $50 a ton from here. And we're going into an election year, which seems to suggest a lot of people are very cautious about how they're going to be spending CapEx and consumer spending as well. So I'm just wondering, your rhetoric is obviously a little bit more constructive on how you're seeing the market. So what do you think the market is missing at this point in time?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [16]

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Well, all I can say is -- or comment on the market through our lens, and as I suggested, the -- our backlogs are very, very strong right now. They're incredibly strong in New Millennium Building Systems, which would suggest that the construction world is going to have a very, very good year. The distribution warehouse business in that arena is incredibly strong. So construction, we do believe, is going to be robust. Automotive has been running at a relatively record pace and the prognostication is that okay, may be off a little, but it's going to continue to be strong.

As we look through the lens of engineered bar, which I suggested earlier is our bellwether, that's a very, very healthy business, and it's looking better now than it has for a couple of years going into the year. And flat roll remains very strong. Coated products, and obviously we're the largest nonautomotive coater in the States, that is very, very strong for us. So again, we can only see what we see. And we can only hear what we hear from our customers, and there's general optimism out there. Part of that strength could be a little restocking, as people overshot last year, and that tends to happen. People buy too much and they -- then they go too short. But underlying demand, in our mind, is very, very solid.

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Andreas Bokkenheuser, UBS Investment Bank, Research Division - Executive Director, Head of LatAm Mining & Basic Materials and Research Analyst [17]

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That's very clear. Maybe a follow-up on that. Do you see that a lot of the strength in your order book may also be driven by inorganic growth? I mean you're effectively taking market share potentially from some of your peers in the market. Is that fair to say?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [18]

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I think it's fair to say in the automotive arena in particular. And in the prepaint, I don't think we're taking a further market share because our lines are running flat out, and we can't produce any more. But with our Sinton plant, with the added capability we will continue to add there. But yes, so automotive, we are picking up, I think, market share. The rest of our business is more sort of straightforward market.

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Operator [19]

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(Operator Instructions) Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [20]

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Mark, if we could stick on automotive just for now, can you give us a picture in terms of how much of your business right now, particularly in the sheet and SBQ arena, is going into automotive? And maybe give us a view of where you are today versus where you thought you'd be when Columbus was going through their mix transition, and then also where you're trying to go.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [21]

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Philip, Barry will give you some clarity there.

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Barry T. Schneider, Steel Dynamics, Inc. - SVP of Flat Roll Steel Group [22]

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Hello, Phil. The automotive here we have is continuing to grow through the Columbus operation. There's a lot of different things we're doing with our auto team directly that is relatively new in the last 5 years to Steel Dynamics. And a lot of those awards are as a Tier 1 -- to Tier 1 suppliers are directly to automotive. So those continue to grow. We do always enjoy good business out of the Butler facility with automotive, and that remains strong. So not only supplying service centers, but directly, we continue to grow, as Mark indicated, getting new market share as we are awarded new parts and our capabilities increase. So as a whole, typically somewhere between 15% and 20% is automotive shipments coming out of our flat roll plants.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [23]

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Chris, from an SBQ standpoint?

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Christopher A. Graham, Steel Dynamics, Inc. - SVP of Long Products Steel Group [24]

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Yes. Phil, this is Chris. On the SBQ side, we're starting to leverage our existing and newfound relationships in the flat roll in the automotive group to open up opportunities for SBQ. We've -- recently, the team has recently achieved some new automotive certifications that will allow us to lever our new inspection and testing equipment and our new rolling capacity there. So although it may be a relatively small number at our SBQ, the plan is to grow, and I think the team is positioned well to do so.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [25]

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And to be perhaps a little more specific, at Columbus we -- as Barry said, we're on platforms. Well, our market share has picked up already, but we're on platforms over the next 12, 18 months to pick up probably 500,000 tons will be coming out of Columbus into direct automotive. And obviously when the Sinton plant comes online, we believe about 1 million tons will be going to Mexico, and predominantly into the automotive arena.

And if you just step back and look at automotive for us, well generally, our traction has been incredibly quick and fast. For the automotive world, they tended in the past to react very, very slowly. Obviously, the USMCA is driving a lot of that as folks are looking for domestic content. And they look to us, first and foremost, I think, to our balance sheet. They want to partner with someone that's going to be around for the next 10, 20, 30 years, and our balance sheet is more solid than some folks', I would say. They also look at our sustainability model. Obviously, there's a lot of Europeans, and a lot of our traction has been with the European automotive makers, BMW, Mercedes, VW. And they see our sustainability story as being very, very persuasive. The fact that we will repurpose 10 million, 11 million tons of scrap each year, we're repurposing about 1 billion pounds of non-ferrous, and there's considerably more positive things with our ESG sustainability story. So they're attracted to that, and they're also attracted to our product development. So we are gaining a lot of market share, a lot of traction with the automotive industry in general.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [26]

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And, Barry, you said 15% to 20%. Were you talking just to your overall flat roll business? Is that what you were speaking to?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [27]

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No. Barry was actually speaking to our total steel shipments. We tend to be somewhere between 13% and 15% automotive.

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Operator [28]

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Our next question comes from the line of Andrew Cosgrove with Bloomberg.

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Andrew Cosgrove, Bloomberg Intelligence - Senior Analyst [29]

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Just had a quick one on long product shipments. Obviously, they were down 10% in 2019. And construction markets, you guys see them recovering this year. So where would we see volumes pick up if that materializes?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [30]

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From a volume perspective on the long product side, I think a couple of things. One is the ramp-up of the rebar projects at both Roanoke and the Structural and Rail Division should have a positive impact from gaining market share with the differentiated supply chain model that we have at those locations, and the fact that we'll be the only independent rebar producer in those regions. So we should be able to get improved volumes related to that. In addition, the Structural and Rail Division has additional capacity. They were only operating around 75% to 80% of their capacity last year. So when we mentioned that we have over 2 million tons of additional capability, a lot of that is in the long products region. And then additionally, Mark mentioned the SBQ. And Chris, I think you would think there was opportunity in SBQ. Is that correct?

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Christopher A. Graham, Steel Dynamics, Inc. - SVP of Long Products Steel Group [31]

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That's correct.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [32]

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I think just to emphasize there, when you look at the structural mill, our heavy mill, which is where we roll our rail, that has been kind of at 100% utilization for some time. Our medium section mill is where we've been struggling. And that's where some of the rebar -- or not some -- all the rebar there is produced. But we're in the good position, and we haven't been there for a long, long time, in that the medium section mill is pretty well at full utilization. Is that right, Chris?

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Christopher A. Graham, Steel Dynamics, Inc. - SVP of Long Products Steel Group [33]

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Yes.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [34]

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So it is turning. It's positive.

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Andrew Cosgrove, Bloomberg Intelligence - Senior Analyst [35]

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Okay. And then just one more on Heartland. I know in the middle of 2019, I think the target utilization rate by the second half was to get to 70%. You had mentioned before slightly over 60%. I guess a little over 500,000 tons. Is that kind of demand-oriented? Or was it more employee-driven? As you had mentioned, you're hiring more people for next year and looking to get to 80. So just kind of gauging the impact there, and I guess how close you could get to target next year, as far as Heartland is concerned.

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Barry T. Schneider, Steel Dynamics, Inc. - SVP of Flat Roll Steel Group [36]

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Yes. We continue to develop markets for the Heartland operations. And right now internally, a lot of the growth at Heartland has been through debottlenecking our finished goods production and painted production through the Butler and Jeffersonville facilities. So a lot of the development has been internally being able to get more products to our paint lines where we could bring more value. So as we look to external shipments, we've been right on the edge of where we need to add people and really, just the team is finding new ways to get high productivity out of what they're doing. So the last thing we do is bring people in, because we want to make sure it's a sustainable growth. So we continue to find those markets and particularly in the cold rolled steel sales, which is something that, because of our galvanizing campaigning, we typically haven't done as much cold roll sales. So we continue to make good ground there.

But really, internally it's been great to get our paint lines just fully utilized and to fully develop those products in those customers.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [37]

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I think you can expect that we shipped 500,000 tons, a little over, last year, and that we'll be ramping up through the year to that 750,000 to 800,000-ton level. That's not going to happen this month or next month. But I think as Barry said, as we gain new markets, you're going to see that ramp up through the year.

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Operator [38]

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Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'd like to turn the floor back over to Mr. Millett for any closing comments.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [39]

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Well, for those that are still on the line, thank you for your support both from a customer and shareholder perspective. And also, our employees that I'm sure are still on the line, we truly appreciate everything you do for us. And I just want to emphasize that hey, let's be safe out there and make sure that your fellow teammates are safe as well. So thank you. Have a great day.

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Operator [40]

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Thank you. Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation, and have a great and safe day.