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Edited Transcript of STLD earnings conference call or presentation 22-Jan-19 3:00pm GMT

Q4 2018 Steel Dynamics Inc Earnings Call

Fort Wayne Jan 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Steel Dynamics Inc earnings conference call or presentation Tuesday, January 22, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher A. Graham

Steel Dynamics, Inc. - SVP of Manufacturing Group

* Mark D. Millett

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

* 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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* Alexander Nicholas Hacking

Citigroup Inc, Research Division - Director

* Christopher Michael Terry

Deutsche Bank AG, Research Division - Research Analyst

* David Francis Gagliano

BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst

* Derek Brian Hernandez

Seaport Global Securities LLC, Research Division - Senior Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Philip Ross Gibbs

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Piyush Sood

Morgan Stanley, Research Division - Research Associate

* Seth R. Rosenfeld

Jefferies LLC, Research Division - Equity Analyst

* Timna Beth Tanners

BofA Merrill Lynch, Research Division - MD

* Tyler Lange Kenyon

Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior 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 2018 Earnings Conference Call. (Operator Instructions) Please be advised this call is being recorded today, January 22, 2019, 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, Karen. Good morning, everyone, and welcome to Steel Dynamics' Fourth Quarter and Full Year 2018 Earnings Conference Call. As a reminder, today's call is being recorded and will be available on the company 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 our leaders from the company's operating platforms, including our metals recycling operations, Russ Rinn, Executive Vice President; our steel fabrication operations, Chris Graham, Senior Vice President, Downstream Manufacturing Group; and our steel operations, Glenn Pushis, Senior Vice President, Long Products Steel Group; and Barry Schneider, Senior Vice President, Flat Roll Steel Group.

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 to general business and economic conditions. Examples of these are described in our annually filed SEC Form 10-K under the heading 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 this morning entitled Steel Dynamics Reports Fourth Quarter and Record Annual 2018 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. Good morning, and happy 2019. Welcome to our fourth quarter and full year 2018 earnings call, and we certainly appreciate and value your time with us this morning.

Hopefully, you see the Steel Dynamics team delivered another tremendous performance in 2018. Our strategic growth and market positioning during the last 5 years was integral to our current performance. Thank you to the entire SDI team for your passion and dedication to excellence in everything that you do. And congratulations to becoming a member of the Fortune Most Admired Company. You moved up to first in the metals sector, and that is an admirable place to be. So thank you for that. And thank you to our loyal customers, vendors and shareholders.

On many measures, 2018 was a record year: record operating metrics, record profitability and record cash generation, to name just a few. We have many exciting plans for the coming years as well, but before I explain more, I asked Theresa to provide insights regarding 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, everyone. I add my congratulations and sincere appreciation to the entire SDI team.

It was an outstanding year and numerous milestones were achieved: record revenues of $11.8 billion derived from higher realized pricing across all 3 of our operating platforms and record steel and fabrication volume; record earnings, including operating income of $1.7 billion and net income of $1.3 billion; record cash generation, including cash from operations of $1.4 billion and adjusted EBITDA of $2.1 billion. In recognition and appreciation for this tremendous performance, we awarded a well-deserved $1,500 cash performance bonus to all nonexecutive eligible colleagues in December totaling $12 million.

Our fourth quarter 2018 net income was $270 million or $1.17 per diluted share, which includes 3 items: the additional company-wide performance incentive of $0.04, lower earnings related to our planned outage at Iron Dynamics of $0.04 and lower estimated earnings associated with the planned outages at our Butler and Columbus Flat Roll Steel divisions at $0.06 per diluted share or $20 million.

The outages also reduced fourth quarter volumes by about 70,000 to 80,000 tons of flat-rolled steel. Excluding these items, fourth quarter 2018 adjusted net income was $1.31 per diluted share, above our adjusted guidance.

Fourth quarter 2018 revenues were $2.9 billion, meaningfully higher than fourth quarter 2017 sales but slightly lower than our record high achieved in the third quarter sequential results. Our fourth quarter operating [income] was $366 million, more than 85% higher than fourth quarter earnings but 30% lower than record third quarter sequential results, driven by lower flat-rolled realized volume value.

As a reminder, the fourth quarter is generally more difficult to translate as weather, seasonality and customer inventory realignment tend to distort true underlying demand dynamics for the coming months. 2018 was not -- was no different, but of note, our performance in the fourth quarter far outpaced that of 2017 and our best fourth quarter operating performance. As we discuss our businesses this morning, you'll find we are optimistic about 2019 from a macro perspective and even more so because of our unique earnings catalyst.

Regarding our steel results for the fourth quarter. Shipments decreased 6% across the platform to 2.6 million tons as compared to record high sequential results. Steel metal spreads compressed as our average quarterly realized sales price decreased $48 per ton in the fourth quarter and average scrap costs consume only decreased $9 per ton.

The sales price decline was driven by lower flat-rolled steel prices. In general, most of our long product steel prices actually increased in the fourth quarter. The result was fourth quarter steel operating income of $402 million. Although lower than third quarter record results, the strong performance is our third best.

For the full year 2018, steel operations achieved numerous milestones resulting in record shipments of 10.6 million tons and record operating income of $1.9 billion. Annual metal spread improved as our average sales prices increased significantly across the platform and scrap costs increased to a much lesser degree. While the teams achieved record volumes, we still have more capability in light of our acquisition of Heartland and the numerous production enhancements we made during the year, including cost-effectively accessing the excess melting capacity at our Roanoke constructional steel division.

For our metals recycling platform, fourth quarter operating income was $17 million, aligned with third quarter results. Improved average quarterly mill spreads were offset by seasonally lower shipments. Supported by improved domestic steel mill utilization, the metals recycling team increased annual 2018 shipments and earnings and continued to improve operating costs. This resulted in improved annual operating income of $88 million. We continue to effectively lever the strength of our vertically connected operating model, which benefits from the steel mills and the scrap operations. Two-thirds of their ferrous scrap was sent internally to our own steel mills, increasing their scrap quality, melt efficiency, and reducing company-wide working capital requirements.

Fourth quarter 2018 operating income for our fabrication business improved sequentially to $15 million. Earnings increased as improved product pricing more than offset the diminishing rise in average steel input costs and seasonally lower shipments. Order activity was strong throughout 2018, and the team achieved record annual joist-and-deck shipments of 642,000 tons.

However, in a rising steel input cost environment, annual operating income was $62 million versus the $87 million achieved in the prior year. We continue to see strong order entry and customer optimism. We're beginning 2019 with an even greater project backlog than this time last year, which is a positive indicator for nonresidential construction.

During the fourth quarter of 2018, we generated a strong $491 million of cash flow from operations and, for the full year, a record $1.4 billion with free cash flow after fixed asset investment of $1.2 billion. Operational working capital grew $284 million during the year based on market improved conditions.

Full year capital investments totaled $239 million with almost $190 million used within our steel platforms, including completing the reinforcing bar expansion. We currently estimate 2019 fixed asset capital investments to be in the range of $350 million. However, this does not include any expenditures for the new mill, which I'll talk about in a minute. Of that $350 million, there'll be about $100 million related to the completion of Columbus' third galvanizing line, $100 million broader expansionary and efficiency growth projects, and about $150 million related to sustaining capital, including that related to safety and environmental.

Regarding shareholder distributions in 2018, we increased our cash dividend in the first quarter by 21% and maintained that throughout the year. We also repurchased 3 point -- 13.1 million shares of our common stock for $524 million, representing 5.5% of our outstanding shares. About $400 million remains authorized at the end of the year for repurchase.

Our liquidity increased to over $2.2 billion at December 31, representing nearly $1.1 billion in cash and short-term investments and $1.2 billion of available funding into our revolving credit facility.

Before I hand the call back to Mark, I will share some additional insights regarding the anticipated cash investment time line for our recently announced new Southwestern U.S. flat-rolled steel mill, which is a key part of our growth strategy. The total investment is still expected to be between $1.7 billion and $1.8 billion, subject to revisions as we make final site selection, obtain required permitting and finalize the project time line.

Based on what we know at this point and assuming timely receipt of required environmental and operating permits, we would expect to begin actual facility construction in 2020 followed by starting operations in the second half of 2021. Based on this time line, we estimate the approximate capital investments to be as follows: in 2019, between $200 million and $300 million; in 2020, between $800 million and $900 million with the remainder being spent in 2021. We'll continue to refine these estimates as we make our final site selection and secure state and local incentive.

The strength of our through-cycle cash generation coupled with a strong capital foundation provides meaningful opportunity for growth and continued shareholder distribution through our positive dividend profile and share repurchase program. We're squarely positioned for continuation of sustainable, optimized, long-term value creation. Mark?

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

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Super. Thank you, Theresa. While safety is and always will be our #1 priority, 2018 safety performance did not meet the record incident rate performance we achieved in 2017, somewhat disappointing. But the team has refocused and done a good job reversing the uptick in recordable incidents we experienced in the first half of the year. I'm also encouraged by our continued improvement in our lost-time accident rate, which is the best we've ever achieved.

Nothing surpasses the importance of creating and maintaining a safe work environment. While safety performance remains significantly better than industry averages in the fact that they think about safety at all times. It must enter the subconscious. I challenge all of us to be focused and to keep moving toward our goal of 0 injuries.

To that end, I want to recognize the steel fabrication platform. They not only had record annual production in 2018, but they did it safely, achieving a record 2018 safety performance. The team also did a good job maneuvering within a rising steel input cost environment present through a large part of the year. Our fabrication order backlog remains very, very strong with continued optimism from our customers. This bodes well for nonresidential construction demand 2019.

The fabrication platform also supported our steel mills and pushed 370,000 tons of steel internally in 2018. This is a meaningful level to achieve sustainably high steel utilization through the cycle. In total, our business has sourced almost 985,000 tons of steel internally last year.

Our metals recycling team also performed well and supported our steel operations, internally supplying over 3.3 million tons of ferrous material through the year. Annual ferrous scrap shipments and average pricing increased as domestic steel production improved during the year. Our nonferrous commercial associates should be commended for navigating a complicated set of circumstances given China's ban on certain recycled material. Despite the issues, we increased nonferrous shipments, improved earnings and generated new international supply connections.

More recently, ferrous scrap accessibility has been steady and dealers have built inventories. We anticipate supply will outpace demand even with higher steel-related demand through 2019. This is consistent with our long-term scrap view and supports healthy steel metal margins.

As Theresa outlined, our steel platform had an outstanding year. The teams executed at the highest level, levering a reverse market environment while innovatively optimizing our assets.

Domestic steel demand was strong throughout the year. Steel consumption increased based on the strength of the automotive, construction and energy sectors. We also experienced a decline in total finished steel imports on both an absolute basis and as a percentage of consumption. We believe both U.S. and Mexican steel consumption will continue to improve in the coming years with Mexican growth outpacing that of the U.S. based on meaningful increases in their manufacturing phase.

We continue to position Steel Dynamics for the future through optimization of existing operations, organic investments and transactional growth. During 2018, we invested almost $190 million in our existing steel operations and acquired Heartland Steel, a 1 million ton flat-rolled processing facility.

We completed a $38 million, 200,000-ton reinforcing bar expansion at our Roanoke Bar Division in the third quarter. We're the only independent supplier in the area.

We also just recently completed a 240,000 ton, $82 million expansion of rebar at our Structural and Rail Division. This expansion includes cut-to-length and coiled rebar capability.

Our unique rebar supply chain model is expected to meaningfully enhance customer optionality and flexibility, providing significant logistics, yield and working capital benefits to our customers. In addition, we'll be the largest independent rebar supplier in the Midwest region, and we expect rebar shipments from the Structural, Rail Division to begin next month.

Our acquisition of Heartland at the end of June was a great strategic addition, increasing our product diversification through value-added, wider and lighter gauge product capability. Its geographic proximity to our existing Midwest flat-roll operations also allows for meaningful value creation.

Integration is going well, but there's still work to be done. We plan to reach an annual run rate of about 80% to 90% of capacity by midyear 2019. Heartland provides a unique margin-enhancing opportunity for us, and these are just some of the numerous organic projects that were completed in 2018 that will benefit the coming years.

During 2018, we also announced further growth for our Columbus Flat Roll Division. In the last 2 years, Columbus has transformed its product portfolio through the addition of a paint line and the introduction of more complex grades of flat-rolled steel. The shift of product to these diversified, value-added outlets has reduced the amount of volume available to our existing galvanized steel customers.

So to address this lack of sufficient galvanizing capacity, in June of 2018, we announced the addition of a third galvanizing line at Columbus. This $140 million investment is another step of further value-added diversification to the mill and less hot-rolled coil exposure. The 400,000-ton line is planned to begin operating midyear 2020. Additionally, during the next 18 months, we plan to invest about $90 million at Columbus to further increase Columbus' range of complex grade capabilities, including advanced high-strength steels.

I'm also excited about the expansive opportunities and long-term value creation that our Southwest U.S. and Mexico growth strategy will provide Steel Dynamics. Each of our operating platforms have an existing presence in the region today, but we're on the move and planning to meaningfully expand our influence in all platforms.

The recently announced planned construction of our new flat-roll steel mill in the Southwestern U.S. is a significant piece of the plan. The facility is designed to have an annual production capability of 3 million tons and include a 450,000-ton galvanizing line and a 250,000-ton paint line with Galvalume capability. We estimate the investment to be between $1.7 billion and $1.8 billion.

The new mill will have capabilities beyond existing electric-arc-furnace flat-roll steel reducers, competing even more effectively with the integrated steel model and foreign competition. We're not just adding production capacity. We have targeted markets, and the new mill will have competitive advantages in those areas.

We've targeted 3 regional markets representing over 27 million to 28 million tons of relevant flat-roll steel consumption, and we believe that demand will increase in the coming years. These regions include approximately 8 million tons of demand from the 4-state Texas, Oklahoma, Louisiana and Arkansas area, which has limited domestic regional supply and relies heavily on imports; secondly, approximately 4 million tons from the underserved West Coast region, which relies heavily on imports as well; and approximately 16 million tons from the growing Northern and Mid-Central Mexican region. 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 future.

A significant competitive advantage lies in the intended location of the facility central to these opportunities. The mill will provide a significant freight cost advantage and shorter lead times to many customers in the U.S. and Mexico regions. This will provide a competitive supply chain that will be an effective option to imports flowing into Houston and the West Coast. Our customers are incredibly excited and have already expressed interest in possibly locating facilities on or near our site.

From a raw materials perspective, our Metals Recycling Operations already control scrap in Mexico due to our scrap management relationships, much of which is prime scrap. We also plan to cost-effectively source pig iron through the port systems. Based on our current scrap relationships both in Mexico and the Southern U.S., we're confident in the ability to procure high-quality scrap in the region.

Developing our flat-roll steel strategy for this region and Mexico has been in the making for several years. We've been developing both customer and raw material supply relationships and are confident in the long-term strategic value and investment profile this project provides. 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 greenfield opportunity.

We're also optimistic about our existing market opportunities for 2019. We believe North American steel consumption will continue to see a steady increase and grow through the year. Furthermore, the actions the U.S. federal government has made to develop a healthy domestic steel industry should provide sustainable, long-term support to the U.S. manufacturing base and continue to erode import volume.

Specific to Steel Dynamics, our unique culture and the execution of our long-term strategy continues to strengthen our financial position through strong cash flow generation and long-term value creation, demonstrating our sustainability and differentiating us from our competition. Customer focus, coupled with market diversification and low-cost operating platforms, support our ability to maintain our best-in-class performance and differentiation. The company and the team are poised for continued organic and transactional growth.

Our phenomenal team provides the foundation for our success. I thank each of you for your passion and your commitment to excellence and remind you safety is always our first priority. We're committed to providing exemplary long-term value to our team, our communities, customers and shareholders alike and look forward to creating new opportunities and additional value in the years ahead.

So once again, thank you for your time today, and Karen, please open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Chris Terry from Deutsche Bank.

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Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [2]

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Just in terms of the 3 million ton facility you're going to build in the south, you mentioned the location strategically with customers. I was just wondering if you could talk through whether you have a baseload commitment, how the qualification period would work for customers and the sort of numbers of customers you're talking about, please.

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

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I think, obviously, it's a little too early to have a full baseload when the mill is scheduled for a mid-'21 -- summer '21 start-up. I will say, though, that with our Columbus facility, we have good knowledge within the Southwest area, I think 600,000 tons or so, perhaps a little bit more. About 600,000 to 800,000 tons currently flows into the Southwest and about 120,000 tons flowed into Mexico last year. And we believe that the 2 mills will be complementary going forward. But nonetheless, we know the customer base is there, and we are very, very optimistic that the baseload will be debarked. We are looking at developing the site with kind of an industrial campus perspective, not unlike Butler. If you were to go to Butler today, we have, right next door, I think, 5, 6, maybe 7 facilities employing 1,500, 1,600 folks and consuming a good, I would say, 400,000, 500,000 tons a year, and our strategy will be to emulate that. And the initial customer excitement is, in all honesty, beyond expectation. I think you go -- and this may be simplistic, but if you just take a map and you put little red spots or blue spots or green spots on flat-rolled producing sites at the mills, you see an absolute void in the Texas, Oklahoma, Louisiana, Arkansas region. A total void. That region is having to be served at a distance at a high freight number from domestic mills and obviously from imports. A large amount has been served by imports coming through to reduce them. The customer excitement, I think, is that they've never had a regional presence there, so they haven't been able to expand their own operations to an extent that they would like, and they see this as that opportunity.

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Operator [4]

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And our next question comes from Seth Rosenfeld from Jefferies Financial.

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Seth R. Rosenfeld, Jefferies LLC, Research Division - Equity Analyst [5]

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Just to follow up on the southwest mill. Can you please give us a bit of an update on broader capital allocation strategy? Clearly, many investors somewhat surprised by that investment last year. Can you give us an update on how you're prioritizing organic versus inorganic growth moving forward and whether you think the company has firepower for additional growth initiatives that could be announced in the medium term?

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

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This is Theresa. Yes, so from a capital allocation perspective, given the time frame over which these dollars are expected to be spent and given the cash that we'll be generating during that time frame, we firmly believe that we still have the ability to not only grow organically with this facility and with the other projects that we've announced thus far, including the Columbus galvanizing line, but we also have the capability to do some transactional (inaudible) and to also continue with our shareholder distributions through both the positive dividend profile and the continuation of a share repurchase program. So we don't believe that this facility in and of itself curtails any of the other opportunities or options that we have from a capital allocation perspective.

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Operator [7]

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And our next question comes from Piyush Sood from Morgan Stanley.

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Piyush Sood, Morgan Stanley, Research Division - Research Associate [8]

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I saw your full year constructive guide. And when we compare that to what we're reading and (inaudible), seems like there's an ongoing buyer's strike. So do you think we should build some level of conservatism in our 1Q outlook and then a shipment rebound in 2Q? Or do you think the buyer's strike is a little hyped up right now?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [9]

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From a buyer's strike perspective, I think the question is whether or not you think that we'll have the benefit of a stronger second quarter. Is that the question?

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Piyush Sood, Morgan Stanley, Research Division - Research Associate [10]

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That and, in terms of shipments, should we expect something similar to what we saw last year? Or is there a skew that's maybe leaning towards 2Q or with the second half?

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

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Okay. Well, I think you're right. There has been some buyer hesitancy. I believe it coincides with the raw material fixture that has been depressed the last 2 or 3 months. As we've seen many, many times in the past, when there's an expectation of continued downward pressure on scrap pricing, the steel consumer expecting lower pricing tends to limit their buy to just what they need and don't necessarily want to speculate on growing their own inventories. I would suggest, though, that we're at the bottom. I do think, as we've seen and I stated many times before, there's a tendency for everyone to jump out of the market, and then all of a sudden, everyone jumps back in the market, and we're getting to that point. But I do believe underlying demand still remains very, very solid and will grow in 2019. Automotive is -- momentum continues its pace. And I got to say, hats off to our Columbus mill because we continue to pick up market share in automotive. They shipped 400,000 tons into the automotive markets last year. If you remember, just a few years ago, that was almost 0. And the traction of the direct automotive team has been absolutely phenomenal. And we see that continuing to grow as we're on -- we've got commitments on future platforms. So again, kudos to the direct auto team, to John Nolan, who's been leading that, and Dave and everyone. But for us, auto is a growing market share opportunity. At construction, we continue to see growth there. As you saw, Columbia City had record shipments in 2018. As a sort of barometer through New Millennium Building Systems, we're seeing a very, very strong backlog there. Activity is -- continues to be very, very strong and up, which I think bodes well for that industry. We're seeing projects get pushed a little bit back. Those projects are not getting canceled. It's just getting pushed back, I think, through lack of construction labor. And so that gives, I think, legs -- continued legs for that part of the industry. Structural, Rail Division also, I think, benefiting from rail. We've got about 30% market share now. They shipped almost, almost my target of 300,000 tons, so congratulations there. And I think the -- that will continue to grow. The tariffs are having an impact on the West Coast. The Japanese, Asian rail is inhibited from coming in, and that's opening up greater markets for rail in the U.S. Another large market for us, obviously, energy. Energy has remained strong. A little hesitation here and there, but having been with several of our very, very large energy customers over the last 2 to 3 weeks, they are incredibly bullish. The -- with oil pricing where it is today, the energy companies can make money, will continue to drill, and with that, imports -- I mean, exports are expected to increase. And today, they're flaring off a massive amount of the gas, which needs to be collected and utilized and levered. So they feel that the collection and distribution pipeline is going to be a very, very strong market for the next 2, 3 years, for sure. Then more generally, manufacturing, the other goods, truck, trailer, all remain strong. So we see a very healthy market environment for 2019. And with that, we think that demand or the order rate will pick up here in the next week or 2 and things will reverse.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [12]

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Let me just add, so Mark gave a great market overview, but as it relates to Steel Dynamics specifically, in addition to that, one should remember that at the first half of last year, we didn't have Heartland within our portfolio. We also really didn't have the projects that have allowed us to access the extra melting capacity of the Structural, Rail Division in Roanoke, which opens up several hundred thousand tons of additional opportunity for us in 2019.

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Operator [13]

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And our next question comes from Timna Tanners from Bank of America.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [14]

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Wanted to -- I know you just went through the demand side. I wanted to ask you a little bit more about what you're seeing on the supply side, both right now but also once your new mill is starting up. So in light of the current environment, are you seeing fewer imports because we can't see that on the government website right now? And also, anything you can tell us about the new capacity from Mingo Junction getting absorbed. And then along the same lines, on the supply side, once you start up the new mill, do you envision taking in share from integrated since you mentioned some of the capabilities overlapping there? Do you envision replacing some of the existing Mexican capacity? If you can just discuss that a little further.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [15]

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I'll take the -- which order should we go in? I think, [generally,] on the supply side, which is a supply-demand balance. On coated and -- coated sheet, coated, prepaint, we see very, very strong demand and supply tightness, I do believe. And so that order book is very, very good for us. Lead times are 5 to 6 weeks out in the most part. We are seeing a little softness, and you're seeing that in the pricing in the marketplace right now. Obviously, in hot-rolled coil, you do have imports of hot-rolled coil specifically jumped up. You also -- as you said, you have JSW Mingo Junction trying to penetrate the marketplace, not with very many tons. But unfortunately, sometimes, it only takes a few tons to pressure a market environment. So we are seeing a little bit of the impact there. Granite City obviously coming back. Again though, I think once the uncertainty of the environment and the -- not the uncertainty but recognition that scrap pricing is probably going to be level in the months ahead, people are going to jump back in and start buying. Relative to taking market share for the new mill, again -- and there was -- I got to say that I was a little disappointed with the muted reaction from some of the analyst community on our announcement. Maybe it was because we didn't describe it well enough. I don't know. But that is a phenomenal -- in my mind, the industrial logic there -- strategic logic is incredible and will create a lot of long-term value creation because the mill will be differentiated from a technology process perspective. It's going to broaden our portfolio of products. We're going to the 84-inch mill. It's got the capability of, what is it, 100 ksi at 1-inch thick, so it's going to be [a brew] to the mill. And you can consider it -- I guess envision it as a kind of electric-arc-furnace mini-mill kind of hot end with a integrated style sort of cast that's through hot strip mill. The cast will be a thicker section, and the mill is going to allow us to improve on a thermal mechanical rolling perspective. And that's going to get us into the high-strength API grades that no electric-arc-furnace supplier can provide today, and it's certainly sort of a remaining bastion of the integrated mills. So will we gain market share there? I would certainly hope so. And again, we'll be taking a large chunk of market share from imports. So that 3 million tons shouldn't be viewed as direct competition to American capability. There's 68% of energy goods. 68% or so of energy pipe and tube is in the Texas arena. About 40% of that is in Houston. (inaudible) amount of materials flowing into the Houston region. And unfortunately, given that the freight expense to get domestic steel down there, the American pipe manufacturers have been at a disadvantage. With us in the region eliminating that freight disadvantage, and as importantly, given short lead times, they'll be able to order on a short-term basis. They won't have to wait for 3 weeks or 4 weeks for stuff to come down the river or 2 or 3 months for inputs coming in. Those advantages will certainly allow us to take a large chunk of the import market that's flowing into Houston. And the sites that we have auctioned can get us to the West Coast on a very freight advantage basis, and that opens up about a 3.5 million to 4 million ton marketplace out there as well. So we're absolutely incredibly excited by the opportunity, and in all honesty, as we talk to our customers each and every day, I just get more excited.

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Operator [16]

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And our next question comes from David Gagliano from BMO Capital.

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David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [17]

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Mark and Theresa, I have a related question to some of the comments you just made. Obviously, it sounds like a phenomenal greenfield project in and of itself. I think part of the reason for the muted reaction is there's a decent amount of concern out there about the 2021/2022 bigger-picture supply-demand balance. And obviously, just like you're going to go after market share at the expense of imports, which obviously makes sense, but my question is in a bare case pricing scenario, what type of hot-rolled coil pricing environment would you consider pausing that mill, that expand -- or that project? And at what point would you be too far into the project to put it on hold, given the time line that you just touched on a minute ago?

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

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We always look at the investments on a through-cycle basis. This is not a trade play, hoping that the trade environment is going to be positive forever. It's a market play. The mill is going to be able to deliver a differentiated product that certainly no [EF] producer will be able to produce, at least today. That differentiated product going into the Southwest market and into Mexico will, I think, allow that mill to have higher utilization rate than the typical industry rate at any point of the cycle. So yes, we're in a steel environment. We're in a steel industry. We cycle up and down, but we feel that the through-cycle return metrics, the cash generation capability of this mill gives it a very good return for our shareholders.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [19]

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But just as a reminder, and I think you all know this, but when we look at transactional opportunities, we look at through cycle not trying to guess where the cycle is at a point in time to make sure the cash sustainability is there. We also do that with our organic projects. So to Mark's point, this facility has been tested on the perspective of capital allocation and investment premise and value creation through that. So it doesn't really matter that we may be in an environment in 2018 where we have peak spreads. We use through-cycle spreads. We will measure that profitability. And we're not in a point in time yet to be able to talk about returns on the facility simply because we're still doing a lot of work along the time lines and looking at what the configuration will actually entail from a cost perspective. But when it's time, we absolutely will happily do that.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [20]

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And again, it's just our belief. And we have always -- when we see a supply chain advantage, whether it be our paint business or whether that be our long-rail business, there's always room for a very, very cost-effective, efficient provider of new products. And so through cycle, I've got no concern.

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Operator [21]

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And our next question comes from Alex Hacking from Citi.

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Alexander Nicholas Hacking, Citigroup Inc, Research Division - Director [22]

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I have a couple of follow-up questions on the new mill, if that's okay. Firstly, are there key milestones that we should be looking out for next year? And then secondly, on the 3 million tons, do you have any preliminary estimates about how that's going to end up in terms of end markets, automotive, energy, you mentioned earlier machinery, et cetera?

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

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So from a schedule standpoint, we are -- as I said, sites have been certainly auctioned, both including the incentive package negotiations. And I would imagine within -- it gives a little bit of freedom here, but probably 6 weeks to 8 weeks, we should have that in hand. And we're tweaking that, looking at logistics, rail, just a couple of the little things to tidy up. But hopefully, 8 weeks or so, we should be able to announce the specific site. And once we do, I think you'll see the incredible strategic logic in that site. From the standpoint of markets, roughly 40% or so moving to Mexico, 60% going into that 4-state region. And again, just to remind you, that 4-state region has got about 8 million tons of demand currently. Mexico has roughly 15 million tons of demand, expected to grow by 2025 to, I think, roughly 20 million, 21 million tons. And today, 40 million tons of that are imported. They're short.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [24]

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You mean 40%.

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

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40%, sorry, is imported. And there's a dislocation between mill capability within Mexico and demand requirements. And so there's a growing gap actually between the total sheet and coated as the automobile industry ramps up there.

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Operator [26]

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And our next question comes from Phil Gibbs from KeyBanc.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [27]

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Just had a couple of questions a little bit on just the statistical side here. So the performance comp, Theresa, and the IDI maintenance piece, where did those flow through on the segment basis?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [28]

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That all rolls through the Steel segment. Because Iron Dynamics is captive to the Butler Flat Roll Division, it resides within our Steel segment.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [29]

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Okay. Perfect. And then if I could, the mix on the sheet side.

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

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That (inaudible) is filled up in cycle. For the fourth quarter, the mix on flat-roll products, we had 873,000 tons of hot-rolled and P&O. We had 103,000 -- excuse me, 132,000 tons of cold-rolled and 751,000 tons of coated. Apologies for that.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [31]

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Yes, no problem. And then just to be clear, the $250-ish million at your midpoint for the investment in the new mill, is that something that you definitively plan on putting in, in this year's numbers, meaning, is that something that we should be baking into our models? Or should we await basically the go-ahead there with a further announcement? Or is that something that we should basically just go ahead and start thinking is in the numbers?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [32]

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Actually, the first $200 million to $300 million that we're talking about for 2019 is really downpayments on equipment. It's purchase of the actual land itself. It's engineering work. So you absolutely should put that in your estimates for cash allocation.

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Operator [33]

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And our next question comes from Derek Hernandez from Seaport Global.

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Derek Brian Hernandez, Seaport Global Securities LLC, Research Division - Senior Analyst [34]

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I just wanted to switch gears quickly on the fabricated backlog being stronger year-over-year. Would this be primarily elevated pricing for the segment? Or do you also anticipate a significant volume increase for 2019 over 2018?

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Christopher A. Graham, Steel Dynamics, Inc. - SVP of Manufacturing Group [35]

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I can take the first part of the question, do...

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [36]

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No, the question relates to fabrication, Chris, and we said the backlog's up year-over-year. And some of that is related to the price appreciation that we've been able to garner here going into the 2019 time frame, but it's also volume related. It's not...

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Christopher A. Graham, Steel Dynamics, Inc. - SVP of Manufacturing Group [37]

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Yes. The backlog from a tonnage basis is also up as well, Theresa.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [38]

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And so we're expecting to see pretty robust volumes next year based on the customer optimism.

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Christopher A. Graham, Steel Dynamics, Inc. - SVP of Manufacturing Group [39]

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Yes. The market chatter regarding '19 is nothing but positive. The things we watch for, the Architectural Billings Index is still well north of 50, in the 54-plus range. We continue to see a healthy mix of big box, institutional and manufacturing, so everything points to a good '19. On a New Millennium -- from a New Millennium standpoint, our December bookings were rather robust, up nearly 30% higher than last year. That's not always indicative of the overall market, but our team is seeing success and positioning itself well for '19.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [40]

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And I think another point to add to that is that, even in 2018 with our record shipments, that really was not just based on market share gain. It was really across the boards, the joist-and-deck shipments in the U.S. or consumption in the U.S. actually improved pretty meaningfully last year.

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Christopher A. Graham, Steel Dynamics, Inc. - SVP of Manufacturing Group [41]

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Yes, it was -- it's a high, obviously, since the -- since 2007. We're still below what used to be considered the 20-year average of maybe 1.2 million tons a year joist production. I think that the market booked -- industry booked about a little over 1.1 million this year. So we believe there is still runway left there.

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Operator [42]

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And our next question comes from Matthew Fields from Bank of America.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [43]

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Just wanted to get your updated thoughts on investment-grade credit rating with the new mill announcement and maybe some increased shareholder returns. Just wanted to get your current thoughts on how important to you an investment-grade credit rating was and what, if anything, you guys are willing to do to achieve it.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [44]

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Great question, Matt. I expected to have that. So based on, again, the period of time over which these dollars are going to be spent for the new facility, we absolutely believe that our credit metrics can still be maintained at investment-grade levels while doing new organic projects. We do believe that there's room also for the additional continued shareholder return. And so it would be our expectation that -- I think as I said on the last call, we've been dialoguing with the agencies. We're not in a position at this point in time to make a firm commitment on this call, but we're definitely having those conversations.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [45]

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So would you say it's sort of as important -- it continues to be more important to you to be investment grade than maybe a year ago when it would have been nice but not necessary?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [46]

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I would say that's true.

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Operator [47]

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And we have another question from Piyush Sood from Morgan Stanley. And we have a question from Tyler Kenyon from Cowen.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [48]

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So we talked a bit about sheet supply and demand dynamics and just was wondering if you could cover a little bit more as to what you're seeing from a demand and supply perspective just within some of the long product categories, so rebar, merchant, structures and SBQ, please?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [49]

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I'll take the -- jump in, Glenn, anytime, but I think the engineered bar SBQ world is very, very healthy. We were able to have an uptick in pricing for 2019. Like everywhere else, there's a slight hesitancy in December as -- because -- although the prices go up, they're indexed with the scrap. So they're not sort of speculating on their own inventory. But the customer base is incredibly bullish. I do believe that. Interestingly, down there, the inspection line -- these are small organic projects, but the inspection line down there was commissioned as planned, and I think it's up and running and is almost at production capability. And we have a turning line up that's going in there that'll get commissioned later this quarter. And those helped draw volumes through the system, certainly needed for the automotive grades that we're ramping up. But generally, a very, very healthy environment at engineered bar. As I said, Structural, Rail Division at Columbia City, very, very strong. Record shipments last year, pushing up toward a 2 million ton shipping rate through -- for 2019 will be an expectation there. Merchant shapes at Roanoke a little soft. Again, they tend to be impacted probably more than anyone to the rise and fall of scrap.

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Operator [50]

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And that does conclude our question-and-answer session. I'd like to turn the call back over to Mr. Millet for any closing remarks.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [51]

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Thank you, Karen. Thanks for your help today. And to our employees out there, again, a million kudos and thanks for an absolutely outstanding, outstanding year. Remind you to be safe in everything we do. And to our customers and vendors, we certainly can't do it without you, so thanks for your support. And our shareholders, we will continue to demonstrate the growth in shareholder value that we have demonstrated in the past. Expect it going forward. So great, have a great day. Be safe.

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Operator [52]

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