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Edited Transcript of STLD earnings conference call or presentation 23-Jul-19 2:00pm GMT

Q2 2019 Steel Dynamics Inc Earnings Call

Fort Wayne Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Steel Dynamics Inc earnings conference call or presentation Tuesday, July 23, 2019 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

* 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

* Matthew James Korn

Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Philip Ross Gibbs

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

* Timna Beth Tanners

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Steel Dynamics Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised, this call is being recorded today, July 23, 2019, and your participation implies consent to our recording the 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, Christine. Good morning, everyone, and welcome to Steel Dynamics Second Quarter 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 of Steel Operations; Chris Graham, Senior Vice President of the Long Products Steel Group; Barry Schneider, Senior Vice President, Flat Roll Steel Group; for our new flat roll mill and Southwest strategy we have Glenn Pushis, Senior Vice President, Special Projects; and 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 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 yesterday entitled Steel Dynamics Reports Second Quarter 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. Good morning, everyone. Welcome to our second quarter 2019 earnings call. As always, we appreciate and value your time with us this morning. But first, I'd like to thank the SDI team for delivering a solid quarter despite a challenging pricing environment and congratulate them for their continued innovative, passionate spirit that continues to drive this phenomenal company toward excellence. It is gratifying to see our teams continue to break records, create new products and find new ways to be even more productive, cost-efficient and safe. But first, to begin the morning, Theresa will provide insights regarding our second quarter results.

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

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Thank you, Mark. Good morning. Our second quarter 2019 net income was $194 million or $0.87 per diluted share, within our guidance range of $0.86 to $0.90. Second quarter 2019 revenues were $2.8 billion, 10% lower than second quarter 2018 sales and 2% lower than the first quarter sequential results as average flat roll realized steel prices decline. Our second quarter 2019 operating income was $285 million, 43% lower than prior year second quarter earnings driven by flat-rolled steel metal margin compression and 2% lower than sequential first quarter results primarily due to lower shipments and product pricing within our long product steel operation.

To take this moment to level set, our financial results are quite strong. They're just lower relative to our record high 2018 results. And as we discuss our business this morning, you'll find we are constructive concerning underlying steel demand and optimistic concerning our unique earnings catalog.

Within our steel operations, second quarter shipments increased 3% sequentially to 2.8 million tons, a result of the continued ramp up of our Heartland facility and the recent addition of United Steel Supply. Our average quarterly realized steel sales prices across all operations decreased $23 per ton to $879 in the second quarter. However, if you exclude our steel processing location sales, the average sales price for our steel mills declined $41 per ton as average scrap cost only declined $22, compressing our steel metal margin. The result was second quarter steel operating income of $295 million, and although lower than prior year results, historically, a very good performance.

I want to take a moment to mention additional information we provided related to our steel production volumes versus our steel processing volumes. It's important to note the change in our steel mix from almost purely steel production economics to the higher percentage of steel processing or conversion economics that we have today. We posted our second quarter slide deck on our website, and if you review Slide 8, you'll note that the mix shift changes how you should view our steel operating cost. We still maintain the lowest and the most highly variable conversion cost position, but we now have a larger component of our costs related to raw material steel input used at our steel processing location.

For example, the process steel input was only 10% of our steel platform cost of goods sold in 2017 and it has grown to 16% year-to-date in 2019 and will likely increase further as we continue to grow volume at both Heartland and United Steel Supply. It's a powerful strategic advantage to have processing capabilities with the same higher steel mill utilization during weaker demand environment, create optionality of supply for our customers and allow for value-add product diversified in all markets.

Moving to our metals recycling platform. Second quarter operating income was $11 million, a 47% decrease sequentially based on lower ferrous selling values and lower nonferrous shipment. Indexed ferrous scrap prices fell, and was $90 per gross ton from March to June 2019. We continue to effectively lever the strength of our vertically connected operating model, which benefits both the steel mills and the scrap operations.

Second quarter 2019 operating income for our fabrication business improved sequentially to $31 million representing a 49% increase and our third best quarterly performance. Congratulations to the team. Earnings improved based on strong shipments and meaningfully lower steel input cost. We continue to see strong order inquiry and customer optimism coupled with a strong project backlog.

Our cash generation continues to be incredibly strong. During the second quarter 2019, we generated $361 million of cash flow from operations and $543 million for the first half of 2019. This incredible performance represents a trailing 12-month 85% free cash flow conversion rate.

First half 2019 capital investments were $140 million. We estimate second half 2019 fixed assets capital investments to be approximately $150 million. We still have about $80 million to spend on Columbus' third galvanizing line, which is on schedule to start mid-2020.

We maintained our cash dividend for the second quarter at $0.24 per common share. We also repurchased $93 million of our common stock during the second quarter and $177 million during the first half of the year. Just over $220 million remains authorized for repurchase at the end of the quarter. Since June of 2016, we have repurchased 24.3 million shares representing 11% of our outstanding balance. We believe these actions reflect the strength of our capital structure and liquidity profile and the continued optimism and confidence in our future.

We achieved record liquidity of over $2.3 billion at June 30, 2019, representing $1.1 billion in cash and short-term investments and $1.2 billion of available funding under our revolving credit facility.

Before I hand the call back to Mark, I'll share some updates pertaining to the anticipated cash investment time lines for our new Southwestern U.S. flat roll steel mill to be located in Sinton, Texas. The total investment is currently expected to be approximately $1.9 billion based on an expanded project scope to accommodate the differentiated 84-inch width and associated coil handling requirements. We also increased the galvanizing line from 450,000 tons to 550,000 tons. Assuming timely receipt of required environmental and operating permits, we expect to begin facility construction early 2020 followed by starting operations midyear of 2021. Based on this time line, we estimate capital outlays to be approximately $275 million in 2019, $1 billion in 2020 with the remainder in 2021. In 2019 so far, we've spent approximately $30 million. These estimates do not include state and local incentive benefits.

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

And lastly, for those that track in more detail our flat roll shipments, during the second quarter, we shipped 856,000 tons of hot-rolled and P&O, 191,000 tons of cold-rolled and 960,000 tons of coated material. 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.

Safety is, and will always be, our #1 value and first priority. There's nothing more important. While our performance remains significantly better than industry averages, it's clearly not enough. It's not good enough. We must all remain vigilant both at work and at home to be continuously aware of our surroundings and those around us. I challenge all of us to remain focused and strive toward our ultimate goal of 0 incidents.

The fabrication platform delivered a strong performance with earnings increasing almost 50%. Despite continued wet weather hindering the pace of construction projects, volumes increased based on a steady underlying demand environment. Profit margins also expanded as raw material steel input costs decreased meaningfully.

Our order backlog remained strong to slightly ahead of where we were at this time last year. Project backlogs are expanding as contractors struggle with the construction labor shortage, which should prolong this nonresidential construction cycle. The ongoing strength of this business and continued customer optimism bodes well for nonresidential construction demand well into next year.

The scrap pricing trended down through the quarter with both prime and obsolete scrap indices falling almost $90 per gross ton in 3 months. Our metals recycling profitability decreased as a result of the lower ferrous selling values and lower nonferrous shipments.

Scrap pricing appears to have stabilized in July. Scrap flows began to slow later in the quarter and manifested by lower procurement values, thereby reducing dealer and yard inventories, and export volumes remain weak. Although muted, we would expect some firming of the scrap price over the next 4 to 8 weeks by perhaps $20 a ton. The manufacturing base is still generating an ample supply of prime scrap. We anticipate export volumes to remain constrained throughout the rest of the year, so this is consistent with our longer-term scrap view that pricing will remain stable and supportive of healthy steel metal margins into next year.

The steel platform delivered a solid second quarter performance in a challenging steel pricing environment. A weakening scrap environment, coupled with continued inventory destocking, led to steel buying hesitancy throughout the quarter.

Hot roll coil price indices have fallen approximately $200 per ton since December 2019. Despite these challenges, with the addition of United Steel Supply and the ramp-up of Heartland steel, our steel shipment volume improved. The good news is that underlying steel demand has remained intact, scrap prices have steadied, and we have recently seen stabilization and improvement in flat roll pricing, resulting in increased order activity and improved backlogs across the flat roll platform. In contrast, structural, merchant bar and rebar steel pricing remains pressured from domestic and imported competition.

Underlying domestic steel demand remains constructive, and we've seen continued positive activity across most of the steel-consuming sectors including the automotive, construction and industrial customers. Energy is particularly strong, and with the necessary growth in transportation pipeline and infrastructure for both gas and liquids, will remain strong for several years to come. We believe both the 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 base.

Furthermore, the U.S. trade position should continue to erode imports and increase domestic steel content requirements of the anticipated USMCA, which has recently been approved by Mexico and is in the process of approval by Canada, should enhance domestic demand and further support industry utilization.

We continue to position Steel Dynamics for the future through optimization of existing operations, organic investments and transactional growth. During 2018, we reinvested in our existing steel operations and acquired Heartland. Early this year, we also acquired a 75% controlling interest in United Steel Supply to further enhance our prepaint supply chain. We completed a $38 million, 200,000 ton rebar expansion at our Roanoke Bar Division in the third quarter of 2018 becoming the only independent supplier in the area. In the first half of 2019, the team achieved close to 75% volume rate capability.

In the first quarter of 2019, we also completed a 240,000-ton $82 million rebar expansion in our Structural and Rail Division. Ramp-up here has been a little slower than anticipated, but a key piece of equipment is now commissioned, and we expect to achieve a 75% production rate later in the second half 2019. 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 for the customer. In addition, we will be the largest independent rebar supplier in the Midwest region.

We acquired Heartland midyear of 2018, increasing our flat rolled product diversification through value-added wider and lighter-gauge product capability. This geographic proximity to our existing Midwest flat roll operations also allows for meaningful value creation. Butler has been enhanced in its production capability by redirecting lighter gauge orders to Heartland, allowing Butler to increase more value-added production. In fact, they have been setting production records on all their coating lines even after 25 years of continued growth. It's attributed to their innovative, passionate spirit, and I congratulate both teams for their continued commitment and never-failing can-do attitude. We plan to reach approximately 70% of the planned 800,000-ton run rate for Heartland in the second half of 2019.

In 2018, we also announced further growth for our Columbus Flat Roll division. In the last 2 years, Columbus has transformed its product offering through the addition of a paint line and the introduction of more complex grades of flat roll steel. The diversion of products to these diversified value-added outlets produced the volume of existing products available to our current galvanized steel customers. To address the associated lack of sufficient galvanizing capacity, we announced the addition of a third galvanizing line at Columbus. The $140 million investment is another step of further value-added diversification at Columbus and less hot-rolled coil exposure. The 400,000-ton line is planned to begin operating midyear 2020.

Additionally, we announced a $90 million investment at Columbus to further increase their range of complex grade capabilities including advanced high-strength steels for both the automotive and energy sectors. These upgrades will be completed by the end of 2020.

In aggregate, these upgrades will reduce the availability of about 400,000 tons of noncoated flat roll steel that we currently supply for the Southern U.S. by the year 2021. This event dangerously coincides with the time frame we plan to begin operating our brand new flat-roll steel mill. This should be an immediate help to volume loading the new mill.

And I continue to be increasingly excited about the expansive opportunities and long-term value creation of 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, so we're on the move and planning to meaningfully expand our influence in the region. The planned construction of our new flat roll steel mill is a significant part of that plan. The facility is designed to have an annual production capacity of 3 million tons and will include a 550,000-ton galvanizing line and a 250,000-ton paint line Galvalume capability. We estimate the investment to be approximately $1.9 billion. We've entered into equipment supply agreements in most of the items we estimate to being the primary supplier.

The new mill will have capabilities beyond existing electric-arc-furnace flat-rolled steel [producers] competing even more effectively with the integrated steel model and foreign competition. Having a thicker cast section and more conventional 2-stage hot rolling process that allows thermal mechanical rolling, the metal capability will provide higher strength, tougher grades for the energy and automotive markets.

The mill will be capable of 84-inch wide, 1 inch thick, 100 ksi hot-rolled coil, a capability essentially unavailable in the U.S. today. Furthermore, heavier coil weights and heat size will provide energy pipe producers intrinsic cost and yield saving. The configuration will also allow us to ship some by-products on a limited basis. Downstream value-added capabilities will include, as I said, galvanizing improvement.

To be clear, we're not just adding production capacity. We have a differentiated product portfolio. We will have a significant geographic freight and lead time advantage, and we have targeted customer models.

As you saw, we are happy and excited to announce the new mill will be located in Sinton, Texas. Adjacent to Corpus Christi, the geographic location has numerous significant, competitive advantages to almost any site along the Gulf Coast when considering geographic market position; power; freight benefits; and what became increasingly significant in the site search, water availability and constructability. The people in Sinton have been very welcoming, and we thank them for their partnership and shared vision for this strategic investment.

Significant competitive advantage lies in the Sinton location and central to our targeted customer in the market regions. Sinton lies just 190 miles from the large steel-consuming city of Houston and 300 miles from the growing Monterrey, Mexico region. It also provides advantageous capability to access the West Coast. The site will provide a significant freight benefit to most of our intended customers relative to their current supply chain configuration. We would expect the savings to be a minimum of $20 to $30 per ton compared to their current closest domestic [supply]. In addition, customers will be able to order on a much shorter lead time basis, providing a significant delivery time and working capital advantage. We have the opportunity to provide steel in terms of weeks, not months. These benefits provide a competitive supply chain allowing the new mill to effectively compete with imports thrown into Houston and the West Coast that inherently have long lead times and suspected of pricing risks. This will give the American pipe producers the competitive supply chain to once again compete with foreign pipe producers that have dominated their market as of late. Consider that approximately 2.4 million tons of OCTG and 1.5 million tons of line pipe were imported through the port of Houston in 2018. Customers are excited to have a regional supplier and have already expressed interest in possibly locating facilities on or near our site, and we're in currently in dialogue with many of them today.

From a raw material perspective, our metals recycling operations already control a significant and growing scrap volume 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 system. Based on our current scrap relationships, both in Mexico and the Southern U.S., we are confident in the ability to pursue a high-quality prime scrap in the region.

We have 3 targeted regional sales markets representing over 27 to 28 million tons of relevant flat-roll steel consumption, and we believe that demand will increase in the coming year. The regions include approximately 8 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 to both rail and trucking delivery into these regions. There are approximately 4 million tons from the underserved West Coast region, which also relies heavily on imports, and there are approximately 16 million tons from the growing Northern and Mid-Central Mexican region. In 2018, the Mexican market imported 7.5 million tons of flat-rolled steel. And based on their growing manufacturing base, we believe Mexican demand growth will continue to outpace supply, making it an even more attractive underserved market in the coming years. Sinton will have the most trade advantage shipment into this region from the U.S.

We've been developing our flat-rolled steel business strategy for this region in Mexico for several years. We've been developing both customer and scrap relationships, and we 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.

More generally, we are also optimistic about our existing market opportunities for 2019. For the second half of 2019, we believe North American steel consumption will experience continued modest growth supported by further steel import reductions and the end of inventory destocking. The actions taken by the U.S. federal government have developed a healthy domestic steel industry and should provide sustainable long-term support to the U.S. manufacturing base.

There have been recent [circumvention] trade actions that we believe could have a positive impact in further reducing unfairly traded steel imports into the United States, including coated flat-rolled steel, which could have a significant positive impact to Steel Dynamics as we are the largest nonautomotive flat-rolled steel coater in the U.S. Additionally, we're already seeing a benefit from trade action against prefabricated steel imports that have gained significant market share over the last few years.

Specific to Steel Dynamics, our unique culture and the execution of the long-term strategy continues to strengthen our financial position through strong cash flow generation and long-term value creation, clearly 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 team are poised for continued organic and transactional growth, and that team is exceptional and provides the foundation for our success.

I thank each and every one of you for your passion and commitment to our excellence, and remind you, safety is always the first priority. We're committed to providing exemplary long-term value to our fellow colleagues, communities, customers and shareholders and look forward to creating new opportunities.

So again, thank you for your time, and Christine, we'd love to turn the call over 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 Chris Terry with Deutsche Bank.

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

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Mark, just around the new mills, I was wondering if you could talk a little bit about the incentives, how they play out and over what time line and the sort of things, the discussions you had on that side. And then around the galvanizing, just on the CapEx side, the extra 100,000-ton expansion there. Can you just talk a little bit about customer feedback and how you came to the decision on that?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [3]

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So Chris, related to the incentives, there's approximately $150 million to $155 million worth of incentives. Some of that, probably 10% to 15% of that would be more in the immediate time frame over the 2- to 3-year time frame. The rest of it is a little bit longer on half of U.S. property taxes, so more of a 10-year time frame. And we'll be getting more specific with that as time goes on.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [4]

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It is in -- relative to the galvanizing expanded volumes, I think we said 450,000 tons in the past to 550,000 tons. Obviously, our past commentary was way before the real detailed conversations with equipment suppliers and also just the internal debate with design -- with our own talent, and we just believe that 550,000 tons for the anticipated line is reality for that line, and certainly, can be absorbed by the marketplace.

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Operator [5]

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Our next question comes from the line of Matthew Korn with Goldman Sachs.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [6]

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So we spent so many months watching sheet prices fall and focusing on supply ramp-ups. It's exciting to see prices start to gain some traction and some bullishness appear in the scrap markets. Now back in February, it looked like the market was also headed for a little bit of a turn. You saw favorable seasonality, anticipated iron ores popped in, some price hikes were announced. But that turned out to be a head fake. So a question for you is what do you think is different this time around with where we are in the cycle?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [7]

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Well, I think, obviously, the principal pressure has been the destocking of the supply chain. And to be honest, as I talked with customers over the past 6 to 7 months, some since December, people have been a little surprised, in all honesty, that pricing dropped as far as it did in the first place because underlying demand, we believe and I think all our customers believe is generally intact and, as we said, is very, very constructive. So you're seeing a couple of sort of boiled down the price increases. I think you probably saw the public price increased again -- additional price increases again yesterday. The indices have come up to around about $550-ish today from a low of $505 in June. The future, September future is around the $605. I do believe that the recent price increases will certainly achieve, if not exceed, that future level.

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Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [8]

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Got it. Then let me ask on the new site in Texas. So first, in terms of timing of permitting, your final incentives, when should we see that all zoned up and cleared for construction? And then second, with the -- the aim for mid-'21 operations is to start up. How active are you, and can you be today, in actually building out the book of business? Do you have a target in terms of how much you expect to be under a firm contract? How much you'd earmark for on-site buyers as you described? Any detail there on the strategy would be very helpful.

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

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Okay. Well, firstly, we would anticipate, obviously, firms' site work occurring later this year, but true construction not occurring until early next year after a permit has been put in place. We're expecting, [tentatively], that we'd get a permit first quarter of 2020, give or take a little bit.

And relative to the market for Butler, I think if I could kind of expand a little bit on that, there's been some criticism lately, I guess, as to the expansionary plans of -- in general. I just want to clearly, clearly state that this project, this opportunity is really differentiated. It certainly brings a combination of technologies and dimensional capabilities that is unsurpassed and largely unavailable in the U.S. today, that the energy pipe producers -- a lot of material true necessities is being imported because we just don't have the quality and capability within the United States.

So I would tell you that the mill isn't just adding domestic capacity. It's more of an import killer, the substantial amount of material flowing through the Port of Houston. And it's going to allow the pipe producers in the area, for the first time in a long time, a competitive supplier of scrap or hot-rolled coil to compete with the Korean and other pipe importers.

And as I said earlier, there's about -- in 2018, about 2.4 million tons of OCTG and about 1.5 million tons of land pipe came in competing with our American pipe producers. That's because they just have -- they didn't have a substrate to use, competitively priced substrate.

We think that we're going to compete admirably, to be honest, on the import side of the business. As I suggested, the rearrangement or redirection of product of Columbus is going to essentially eliminate our ability to supply about 400,000 tons of hot-rolled coil products into Texas. That will coincide with the start-up of the mill, so there's kind of an immediate base loading just from our current product mix.

We have a growing automotive volume into Mexico, essentially through BMW and other European providers through U.S. Steel Supply. I think we have an immediate growth opportunity for more prepainted Galvalume. There's roughly -- there's about 250,000, 300,000 tons of Galvalume that came through the Port of Houston last year, and obviously, we'll be able to compete with that.

And then finally, we have had considerable -- actually more than considerable, incredible amount of interest from our customer base. Those in the industry are incredibly excited to have a regional producer in that area, and we have numerous steel consumers both pipe producers, steel service centers, distributors, processors wanting to locate or co-locate in that region. And I would imagine that we can achieve very, very quickly the same model as we have in Butler, where I think we have 500,000, 600,000 tons of, sort of, on-campus consumption. So I'm confident that we can ramp-up the mill very, very quickly.

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Operator [10]

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Our next question comes from the line of Timna Tanners with Bank of America Merrill Lynch.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [11]

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On Nucor's call, they talked a little bit about third quarter being affected by the sharp decline in price in the second quarter on a lag basis to contract customers. So I was wondering if you could expand on how that can affect your operations and if you've seen the same phenomenon.

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

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Timna, yes. As a reminder to everyone, for the Flat Roll Group, we have about 50% of our volume that's contractual, and so it will have the lag effect as well. It's tied in some form or fashion with CRU Index. So we'll have that same phenomenon that Nucor mentioned on their call.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [13]

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Okay. And it would be the interesting to hear if there's other facets that could offset that, especially because you've been expanding more to downstream, but I wanted to ask my second question on the new mill. Just wondering if you could expand on a few things. One is, you say incredibly quick ramp-up, which it sounds like, but when you talk about middle of 2021, when would you expect to get to a full run rate? And at what point would that convert to from hot roll to including more of a galvanized, like how quickly can you expand on your value add, paint line, et cetera? And how much could be plate? Because that was intriguing with the capability to go up to 5.5 inches.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [14]

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I'll take the plate one first before I forget. The 5.5 inches, it is the cast section. We're going with a much thicker section than any other electric-arc-furnace space mill in The States today, if not the world, to be honest. And that allows you to do, sort of, metallurgical things, thermal mechanical rolling, greater reductions to flat better surfaces. The actual finished product maximum thickness is 1 inch, so 1 inch hot-rolled coil. So it's not 5.5-inch plate.

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Timna Beth Tanners, BofA Merrill Lynch, Research Division - MD [15]

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Got you. Okay.

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

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So it's the 1-inch coil plate that we can process or have processed into sort of cut-to-length plate. And maybe, if you look at the plate market, there's an 84-inch range. We should be able to supply 100,000 tons, 200,000 tons of plate, I would think, at least one would hope.

On the ramp-up, again, starting up in mid-'21, I would hope to be in '22 around about 75%, 80% of its rated capacity. And then relative to the value add, given that we have hot-rolled coil substrate available at Columbus, flat roll organization, we will attempt to accelerate the galvanizing line and prepaint line, and that -- Glenn's going to cringe, but I would imagine that's going to be the first half of '21 as a start-up.

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Operator [17]

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Our next question comes from the line of Matthew Fields with Bank of America Merrill Lynch.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [18]

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I just wanted to ask a probably more boring question on the balance sheet here, but you've basically been at about $2.4 billion of debt for the last 2.5 years. Heading into especially next year where you're going to ramp up the capital spending, is $2.4 billion kind of the right level of dollar amount of debt for your balance sheet? Or do you think that there is a lower or higher level that you're more comfortable with?

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

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Yes. No. We absolutely have more debt capacity for the balance sheet, and we execute on both organic and potential transactional opportunity. You'll see it utilize the balance sheet in that way when it's necessary. So there's still room.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [20]

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Okay. So does that mean that investment grade rating is a little bit less important than it was in the past that you're willing to borrow more on the balance sheet to fund these growth opportunities?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [21]

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I wouldn't say that because today, our metrics are actually far superior to just entry-level investment grade metrics. So there's still room to have that on the balance sheet and have investment grade ratings as well. But that's something that will happen when the time comes.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [22]

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Okay. But the focus is on the new Southwest mill and then potentially other M&A opportunities for the shorter term.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [23]

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Correct.

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Operator [24]

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Our next question comes from the line of Alex Hacking with Citi Investment Research.

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Alexander Nicholas Hacking, Citigroup Inc, Research Division - Director [25]

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Mark and Theresa, I just wanted to follow up on the Texas mill quickly. If I synthesize what I think you said, Mark, just looking at the U.S. piece of this mill, which is going to be about 2 million tons of supply or 70% heading for Texas-West Coast, which in your view is about an 11 million-ton market. You said 400,000 tons will substitute Butler, 30% is targeted for energy, which is largely going to displace imports like 600,000, 700,000 tons. That's about 1 million tons. Of the other million tons that the mill is going to sell, do you have a sense of what the opportunity is to displace imports of that versus how much will be taken up with market growth and displacing other domestic supply?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [26]

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Let's try -- [I thought it really mattered], but I believe other areas would be the -- the prepaint Galvalume, that's been a market that has been highly pressured by imports, particularly Vietnam, and that [high] circumvention action here recently will certainly help that. That's -- 250,000 tons of new product in that area. You have directly about 1 million tons down to Mexico for automotive HVAC and appliance. Now that's, today, a 15 million-ton, 16 million-ton market. About 7.5 million tons are currently imported. And even with the increased capacity announcements there, that market is kind of dislocated, but they just don't have the product capabilities for the [ore mod arena] today. So even with their internal expansions, we see considerable opportunity of the years ahead for that 1 million tons.

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Alexander Nicholas Hacking, Citigroup Inc, Research Division - Director [27]

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Okay. And then just following up on the current market conditions. You mentioned, as Nucor and others have done, that we're seeing kind of a destocking for the industrial supply chain. Do you guys have any sense about when that destocking, and as you talked to your customers, did you get any sense that it's already ending in June versus what you were seeing in April and May?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [28]

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I guess one has to assume that it's coming to an end. The customers are back in the marketplace as pricing is appreciating today, the order activity input rates are increasing and lead times are extending. And if you consider that with the destocking, imports will continue to erode for the rest of the year, and we believe the second half demand will be modestly above the beginning half of the year. So I think that will pressure the market into upward price momentum and increased order rate.

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Operator [29]

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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 - VP and Equity Research Analyst [30]

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Mark, what are you seeing on the consumable side? I know that electrodes and refractories and alloys have been pressure points over the last 12, 18 months. But are we seeing any reprieve? Any of those inputs?

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [31]

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I think the -- any one of the significance or materiality would be electrodes, Phil. [And as Barry lays out]...

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Barry T. Schneider, Steel Dynamics, Inc. - SVP of Flat Roll Steel Group [32]

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20%, 25%.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [33]

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20%, 25%? So that's the...

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Barry T. Schneider, Steel Dynamics, Inc. - SVP of Flat Roll Steel Group [34]

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From the peak.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [35]

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From the peak. And obviously, yes, there is sort of contracted volume so that doesn't happen overnight, but it happens through the rest of this year. So that's a positive move. I don't think we're seeing any major issues with the alloys or refractories on the outside so...

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [36]

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Well, Mark, when you talk about electrodes being down, I guess, from peak or on the spot side, I know there's some contract commitments at least in the U.S. market. So how does that all blend together in terms of what you all actually realized?

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [37]

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So, Phil, for the electrodes, if you looked at the cost side that we did in the presentation, you can see that they moved kind of from 2017, 2018 levels of about 1% of our cost to about 2%. Year-to-date, they're up probably around $25 million for the first half of the year compared to the first half of last year.

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Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [38]

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That's very helpful. And then just a question as I bridge cash flow for this year. Theresa, what do you envision for working capital change in the second half? And then also please just remind us again what your CapEx guidance is for this year.

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Theresa E. Wagler, Steel Dynamics, Inc. - Executive VP & CFO [39]

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So the CapEx guidance for the second half of this year, excluding the new mill, is about $150 million. For the new mill, we're expecting to spend approximately $275 million in 2019. And as it relates to working capital, I would expect it to not likely be a draw in the second half. It's likely to be even to maybe slightly ascending as we worked on some of the -- with unfinished inventory that grew a bit in the second quarter.

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Operator [40]

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That concludes our question-and-answer session. I'd like to turn the call back over to Mr. Millett for any closing remarks.

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Mark D. Millett, Steel Dynamics, Inc. - Co-Founder, CEO, President & Executive Director [41]

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Thank you, Christine. Once again, thank you, everyone, that is remaining on the call. Thank you for your time today. It continues to be an incredibly exciting time for SDI. We've had a very, very positive growth curve over the last 25 years, and I believe, with Heartland, with U.S. Steel Supply and now with the new mill, we will continue to maintain if not exceed that trajectory. And I just want to thank our customers for allowing us to do that and for our employees, thank you, seriously, for everything that you do each and every day and continue to work safe.

Thank you all. Bye-bye.

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Operator [42]

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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.