Q1 2020 Earnings Call
Good day and welcome to be steel dynamics first quarter 2020, earning conference call.
At this time, all participants are any listen only mode. After managements remarks, we will conduct a question and answer session and instructions will follow at that time. Please be advised this call is being recorded today April 21st 2020, and your participation implies conceptual recording this call you do not have agreed 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.
Thank you Michelle good morning, and welcome to steel dynamics first quarter 2020 earnings Conference call. As a reminder, today's call is being recorded and will be available on their website.
A replay later today [laughter] sorry on our website for replay later today, leading today's call our Mark Millett, President Chief Executive Officer of steel dynamics, and Theresa Wagler, Executive Vice President and Chief Financial Officer.
Other members of our senior leadership team are joining us on the call individually as we are falling appropriate special doesn't seem tightly amongst the days.
Fitness, which speak only as of this state me before looking at predict that typically preceded by believe expect anticipate are worth of similar meeting their intended to be protected by the private Securities Litigation Reform Act of 1995 should actual results turned out differently.
Such statements involve risks and uncertainties related to our deal metals recycling and fabrication businesses as well, it's a general business and economic conditions. Examples of these are described in the related press release as well in our annually file FTC form 10-K under the heading forward looking statements and risk factors not on the Internet.
Www dot actually see that go and if applicable at any later FCC form 10-Q, you'll also find any reference non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled You'll Endemics reports first quarter 2020 result, and now I'm pleased to turn the call over to Mark.
True good morning, everybody welcome to all first quarter 2020, Onee was cool we certainly appreciate in value will time these unprecedented circumstances.
Steelmaking is designated a critical infrastructure industry by the U.S. Department of Homeland Security.
The deemed essential to the nation's defense infrastructure transportation and overall economy.
That's such all our operations have been operating.
Protecting the health well being able teams is almost critical priority.
We're closely monitoring the cobot 19 situation and I didn't implemented numerous additional practices throughout the company to protect each of us.
Oh, sorry, but more than 8400 team members for remaining steadfast and passionate.
We continue to operate safely with the spirit of excellence.
Credibly prior to work alongside each than during this unparalleled time.
We are committed to the health and safety about people the families and all committed or use.
All while supporting all supply as a meeting the needs of our customers.
But before I continue Chris will you. Please provide insights regarding the team has recently incredible performance during the first quarter that should not go understated the pet despite this president environmental issues.
Longwall strong financial Foundation.
Thank you good morning, everyone.
First quarter 2020, net income was $187 million or 88 cents per diluted share above our guidance at 83 cents to 87 cents due to stronger than anticipated March flat rolled steel shipments.
First quarter 2020 revenues were $2.6 billion somewhat lower than prior year first quarter sales, the 10% higher than fourth quarter sequential results driven by improved steel pricing and shipments.
First quarter 2020, operating income with $274 million $18 million lower than prior year first quarter, but notably 50% higher that sequential fourth quarter results due to record steel shipments driven by solid first quarter underlying demand.
From a platform perspective, or steel operations first quarter shipments increased 7% sequentially to a record 2.8 million tonne, we've increased volumes experience across the platform.
Our average quarterly relay sales price increase $10 per ton to $774 in the first quarter, an average scrap costs increased $24 per tonne carbon steel metal margin compression.
The result was first quarter steel operating income of $293 million, 45% higher than a sequential fourth quarter results.
For our metals recycling platform first quarter operating income was $8 million compared to a loss of $5 million sequentially resolve of higher ferrous and nonferrous selling values and shipments with prime scrap indices, writing it almost $3 per gross ton during the first border.
Well, that's 65% of our mills recycling ferrous shipments serve our own steel mill, increasing or scrap quality or milk inefficiency and reducing our companywide working capital requirements are vertically connected operating model benefits both platforms.
For steel fabrication business first quarter 2020, operating income remained strong at $29 million compared to near record sequential results at $33 million, primarily due to seasonally lower first quarter shipments.
We experienced record order in query and booking to the first quarter and Demarche with a record backlog, we're still experiencing strong wondering query and our entry into traditional construction season on a good footing.
Our cash generation continues to be strong during the first quarter of 2020, we generated $211 million of cash flow from operations offset by operational working capital growth related to higher steel selling values and the 74 million dollar distribution of our annual companywide profit share into our teams.
We spent $218 million in fixed asset investments during the first quarter of which 130 million related to our new sitting in Texas flat rolled steel mill investment to date, we have funded to be hundred $35 million of the 1.9 billion dollar project.
Regarding shareholder distributions, we increased our cash dividend, 4% in the first quarter. This year to 25 cents per common share. This follows increases of over 20% in both 2018 and 2019.
The board also authorized an additional $500 million for stock repurchases in February of this year.
We repurchased $170 million of our common stock during the first quarter and 444 million remains available under the new authorization.
Since 2016, we've invested $1.3 billion in our common stock representing over 50, <unk>, 15% of our outstanding shares.
These actions reflect the strength of our capital foundation, consistent cash flow capability and strong liquidity profile, demonstrating our confidence in our sustainable through cycle strong cash generation.
Part of that confidence is based on the high variability of our cost structure within our operating platforms during market weakness working capital becomes a funding source 2015. Degrade example, working capital provided over $500 million to cash flows out here for the called me month, we expect working capital to also be a source of cash flow.
For us.
For the remainder of the year. We currently are planning for capital investment to be roughly $1.2 billion, which the news that in Texas steel mill represent $1 billion.
[laughter] funding for sitting in its heavily weighted to the second half of 2020 over $700 million about 1 billion dollar spend is actually meant to be in the second half of this year.
As we gain more visibility in to the extent of the disruption in 2020 related to the wrote a virus.
We could shift some of the 2020 investment into 2021, if we believed it was necessary.
Based on current timeline, we estimate capital investments.
For 2021 to be in the range of 700 million to 750 million of which sitting represents 600 million.
We entered the krona virus crisis, the position of strength with a strong cash position and liquidity profile entering 2020, we had over $1.6 billion of cash and short term investments at the end of the first quarter, we have almost $1.5 billion combined with a $1.2 billion.
Undrawn unsecured revolving credit facility, we have available liquidity of over $2.6 billion.
One can't look historically at our financial performance to determine either a trough or a peak future performance, we've grown significantly transformed our Columbus Black oil division for the diversified or field product offering and incorporate even more levers to increase our through cycles financial performance.
2015, we've increased our total shipping capacity from 11 million tons over 13 million tons, while increasing our value added revenues from just over 55% in 2015 to almost 70% last year.
Since 2015, we've transformed columbus's through cycle earnings capability by reducing their operating costs.
Dramatically increasing their value added product capabilities and diversifying their customer base in end market factors.
We've expanded our structural and rail in Roanoke Bar Steel division to include reinforcing bar production capabilities further diversifying the locations product offerings in order to sustain higher through cycle utilization. We've also added new manufacturing businesses to our portfolio that you steel as a raw material, providing additional opportunities to this day.
Our own steel mill utilization throughout market cycles.
Since 2015, we've increased the possible internal volume by over 1.5 million ton.
Our acquisition and growing or steel fabrication platform. This is an incredibly powerful tool during weak demand environment.
In addition, collectively our primary recent and planned strategic growth investments provide an estimated incremental annual future EBITDA of over $425 million on a through cycle historical spread basis. This estimate includes are sitting steel mill and third Columbus Galvanizing line as well as our two operational.
Reinforcing bar expansions, we're simply even more agile today than ever before.
We're also dedicated to preserving our investment grade credit rating.
Capital allocation strategy prioritizes responsible strategic growth with appropriate shareholder distributions comprised of a base positive dividend profile.
I was complemented with a variable share repurchase program during periods of excess cash generation.
We are squarely position for the continuation of sustainable optimized long term value creation.
And on a personal though I want to take just a moment I wish Mike I'm very happy birthday, he's not listen to what are these calls and 25 years and he is listening this worry.
And I also want to thank our team I'm truly for their passion generosity and the care that they're showing for each other's health and safety God bless Mark.
Well, thank you Theresa.
As I stated safety mucin animals will be on number one value on priority nothing is more important.
In the first quarter this year, our safety performance improved from the previous quarters outcomes with meaningful improvement in the severity of incidents.
Oh safety performance continues to be significantly better than in the industry averages.
But as I said, many times before it's not enough they will never be enough until we reach our goal of zero.
We all need to be continuously aware about surroundings, and I'll fellow team members.
Hi, Andrew all of us to be focused.
Both as we think traditionally of safety, but even more so now as it relates to keeping each other in good health.
Steel fabrication platform delivered a strong first quarter performance.
Construction is also deemed an essential business and as such almost all the states slowed construction projects the remain open.
We've had some jobs delayed opus bone, but at this time as not being widespread or meaningful.
This would perhaps be expected as in previous market downturns construction is like the rest of the market by four to six months Jude Prefunded ongoing projects.
We experienced a record number of inquiries and bookings in the first quarter.
I'll fabrication order backlog remains very strong only 15% higher than at this time last year.
I mean, those recycling team performed well in the corner returning to profitability.
During the first quarter prime scrap appreciated about 25 $30 per gross ton.
Even with lower domestic steel production, hey, prime scrap prices retracted about $30 shredded $45 per gross tall.
Lower industrial prime scrap flow related to the temporary idling or the automotive sector in April was offset by reduced demand due to lower steel mill utilization.
Maintaining sufficient prime scrap availability.
That's the announced staggered automotive plant at least thoughts beginning in late April and correct me.
We expect to see prime scrap flow return to good levels prior to ramp up in steel mill utilization and thus centered on stable scrap prices.
In general.
Steel teams had a phenomenal performance in the core hitting record volumes on a tough environment.
We saw underlying steel demand strengthen increased steel certainly values, it looks flat roll and long steel products through substantially all the first quarter.
Before the Russia, Saudi Arabia oil price War.
The cobot 19 stay at home direct this.
Since mid March the landscape that rapidly subsea decline in energy prices related to oversupply.
Significantly reduce steel demand from the pipe and tube manufacturers.
And the temporary closure of automotive production and the related supply chain closures will meaningfully impact flat roll steel demand for this upcoming second quarter.
Since mid March although coil index pricing has declined over $100 to about $485 proton According to plan.
As a result, a reduced flat roll demand and reduced pricing the considerable number of higher costs flat roll steel operations have been indefinitely idled.
Since the end of 2019, we believe it represents a reduction on a between 12 to 14 million tons of annual flat roll sheets steel capacity.
Motion some 20%.
30% of total domestic <unk> capability.
In contrast, the construction sector continues to be study, which as mentioned in this is a critical steel consuming representing 40% to 45% the total domestic consumption a normal markets.
The order activity from our construction really to customers. In addition to current strengthen our steel fabrication order backlog supports the sentiment.
We believe that coming months will be difficult.
And these environments the strength of our people and our differentiated business model becomes even more evident and more impactful.
As demonstrated historically you during times of market inflection, we will likely gain market share based on our own honor it uninterrupted low cost operations, providing the greatest customer optionality.
Product, then market diversification value added market niches and the additional internal steel sourcing from all captive manufacturing businesses.
To put that in perspective.
Oh steel fabrication platform the text Holland, and Vulcan purchased 2.3 million tons of steel on 2019, and only source the about half that from STR my own steel mills.
This provides additional opportunity for internal purchasing to keep us steel mills running at high utilization rates, even in a weaker demand environment.
The U.S. administrations recent guidance for states to begin a staged reopening is positive.
As they begin this critical process improve steel demand will follow from pent up demand and already low steel members.
We provided a summary of our recent growth investments on a slide in our investor deck posted on the web site.
And the last 12 to 18 months, we've executed several strategic investments that will benefit all through cycle earnings and cash flow position.
We expanded to steel mills play that combine addition of 440000 tons of steel rebar production capability.
Revolving product diversification at a differentiated supply chain for the customer.
Our model provides meaningful customer optionality and flexibility the significant logistics yield and working capital benefits.
This end market diversification provides for a higher through cycle utilization for our structural and Rona deal divisions.
Paul in steel and 800000 ton value add flat roll steel processa.
The sells primarily cold rolled galvanized products has been ramping up nicely, providing additional support an operational flexibility for our Butler flat roll Division.
This increase the through cycle utilization of our steel assets and broadened our value added product mix.
The acquisition of 75%, a United Steel supply has been another excellent investment.
It was flat rolled galvanized prepayments steel distribution company does provide an a meaningful distribution channel to new customers.
As a consumer our internal steel products. They also increased the power of our through cycle steel utilization.
Since our acquisition of Columbus flat Roll Division the transformation of his product portfolio through the expansion of its value added still capabilities diversification of its customer base and the addition of a paint line is meaningfully increase that's recycle learns capability, which will clearly demonstrated through the this data.
Well now close to completing a 140 million dollar 400000 ton value added third galvanizing line.
Which we expect to begin operating mid 2020.
The value added product <unk>, Bruce will decrease Columbus is hot roll coil exposure.
By the ready and waiting hot band customer base and the sites for our new Texas steel.
Our system, we continue to be excited about the material growth. The construction of unused next generation flat roll steel mill will deliver.
That's trying to explain all financial strategy focused on entering 2020, providing for the required investment associated with this transformational project.
Our team has an incredible depth of experience in the construction started up an operation of large steel manufacturing assets.
Collectively we believe they are more experienced the next six in any company in the industry and the performance of momentum has been remarkable.
In general we received the required environmental permitting to allow for full construction efforts and we currently anticipate a mid 2021 startup.
That said as trees imagine, we will be reassessing, our timeline throughout the second quarter as we gain more visibility into the impact the cobot 19.
Additionally, even though we intentionally the not purchase equipment from China. Some of our equipment is being manufactured in other countries, where the curve honest as also I do.
We are having weekly conversations with these manufacturers. We currently do not believe our plans schedule has been any Lee impacted.
The new extended the all 3 million tons steel mill include a value added coating line comprised of 550000 ton galvanizing line.
250000 ton paint line with Galvalume capability.
We will follow the same stringent sustainability model as rather steelmaking facilities with state of the all environmental processes.
Our existing steel mills, a fraction of the greenhouse gas emission intensity actually about 12% of average world steel making technology.
Well the 94 inch coil what.
One inch thick on okay, aside product capability, the Texas mill will have capabilities beyond existing electric arc furnace flat roll steel producers competing even more effectively with the integrated steel model foreign competition.
As you know the steel mill is strategically located in a certain Texas <unk> Corpus Christi.
We were targeted three regional sales markets for the mill, representing over 27 million tons of relevant flat roll steel consumption.
Southern <unk> West Coast, United States in Mexico.
We also plan to effectively compete with heavy imports in Houston and the West Coast.
Our customers were excited to out or regional flat roll steel supplier.
We have several customers in discussions with one or the committed the located on site with us and a second close behind.
These two customers alone would represent over 800000 tons of local steel processing on consumption consumption capability.
The second location provides a significant freight benefit to most of our intended customers relative to their current supply chain options.
We believe the potential customer savings related to the freight alone for a minimum 20 to $30 per ton and for some much higher.
This freight advantage along with much shorter lead times provides a differentiated supply chain solution, allowing us to not only be the preferred domestic steel supplier and the southern and western U.S.
But also to the effectively compete with imports, which inherently have long lead times, a speculative pricing Russ.
From a raw material perspective, a metals recycling operations already control significant growing scrap volume and Mexico through scrap management agreements much of which is Brian.
As announced in March we also plan to acquire a Mexican scrap company is part of our raw material strategy for center.
The primary operations, a strategically located near the high volume industrial scrap sources throat central and Northern Mexico.
The company currently ships approximately 500000 gross tubs scrap annually, but as an estimated annual processing capability of about 2 million tones.
After closing we plan to ramp up volume fairly quickly.
We are currently waiting for Mexican regulatory approval as well as other closing requirements. They expect to close in the coming months.
We believe our unique operating culture, coupled with considerable experience is successfully constructing an operating cost effective and highly profitable yeah steel mills.
Positions us incredibly well to successfully execute the Simpson project.
As I've said before we're not simply adding flat rolled production capability.
We have a differentiated product offering.
Significant geographic trait and lead time advantage and an import alternatives to region in need of options.
Our unique culture and the execution of the long term strategy continues to strengthen our financial position through consistent strong cash flow generation and long term value creation.
Differentiating us from our competition and demonstrating our sustainability.
The gain on women as the health and safety of our people our families and communities all while supporting our vendors, serving our customers and sustaining our value creation journey.
Our team has simply incredible.
I'd like to thank each of them for their patients resilience and commitment during these tough times.
They have an individual spared the drives us to excellence.
And also very special thank you to the health care providers and their families within steel dynamics I know serving individuals across the globe.
Thank you be safe be well.
Hi, Michelle please open the call for questions. Thank you.
Thank you.
Good question. Please ignore bypassing the starkey followed by the digit one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
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Also we ask that you. Please limit yourself to one question Bill at the time for everyone. Any additional questions can be addressed upon reentering. The Q. Our first question comes from the line, Chris Terry with Deutsche Bank. Please proceed with your question.
Hi, Mark and Theresa and thanks for the comments.
Just understood in the outlook, so what you've seen so far in April obviously the chart you provided the presentation I'd utilizations in the 80% Mark year above the average that fall into the mid Fiftys in the last couple of weeks just wondered if you could comment on how still days going so far and IPO in may.
Based on your order book, what you might expect that today. During Twoq you know, it's a difficult question, but just wondering if you could provide some color on the ground.
Well certainly I think.
You said, it's a it's an incredibly difficult question.
Not so sure our crystal ball is clearer than others, but I will say that it's positive looking through the lens of our order book and our order input right.
And I read this morning in American mental model individual, saying well nobody is buying at the.
Yes, perhaps they're not buying from other people, but they are buying from us.
I believe that obviously energy is going to be very.
Very statement for the rest of this year into next year.
Automotive is going to come back again, one doesn't necessarily know exactly when but the expectation is late this.
Late this month and through through May.
But the bright spot certainly is construction.
As I mentioned earlier, you know construction tends to lag a market downturn, we sold in 2000 and.
15, we saw it in 2008 2009.
It sounds that lagged the downturn in the market by about four to six months, because operations or or or projects that tend to be prefunded.
It was seeing that and on new millennium building fabrication business in our structural mill.
As I said, you millennium extremely strong backlog, despite some project push backs.
But there's nothing real meaningful change yet.
And we're very very strong of a large market share in that distribution warehouse market that obviously given people staying at home and the expansion of Amazon's underlying.
That is a remains a growth area in all honesty.
Structure Mail Division backlog is currently solid.
Certainly through May.
It did see 25 dollar price decrease the interest recently.
But I do believe.
That people will recognize that will will trough in either the but the bottom the market.
The scrap is gonna be somewhat.
Stable here in the next month the too so those that have been hanging on the sidelines not buying will will likely come to come to market.
In that arena.
In the in the being arena heavy Structurals distribution is certainly slowed.
As as they whittle down their inventories than I would present tight and we're starting to see then come back and by a as they need the.
For the fabricators that business still strong as they supply the ongoing.
Construction projects.
Rail is actually very very strong for us at the strict trusts rail division and the rebar is the as an addition for us.
Compared to past downturns.
The product portfolio.
Of structure, well division is much more diverse today and we won't see the the debt.
Lower utilization right and if you if you remember.
Back in 2009 2010.
That that business went to 30, 35% utilization.
Still remaining somewhat somewhat.
Profitable.
But thats not going to happen this time isn't much well diversified product.
Product mix of market mix.
But that should wasn't swarmed very very well.
Engineered bar that that is seeing a little a softness right there obviously automotive.
As a is there a energy.
Seamless too is a is down there. So that is one arena that is probably as soft as anything going on and I'll probably portfolio.
Flat roll.
It remains relatively robust is probably two strong word but.
We're targeting those operations the run at around about 80%.
Utilization.
That for us that seems to be.
A good balance between.
Fixed cost absorption.
And the pricing.
And it appears that we should be able to sustain that that that targeted output.
Certainly for April certainly for me.
And we were confident that or we can do that in.
June as well.
So generally.
I think it's.
Obviously.
Quarter over quarter, it's going to be a tough couple of months Ross.
But we were positive.
Okay. Thanks, Thanks for calling Marco I'll leave it there.
Thank you. Our next question comes from the line of David Gagliano with BMO capital markets. Please proceed with your question.
Hi, Thanks for taking my questions and.
Congrats on a solid.
Start to obviously, a challenging year I just want to follow up on the on the private prior question.
If we look at you know slide 11, 94% utilization rates in the first quarter.
What's that number today.
Oh.
I think thats, what Mark just really tried to address so we've not just couple of things that differentiates US one is that we continue to operate.
24, seven and so with that where we get the the orders and we gained market share during environments like this especially as others higher cost production is being shut down.
Right now we're still operating at a very good utilization rate across the platform. The most challenged division frankly is our engineered bar division and that's because of their tied to both on the energy market and to just general industrial.
Automotive comes back and more specifically for engineered bar been caterpillar, John Deere et cetera start to operate again and I think that scheduled for the last charts I've seen with toward the mid the and the May.
You should start to see that correct.
But that being said it is very difficult environment. It's just we're able to gain market share and we're very nimble in order entry and working with the customers and that tends to makes a lot and very difficult environment. Our utilization stayed higher the other point is the internal volume.
That is not to be overlapped. So fabrication is still incredibly strong with a record backlog they need steel Dolby buying that steel from our own steel mills.
Same thing with regarding to our internal processing divisions, so heartland, United steel supply et cetera, they need steel they'll be buying that from our internal steel mills. So that helps our utilization profile and not most of our if any of our competitors how that same lever to pull so we can't give you an exact percentage number today frankly.
I don't know what the.
The exact percentage would be overall, but I know that we feel good about where we are in that the teams are doing a great job.
Okay. Thanks for the additional color the.
The the commentary was.
Targeting 80% on the flat side, how about maybe is there a target for the remainder of the.
You know product mix.
Well I think structural.
Should should remain in that sort of 75% to 80% range.
Range.
Again the.
The motion shapes.
Probably less than that gain button shapes Ronald tends not tends not to be a massive bundle or earnings.
Approval anyway.
But our three or four of our principal mills.
Butler Columbus isn't the structural division.
For targeting that 75% to 80% utilization rate.
A series of said engineered bar right now looks pretty soft.
So Dave just as an example of you go back to 2015, which I would suggest is the last week.
Steel environment that we've seen the overall generally our operations even at that time, we're operating at over 70% on the bottle side, they are actually operating closer to 90%.
Always more challenging in a long products side, because there's just extra capacity out in the system as it relates to long products and because they're all electric arc furnace based on but today. We would suggest that we just have more internal levers to pull and so we wouldn't think about it necessarily overall when you kubow fat flat and long.
Hi, Ed much impact as it might have at one point in time.
Okay I'll leave it that thanks very much.
Thank you. Our next question comes from the line of Seth Rosenfeld with Exane BNP Paribas. Please proceed with your question.
Good morning, Mark and Theresa Thanks for taking my question.
With regards to the.
With regard to the cost performance, we've seen in the business as you have continued to grow your processing volumes utilizing some in turn on third party substrate can you give a sense of how that's impacting your overall fixed cost base for the business again, if we think about how you're positioned in 2020 compared to past downturns should we consider the growth in processing.
It is essentially more variabilizing your cost base versus history or should we think about this in a different way, perhaps and then secondly, just one more follow up with regards to Syn 10, I'm wondering can please give a little bit of color with regard to decision to continue with the same 3 million ton target.
Given the weakness in oil and gas you yourself, how did that being weak through 2021 unplanned for 1 million tons going into energy how do we think about 3 million ton target in the current market environment personal line Alex. Thank you.
Okay.
So I think I think good morning, I think I have all the questions written down so from that the first questions about the adding other manufacturing businesses are the processing businesses, there's two points that.
You should keep in mind, one is you're correct. It is increasing the variability of our cost structures, but again as a reminder, each of our operating platforms is already over 80 vipers that variable cost, but this helps that as well you know the component to recognize is that because they're buying steel and you didn't feel as though.
Substrate.
That is impacting our cost of goods sold by having deal run through cost of goods sold which is higher priced and so I'm just.
Notably in the first quarter.
We had about 15% of our cost of goods sold was associated with the steel purchases from the.
From the converting a.
Company.
Well, let's sit in perspective, Mark I'll, let you handle the the energy question, Yes for sure I think Jeff.
Yes, the mill is structured or design of 3 million tons. This is not like.
Professional thin slab.
Based on.
You have to pass. This this is has one costume with a 3 million ton capability.
As such.
There's not a matter of.
Building half the plant or anything like that and nor do we.
We'll be the anticipate doing so.
Obviously, the the output would be adjusted somewhat to to the man.
Gain.
Yeah, Yeah energy markets are.
Pretty tough right. This second.
But as one.
Oh for those that have been in the industry for for a significant amount of time things through cycle.
The about market will come back, but the advantage of the soon facility because its geographic location.
We're not dependent on one sing single.
Mark.
Got it.
You know, we've got a roundabout 20 27 million tons of paper a market capability and when you look of the southwest.
You look at the West Coast and you look in Mexico.
And we can we can shift that product between the energy and automotive and construction.
And we feel that the investment premise remains totally totally intact.
Just a quick point on that from an energy perspective last year I think other shipment about 7% was related to energy, but that was primarily at our engineered bar division Columbus, but within that number we also ship quite a bit of volume from or steel of West Virginia.
Facility into solar so our energy number also includes solar and solar is still something that's actually increasing demand during that time as well.
Great. Thank you very much.
Thank you. Our next question comes from the line of Timna Tanners with Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning, and hope everyone is healthy and safe.
Likewise Turner.
One of two just drill down a little bit into your cash flow philosophy. So I heard you maybe trace I Miss heard can you clarify you said for the remainder of the year Capex is 1.2 billion, which sounds like your Capex forecast is intact at 1.4 billion or did I hear that wrong and if any you also went on to say that.
Hi, you could adjust it if needed, but you're not adjusting it and you also said that you could you just authorize further buybacks and just completed what is a 170 million buybacks in the quarter. So I kind of get the impression that for now feel dynamics is operating as F.
But the impact of reduced demand and Tobin 19 impact as is a shorter term <unk> phenomenon and kind of getting back to normal later in the year, that's what I'm piecing together from your comments on that Capex and then the buybacks, but I just wanted a little bit more thought on on how you're thinking philosophically about the rest of year and.
Capex and by batsmen. Thanks.
Great.
Let me clarify your right concerning the capital expenditures currently for 2020, we started the year, saying, we expected to spend about 1.4, we spent 200 I'm a little over 200 million in the first quarter. So for the remainder of the year, There's 1.2 billion.
That 1.2 billion.
Over 700 million of that is actually late in the second half of the year and its related to sentence.
As we progress Timna through the second quarter, we believe we're going to gain a lot of visibility as this state.
For lack of a better word reopened.
On what that means for steel consumption and on our own operations for the remainder of 2020.
As we progressed to the second quarter should we think that we want to potentially take some of that capital and push it into 2021, we can make that decision to do that at that time.
Right now from what we're seeing as Mark mentioned, how the mills are operating in market share in the activity that were seen we don't believe that decision is somebody that we're making today.
As it relates to our share repurchases.
We repurchased 107 million in the first quarter most of that was purchased with in January and February timeframe.
But you should expect to see from us in the second quarter is that we will be watching the markets watching the impact of the current a virus and you won't see us heavily into the share buyback market at that point in time, and then we'll reassess where the second happened here. The reason the board authorized an additional five.
<unk> million in February of this year and simply because we think share repurchases during periods of excess cash flow is up for as an important tool that have until we wanted to have that tool because we actually only had I think about $40 million to $50 million left on the previous program.
Does that help clarify how we're thinking about things yeah, absolutely because I was having a difficult times squaring some of those comments with the market environment and okay. So I guess just as a follow up if I could I'm can you just talk a little bit about when you think you'll have more visibility on construction. So like you said constructions late cycle you wouldn't see.
Cancellations, yet on that but it sounds like that could start to flow through later in the year I just wanted to get a little bit more thought on when you would start to see any impact on your backlog or any commentary from what you've seen on the ground level because we're hearing that private sector activity is kind of drying up so I'm just wondering if.
That's it that's inline with what you're hearing as well thanks.
Well I've seen the the same commentary.
[music].
And that the this it seems to be a little disconnected to our actual order book and what we've seen.
And as I've said a quite consistently.
Our mill lanes for breast the eye is through that order book and through the the inquiry rape and all that remains quite strong.
As an analogy you know if you look at the 2008 2009, a downturn which was.
Pretty significant onto itself.
Yeah, we saw the structure rail division.
[music].
Operating pretty consistently into the summer of 2000 mine, there's a good 456 months.
Strong.
Sort of continuation from from Prefunded projects.
Well as soon as they said.
A large part of our business is in the in the distribution warehouse arena.
That is I would say is expanding more than contracting.
So I think we seen we see things optimistic.
We're also very very realistic.
And I just want to go back to to what you're saying about is there is really.
The dichotomy between the markets and what was saying relative to a thought strategy <unk>, but and I am going to ramble, a little bit I think but.
[music].
I'm, probably not Simpson and members of the Sci team have been in the business probably longer than than anyone on the call and probably most leadership in an area steel companies.
And we've seen the.
80, 81, we lived through managed through.
2001 2002 when.
45% of the the industry was it was in insolvency.
We lived through 2008 2009, we lived through 2015.
So we are very realistic and recognize the impact in the market change.
And and managed to that and I think we've demonstrated through all 25, 25 26 year history.
We're very intentional we're very disciplined and we're actually conservative.
That that same time.
And and periods like this.
You know leave leaders and you've got one of the best leadership teams in.
We'll hear.
They need to lead they shouldn't be seeking cover you know we need to be seeking opportunity.
And that's where we think since on the isn't off a very very good investment a very good opportunity. We'll continue to go to stand up the path.
That being said just reemphasize what trees as Ed will continue to reassess our our order books are the mall.
Oh cash flow generation.
And we'll adjust as we see fit.
But I think it's very very important to recognize the again a lot of the capex for sentiment is sort of back ended the towards the end of the year here.
And it's a is huge lever that we can pull.
Yes, if necessary.
Okay, and vital lever you mean to delay right now I don't envision you're talking about like pulling it per se right now, we're just talking about delayed it right and.
There for you.
You really can't forget the strength of the working capital.
The funding source it can be.
Okay really helpful guys. Thank you.
Thank you.
Thank you. Our next question comes from the line of Philip Gibbs with Keybanc capital markets. Please proceed with your question.
Hi, good morning.
Good morning, good morning.
Mark can you talk a little bit about the on site customers that you're going to have on certain I think it was part of your script on certain but I just wanted to be shorter because I think you'd said over 800000 tons of local or on on site.
Processing and obviously, that's a big chunk of the 3 million tons that you're looking to to get.
So one I just want to make sure I heard that correctly and too.
Where do you think that that can go.
As this project evolves.
Well I think the we've got one a fine.
And a second very very very close to signing.
This.
Preference on their part not too.
So but name so at this moment in time.
But youre right it was the.
Two of them with back to about 800000 tons.
Of.
Of the consumption and processing capability.
We probably have another.
Not probably we do have for other interested customers.
That have been given full full packages.
Lease packages and those things.
They.
Just a slowed a little bit because of the situation. We're in it but we're confident that we're going to get those folks to.
But is it is is a very I think important part of the overall.
So a strategy of that mill.
Collectively.
It's likely to be somewhere over a million tons of on site capability.
Okay, well that's helpful. So talking basically a third.
Kind of built in onsite there.
[music].
I think that their tax benefits.
Or deferrals and accelerated depreciation on years, where new assets go into service.
It's just say 2021 is intact for for certain leased says it is today.
What should we be thinking about the size of just the accelerated depreciation.
Benefits in terms of tax avoidance in the year Irrs that goes into service goes out obviously with 2 billion of spending it could be pretty meaningful.
Yes.
Exact numbers, but I see that of the $1.9 billion.
We're likely to has accelerated depreciation on at least 80% to 85% of that number.
Okay would you take that all.
In year one.
Given they've got all the assets go into service or not.
In 2021.
Yes, so that would all be.
Recorded in 2021.
Thanks very much.
Thank you. Our next question comes from the line of Andreas Bokkenheuser with GBM. Please proceed with your question.
Well, thank you very much and good morning, I Hope you guys all well I'm just two quick questions for me.
First of all on oil obviously this week oil volatility how do you guys think about that you know just aside from what it could do to you know investment in the energy sector on tubular steel and so on so you.
You know what when you kind of so what happened yesterday to prices what kind of went through your margins himself are there any opportunities for steel dynamics that we should be thinking about and what are what are the so that's obvious challenges as well. So maybe just give a little bit of framework. If you. If you will a route how you're kind of thinking about the oil price move yesterday.
And I guess the second question is more on construction or can you give a little bit more granularity there wouldn't be look at the residential and nonresidential construction numbers I'm just seems to be as much we miss asterisk strengths and has been for the last euro. So you guys seems to be exposed to the strength of it.
So could you give a little bit more granularity as where are you seeing that strength in any particular areas. They said rational one nonres no geographic decent more south of Nols and so on that would be a very helpful. Thank you very much.
Well certainly the.
Well regarding the energy markets.
I think yesterday it was quite incredible.
And also should be about time to digest.
But in general obviously the immediate.
Impact is on the energy markets pipe and tube.
And that was.
Not just going to covert thing that obviously is Russia in Saudi Arabia doing their thing.
And the low energy prices will surely extend the the downturn there.
Yes.
You know, 8% to 10% I guess.
This is the steel market in a normal in normal times.
So that we we looked at that is a pretty stagnant market.
The rest of the view going into into a this year next year.
The first half of next year anyway.
The I.
I guess the positive.
Well one.
Scrap tends to move down the oil.
No I'm not sure the physical market.
Back to <unk>.
Occur.
Hey, we're looking to scrap should move down and my but we think given the physical market.
It's probably a a sideways market.
Forward, but that may or May change here next week to week or two.
What I, what I do think.
Is that.
The the pressure on the energy market is going to intern put pressure on the only integrated mills.
And I think that.
You've seen a pretty dramatic.
Idling of integrated capacity blast furnace capacity here.
Last four or five six weeks.
And if you look.
Back over a longer period the last.
A couple of use.
The there's been a.
Turning on to then off of some of that capacity.
As the the suffer.
<unk> pretty strong economic pressure.
I think.
A sustained downturn in the energy markets.
Nick.
So on those assets.
It's going to be a tough.
Tough decision to to ever bring on back. So I think it may as a positive that may help rationalize the the industry to some small degree.
Thank you I said.
All right and I know you know the second question on construction granularity.
Again a.
This certainly has been weakness in the in the northeast, but thus tended to be more.
Projects construction.
Locations actually being shut down by by the states.
We certainly see strength.
Yeah and in the South recently as I said see strengthen in that distribution a warehouse.
Arena.
Thank you. Our next question comes from the line of Gordon Johnson with DLJ Research. Please proceed with your question.
Hey, guys. Thanks for taking my questions. Its question May have been asked but I was wondering if I could get a little bit more color on your shipments expected across some of the different lines. I know you said your utilization dropped at 75% arm, but can we get maybe a little more color on kind of what you see maybe somebody green shoots you see in that sector.
Yes, but we're not going again two specific for two different reasons. One is that we generally don't get about type of guidance and.
Second reason, it, especially going into the environment that we're in right now there's not a lot of visibility and so we want to make sure that we're we're being appropriate but I think what mark was suggesting is that you we intend to see utilization.
Or at least we're planning for utilization I or flat roll operations somewhere in that you know 70, 580% range and traditionally even in 2015, we were actually operated about 90 per site. So we generally gain market share in flat roll during periods of weakness and we're seeing that today.
Oh, and we've not we don't see a driver for that to change throughout the quarter long products side, it's more difficult so and the structural and rail arena, we don't expect to maintain higher utilization that 70, 580% range on because of the order backlog as it sits today and because construction is continuing.
For us in that arena and with the addition of rail and rebar that product diversification helps out facility across the other long product well I mean, it's more difficult so you're going to see them most weakness in our mind any special bar quality early SBQ arena.
And then that distributed throughout so that's probably about as much clarity or granularity as we can provide on volumes at this point.
Okay. That's helpful and then one last one.
In the checks we've done it seems like you guys are doing quite well construction space, particularly against the integrated mills on is there any I guess approach you guys have or color. You can provide on you know I guess incremental attempts to take share that spacing is that accurate that you guys are doing quite well under construction space again to integrate peers extra question.
Yes, I know that that's absolutely correct.
In especially.
No. It wasn't just in periods like this in the first quarter, our structural rail team did a fantastic job on the construction side and pulling in volume and if you were speaking more specifically about our fabrication business, we have been gaining market share in that area as well as a team do incredibly well and Merck point out its worst with it.
Finally in that warehouse arena, and we haven't taking market share and we would expect to continue to do that.
Thanks again.
Thank you.
Thank you. Our next question comes from the line of Sean Wondrack with Deutsche Bank. Please proceed with your question.
Hi, Mark Im curious and thank you very much for all the information today.
Just when you look at the auto market.
Now I.
I think you had mentioned that some of the auto manufacturers are looking to come back online next few weeks.
Can you talk about <unk> are you starting to hear from them more like more order inquiry.
And also sort of for that for the industry I realize you guys are great operator, and you're going to have the ability to potentially take share this year.
What is sort of your baseline if you have one you had a baseline forecast for for auto production do you assume it's down 10%. This you.
Just curious about that thank you.
I didn't hear that thank you our next question.
The question relates to automotive.
And it relates to defer sector as they start to roll and we've been taking market share and specifically.
The European automakers et cetera would we expect to continue to take back market share and what are we thinking about volume perspective, how much will steel consumption volumes are auto builds from your perspective on how much will that be down.
This is what I'm, saying.
And then the perspective, just around what do we feel about continuing to take that market share.
Yeah.
Got it okay, well I I would suggest that.
As I said earlier, my Crystal balls, probably know better than anyone else is on the call and off the whole recovery is somebody to.
When when folks get back into the marketplace.
And what speed.
The do they ramp up.
From from.
Present information it appears that you know the automotive will stall rolling back.
Starting the end of the mid to end of next week and all the way through.
Made depending on which company.
You know it's that they've got a.
There's a backlog of vehicles right right in the second.
So a quick recovery is.
Is there could again.
You look at past troughs intends to replenish they've been and.
Position to replenish inventory pent up demand I'm not so sure you we will we'll see that this time around.
Got to quantify our gain market share is.
You know relative to Tom's its is a tough but.
All I can say is the.
Severities are sort of armed and ready to go and it's our flexibility across all markets is not just the auto.
But all markets that allows us to.
To take off opportunistic gains.
Because it's going to be a while.
For the integrated Mills, just thought Tony on all there.
All their idled.
Capacity.
One would imagine that they need to see.
Some visibility and transparency.
For a market that is only.
As a positive momentum and that pricing also has positive momentum.
And that's not going to happen just because the automotive.
The two other I want to tier two stylist start up.
So there's there's that there's that time period and the it's a it's a matter of months, maybe along with the spot Ryan who knows but it's a matter of months.
The flexibility of electric arc furnace operations can can take advantage of the the marketplace.
Thank you. Our next question comes from the line of John Massocca with John Massocca very independent research. Please proceed with your question.
Thank you very much.
[noise] how much of the.
Butler and Columbus Mill.
Hi age used to be.
Scalp for welded to.
Exploration.
And then the plan for <unk>.
Should we choose to some those volumes become construction steels.
Given the short term crude oil.
[noise] well for.
But all I would say Butler.
<unk>.
The the.
Energy scale is not a massive part of the portfolio.
And so we tend to see.
Oh Hot roll coil.
Dependence a up from the facility is not there's not really related to oil and gas.
And given the.
The value add diversification. The we don't really have a massive amount of hot band to sell to be honest.
Columbus, certainly has greater exposure and if you remember when we purchased the mill in 2014.
That was a dominantly.
And energy pipe, Oh supplier and I think back then it was three is a 30% maybe 40% of its own.
40%.
Since then the team.
And really a sort of catalyzed by the downturn in energy in 15.
Team has done a phenomenal job diversifying that that asset.
Adding yeah, great coating capabilities.
Paint line.
Okay.
A variety of high strength the type agreements deals that Oh.
Ah getting into automotive getting into Mexico.
So the.
The the product in the market diversification the.
Totally transformed the entity.
And so it it's through cycle earnings today is nothing like.
15, and this was much higher.
That being said.
It's probably 10% maybe 15% energy.
Related so John just overall I do put a point on it last year, our shipments we only had 7% that were related across the company that were related to energy and some of that included solar so that was a high premium grade or CTG that sort of thing. So it's not that much of our business either last year or today.
At this point and then as it relates to sit and we will also be competing leading very effectively with imports and I think that's something that people should recognize as well.
Thank you asked point girls congratulations on being the old man the call Mark.
I turn soon.
Anyone.
Well I I don't I'll be respectful, but you and I both my though.
[laughter].
[laughter].
Thank you. Our next question comes from the line, Phil Gibbs with Keybanc capital markets. Please proceed with your question.
Hey, Theresa.
Did you provide the mix of she'd products.
It's typical typical I apologize.
I apologize Phil I didn't I have it here, though.
So great for flight will ship and they know a lot of you use it for your models are hot roll coil, and our pickled and oiled shipments were 891000 tons.
Our cold roll shipments were 151000 ton.
And our coded shipments were 948000 time for a total of 1.990 million tons.
Apologies.
No no no worries that's all thanks very much.
Thank you.
Thank you. Our next question comes from the line of Charles Bradford of Bradford Research. Please proceed with your question.
Hi, Good morning, and I've got both you guys beat on age, but corrected goes down to.
Little bit something maybe out or you are barely works, but apparently you as steel has dropped out of membership.
Yes.
Oh, that's that it may impact the quality of the industry data that we get have you seen any change in the quality I'm thinking, especially of the usually bad operating rate figure.
Chuck.
I would say, we've not seen any change, but nor have we analyze that to be honest.
Thank you.
Thank you. Our next question comes from the line of Tyler Kenyon with Cowen. Please proceed with your question.
Hey, good morning, more countries I hope, you're both doing well.
Pre so just a quick one for me do you anticipate any relief in 2020 from the recently passed Cures Act payroll tax deferrals enhanced deductibility of interest expense et cetera.
In any way to <unk> the bracket.
You know what kind of of cash relief that could provide in 2020.
Yeah, given the analysis that we've done I really can't predict great bracket around it but at this point I'm Tyler's not somebody not where do you mean as will be significant for us there's definitely the payroll tax relief would have an impact, but apart from that and get it.
Our expectations on operating in a different areas, where they're hoping either smaller companies or companies that are not doing as well as we are I don't think it's going to be something that's meaningful at this point that changes will be sure to let you know.
Thank you.
Thank you that concludes our question and answer session I'd like to turn the call back over to Mr. Miller for any closing remarks.
Well, thank you Michelle and thank you everyone on the call I, just would love to emphasize.
You know I'm I'm, a pretty optimistic guy and if you were surrounded by the team we have it S. The <unk> you would have that that same optimism.
And it's really based on honest the ice position and I suggest even in these tough times of the and yes, the I team.
Shines in moments the challenge and we are.
In a position of strength a business model.
This is bill for to be resilient and trial truck markets and tough markets. You know we have a high variable cost structure, 85%. Our cost structure is variable, we got a broad value added product portfolio.
And we have strong pull through volume as we've suggested from our an internal downstream operations.
All that builds a high utilization rate, we've demonstrated in every trough higher utilization rates than our competition.
Why do you have capital intense.
Steel assets volume is absolutely critical and that translates into better financial metrics through cycle. So we're still confident in our cash generation capability.
We're still confident.
Our financial Foundation.
And we are.
Battling each and every day, but up but orders.
We continue to flow and.
So we do remain positive that being said, we're incredibly and intangible.
And we recognize that we need to be assessing markets and all and opposition almost each and every day.
We've demonstrated that in the past and we will we will demonstrate that the going forward. So for all of you.
Thank you for being on the call customers employees and employees seriously. Thank you you make a as guy who who we are today.
And everyone be healthy be say bye bye.
Thank you once again, ladies and gentlemen, this concludes todays call. Thank you for your participation and have a great and they die.
[music].