Q3 2020 Steel Dynamics Inc Earnings Call
[music].
Good day and welcome to the steel dynamics third quarter 2020 earnings Conference call. At this time, all participants are in a listen only mode. After.
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 I, probably 22020 and your participation implies consent to our recording this call. If you do not agree to these terms. Please disconnect at this time I would like to turn the conference over to Tricia Meyers Investor Relations manager. Please go ahead.
Thank you Molly good morning, and welcome to steel Dynamics' third quarter 2020 earnings Conference call. As a reminder, today's call is being recorded and will be available on our website for replay later today, leading todays call are Mark Millett, President and Chief Executive Officer, Phil Dynamics, and Theresa Wagler, Executive Vice President and Chief Financial Officer.
The other members of our senior leadership team are joining us on the call individually as we are following appropriate social doesn't think idling some up.
Some of today's statements, which speak only as of today, maybe forward looking in protective typically preceded by believe expect anticipate are worth of similar meaning they are 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 steel metals recycling and fabrication businesses as well as to general business and economic conditions. Examples of these are described in the related press release as well. It has in our annually filed FCC form 10-K under the heading forward looking statements and risk factors found on the Internet at Www Dot.
I think if you backed out and if applicable and any later FCC form 10-Q.
You will also find any reference non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics reports third quarter 2020 results and now I'm pleased to turn the call over to Mark.
[noise] [noise]. Thank you Tricia good morning, welcome to our third quarter 2020 earnings call. We appreciate your time and thanks for joining us today.
We continue to operate safely I still closely monitoring the COVID-19 situation.
Protecting the health and welfare or bubble teams is our highest priority.
Hi, thank each of them for their continued diligence and commend them.
I'm incredibly proud to work alongside each of them.
Specialty during this unsettled time, they are very special group [noise] accomplishing extraordinary things, we're committed to them the families and our communities all while supporting all suppliers are meeting the needs of our customers but.
So without further Ado I will hand, the Mike to Teresa to provide further insights into our strong third quarter performance. Thank you Mark good morning, everyone.
Our third quarter 2020, net income was $100 million or 47 cents per diluted share above our guidance of 42 to 46 cents per share due to stronger than anticipated flat rolled steel shipments and metals recycling earnings are there.
Our third quarter results were reduced by costs net of capitalized interest associated with the construction of our sitting taxes flat roll steel mill of approximately four cents per diluted share.
Excluding these construction costs third quarter 2020, adjusted net income was 51 cents per diluted share also above our adjusted guidance of 46 cents to 50 cents per share.
One comment before proceeding the compare ability of third quarter 2012 financial results to prior year amounts ism favorable but to achieve what our teams have achieved in this environment is simply incredible and I want to add to Mark's comment is this yearly thank and congratulate.
Our third quarter 2020 revenues were $2.3 billion, 11% higher than second quarter sequential results as volumes improved across all three operating platforms.
Our third quarter 2020, operating income was $156 million fairly study with the sequential second quarter, but 32% lower than prior year results due to lower steel prices, resulting in metal spread compression. However, currently we have experienced a very strong rebound and domestic steel demand from the second.
Quarter sequential Covidien 18, induce trough environment customer steel inventory levels were extremely low entering the second quarter and then were drawn down even further based on market uncertainty.
From an operating platform perspective, our steel operations delivered an outstanding performance. During this challenging time third quarter steel shipments of 2.7 million tons were 7% higher than the sequential second quarter shipments and on par with prior year third quarter volume our steel mills operated at 85% of their capability.
While the rest of the domestic industry operated at only 64%.
Due to the momentum from a record first quarter volumes, our year to date steel shipments are only 1% lower than in 2019.
Our ability to maintain higher steel volumes as a result of our value added highly diversified product offerings, our supply chain differentiation and our internal downstream manufacturing businesses. However, based on timing and the impact of flat roll contract related sales, our average quarterly realized steel price per ton declined sequentially.
More than offsetting the benefit of lower scrap costs and higher volumes.
Our average quarterly realized external steel sales price decreased $21 per ton sequentially to $734 in the third quarter, an average scrap costs only declined $7 per tonne, resulting in steel metal margin compression.
The result was third quarter 2020, operating income of $144 million for our steel operations, 17% lower than the sequential second quarter.
As states began reopening and domestic manufacturing improved scrap supply and collection increased this in combination with higher domestic steel production drove significantly higher ferrous scrap volume our operating income from our metals recycling operations was $15 million in the third quarter of 2020 compared to a 6 million dollar loss in that.
Sequential second quarter.
We also are benefiting from the addition of Zimmer our newly acquired Mexican metals recycling business. The acquisition was completed in August is a key cog in our ongoing raw material strategy for our new taxes steel mill.
Our metals recycling operations provide a competitive advantage for sourcing ferrous scrap where steel mills, allowing for increased crop quality melt efficiency and reduction of companywide working capital our vertically connected operating model benefits both platforms.
Our steel fabrication business had a record operating income of $39 million in the third quarter compared to sequential results of $27 million due to record shipments and margin expansion as product pricing increased while steel input cost declines.
We continue to experience a strong order backlog and customers remain positive concerning or nonresidential construction projects in fact, the steel and Joist Institute recorded one of its strongest historical booking month. This last September.
Our cash generation continues to be strong based on our differentiated business model and highly variable cost structure. During the third quarter of 2020, we generated $152 million of cash flow from operations.
An $849 million during the first nine months of the year.
We also invested $855 million in fixed assets.
Of which $640 million was invested in our new taxes flat rolled steel now.
For the fourth quarter of 2020, we believe capital investments will be roughly $400 million of which our new Texas steel mill represents $360 million.
We currently estimate capital investments for the full year of 2021 to be in the range of $850 million with the Texas steel mill, representing about $700 million of that amount as their operations are still expected to begin mid year 2021 and.
In addition, I've been getting a lot of questions about our effective tax rate.
For 2020, the effective cash tax rate will be approximately 20% for the year. However, based on credits we expect to receive due to this that in Texas Mill, We would expect 2020 cash taxes to only be approximately 3%.
Regarding shareholder distributions, we maintained our quarterly cash dividend at 25 cents per common share after increasing at 4% in the first quarter of this year. Since 2016, we've also invested $1.3 billion in our common stock representing over 15% of our outstanding shares and 400.
And $44 million remains authorized for repurchase at the end of the third quarter I'd.
Additionally, we opportunistically access the investment grade capital markets in both June and October of this year, extending our debt maturity profile and significantly reducing our effective interest rate, we're thrilled with the differentiation our investment grade bond investors recognize that steel dynamics provide in our fundamental free cash flow generation capability on it.
[music] cycle basis as ever.
As evident in October we issued $350 million of 1.65% seven year paper and $400 million of 3.25% 30 year paper with proceeds intended to refinance our existing 2025 notes and other general corporate purposes.
These actions reflect the strength of our capital foundation, consistent cash flow capability and strong liquidity profile, demonstrating our confidence in our sustainable through cash strong generation.
We entered 2020 in a position of strength with App ample cash and available liquidity of $2.8 million and at the end of the third quarter. We maintain strong liquidity of 2.5 billion comprised of cash of $1.3 billion and are fully available revolving unsecured credit facility of $1.2 billion pro.
Pro forma our October financing activities, our liquidity would have been $2.8 billion.
As a reminder, you're seeing this is our performance in the current market environment and you can't look historically at our financial performance to determine either a future trough or peak, we've grown significantly transformed our Columbus flat roll Division further diversified our steel product offerings and incorporated even more levers to increase our.
Through cycle financial performance.
In addition, collectively I apart 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 our Texas steel mill and third Columbus metallic coating line as well as our two operational.
Rebar expansions, we're simply even more agile today than ever before we more than doubled our annual free cash flow from operations to $1.1 billion from 2015 to 2019 compared to 2010 to 2014, we are.
We are dedicated to preserving our investment grade credit rating, our capital allocation strategy prioritizes responsible strategic growth with appropriate shareholder distributions comprised of a base positive dividend profile that is complemented with is variable share repurchase program. We are squarely positioned for the continuation of this deep sustainable.
All optimized long term value creation.
Some of you also use some more detailed information for flat roll operations I'll give you the third quarter shipment profile now are hot roll coil shipments for the third quarter were 803000 tons are cold rolled shipments were 144000 tons and our coated shipments were one mill.
In 13000 tons for a total of 1.960 million tons.
I don't know personal no I really do want to thank our teams for their passion and their generosity and really the care they are showing for each other's health and safety.
Mark.
Super Thank you Theresa.
Thank you for a clearly articulating the differentiation of Sci.
Thanks, its competition I think we've just navigated.
Just navigated a.
An incredible incredible cycle downturn, and then recovery and performance.
Our team is doing is just.
The almost totally.
And speaking to them.
In the end, but nothing really is more important than the safety of our team.
Safety is and always will be our number one value.
Our safety performance continues to be significantly better than industry averages, but our continued goal is to have no injuries among those people.
Our safety performance has further improved from a severity perspective.
However, among some of the operating platforms third quarter safety results were not what we would like to see for all teams we all.
We all must be continuously wearable surroundings, and our fellow team members I ask all of us to keep safety top of mind to control safety, we can take charge of safety.
It's in a traditional sense as it relates to keeping one another and good health.
Steel fabrication platform delivered a remarkable third quarter performance with record quarterly volume and earnings.
Our fabrication order backlog remains strong as higher than it was this time last year and in fact higher than 2018 cut.
Customers remain positive concerning non residential construction projects, we anticipate the strength remaining through the rest of this year and into 2021.
The metals recycling volumes and earnings also meaningfully improved in the third quarter.
As states rescinded children place mandates on the automotive supply chain restarted scrap flows dramatically improved throughout the third quarter.
The same time domestic steel production utilization increased from an average 56% to an estimated 64% and ferrous scrap demand significantly improved.
As flows continue to increase in steel production remains steady we believe scrap prices should remain fairly stable through the remainder of the year, we would likely seasonal price appreciation in December January timeframe.
We also welcome the similar team and to the steel dynamics family.
The addition of this Mexican metals recycling business is a meaningful step in our raw material sourcing strategy for our Texas flat roll steel mill.
The combination of Zimmer with our existing operations has already resulted in new business and we're excited for the continued growth.
The steel team continues to achieve an outstanding performance, especially considering the.
Environment and a sincere thank you to all involved, especially our customers for helping us achieve volumes that only modestly less than record shipments achieved in the first quarter of this year.
As a result of COVID-19 related implications a considerable number of high cost blast furnace flat roll steel operations were idled earlier this year, but.
Potentially as much as 15 million tones.
Since that time frame.
Steel demand and pricing has improved an estimated five to 6 million tons is being brought back online.
Although some additional volume May return, we don't believe all of it will come back but.
The cost of restart along with recycle market pricing and also.
While supporting ongoing profitability will likely keep significant volume curtailed offsetting the new capacity increases to be seen over the next 24 months.
While the overall domestic industry operated only 64% the strength of our differentiated business model, coupled with a passion about people drove SVR steel mill production utilization to 85%.
Even more remarkable our flat roll steel mills achieved utilization 99%.
And tough environments, the strength of our people and our superior business model become even more evident.
As demonstrated this year, Jim periods of Mark an inflection, we maintain higher volumes compared to our steel peers and gain market share.
Alright, uninterrupted low cost operations provide the greatest customer optionality.
Our broad product portfolio and end market diversification within value added market niches drives flexibility for our commercial teams.
Superior supply chain solutions create additional value for our customers, making us a preferred place to shop.
Furthermore, the profit drivers the Optionality you have internal steel sourcing from our captive manufacturing businesses, while we call pull through volume.
To put this in perspective, our steel fabrication platform and steel processing locations purchased 2.3 million tons of steel in 2019.
Only about half of this volume is typically sourced from STR and steel mills, but in different difficult markets. We have the option to direct the higher proportion of these orders internally.
As states continue to reopen to varying degrees many steel consuming businesses have resumed operations.
At the same time customer inventory levels have been reduced to extremely low levels.
This combination of increasing demand coupled with low inventory reserves has resulted in a tight flat roll steel supply environment.
As a result lead times have stretched out on flat roll steel pricing has significantly improved.
The hot rolled coil see how you price index increased almost $160 per ton from the beginning of August to September and as soon as increased another 40 to $50 per ton.
The automotive supply chain has experienced the most significant recovery, let's say.
Attaining production levels of either close to or in some cases more than pre koby levels.
The construction sector remains resilient and related steel demand has been steady.
As evidenced by a structural rail division volume and our record steel fabrication shipments and strong customer backlog.
The order activity from our construction sector customers combined with the strength in our steel fabrication order backlog support our optimism for continued strength through the rest of this year heading into 2021.
Residential construction has also been surprisingly strong generating high demand for each we AC and appliance products.
The energy sector, though continues to be structurally weak and will likely require a longer recovery period.
Related to our growth we have a summary update of recent investments in our most recent investor deck.
And the last 12 to 24 months Weve executed several strategic investments that are already or will meaningfully benefit all through cycle earnings and free cash flow position.
We expanded to steel mills by the combined. The addition of 440000 tons of annual steel rebar production capability for us.
Providing product diversification and a differentiated customer supply chain.
This end market diversification is providing for higher through cycle utilization utilization for our structural and Roanoke steel divisions.
We continue to expand capacity at Harlem. It is an 800000 ton value added flat roll steel processing.
Team has been operating at record levels, providing additional internal production support and operational flexibility for our Butler flat roll Division.
Increasing the utilization of our steel assets and broadening our value added product portfolio.
The acquisition of 75% of United Steel supply has also been an excellent investment in addition to our portfolio.
As a local distributor pre painted construction products. It is provide a meaningful channels and you more diversified customers.
The United Steel supply continues to break shipping records.
Since the acquisition Columbus flat roll Division in 2014, we have meaningfully increased its through cycle lanes capability.
We have transformed its product portfolio with the expansion of its value added steel capabilities and the diversification of its customer base.
The team achieved another milestone in July with the startup of a new 400000 tons the value add coating line.
Columbus now has four higher margin coating lines now.
The investment both reduces Columbus is hot rolled coil exposure and provides a ready southern hot band consumer base for us since in Texas Steel mill.
We remain incredibly excited about the new generation the flat rolled steel mill is.
A significant contribution to our growth and future earnings capability.
That's true Teresa explain we purposefully ended 2020 from a point of financial strength provide.
Providing ample liquidity for the required investment associated with this transformational project.
Our team has incredible depth of experience and the construction startup and operation of large steel manufacturing assets.
Collectively we believe they have more experience than exists than any other company in our industry.
The Texas his team's performance and momentum continues to be absolutely remarkable.
Construction is going extremely well I still on track for a mid year 2021 start date.
We are having a frequent conversations with the equipment suppliers regarding the impact new COVID-19 in Coney don't believe our planned schedule has been meaningfully impacted.
The new state of the art 3 million ton steel mill will include two value added coating lines comprised of 550000 tons of galvanizing and 250000 tons of prepaying.
You will follow the same stringent sustainability level has are the steelmaking facilities with state of the art environmental controls and processes.
Our existing steel mills have a fraction of the greenhouse gas emission and energy intensity of average traditional steelmaking technologies.
Well, then 84 inch coil with and up to one inch thick hundred Kansai product, the Texas mill will have capabilities beyond existing electric arc furnace producers competing even more effectively with integrated steel model and foreign competition.
Steel militaristic strategically located and since in Texas near Corpus Christi.
We have three targeted regional sales markets for the senses mill, representing over 27 million tons of relevant flat roll steel consumption.
In the southern and West Coast, United States and Mexico.
We also plan to effectively compete with a heavy imports in Houston and the West coast.
Our customers are excited to have a regional flat roll steel supplier. We now have three customers committed to locate onsite representing between 800000 and a million tons of annual processing and consumption capacity.
We're still speaking with several other interested parties.
Since then location provides a significant freight benefit to most of our intend to customers relative to the current supply chain options.
This freight advantage coupled with much shorter lead times provides a superior customer supply chain along.
Allowing us to be the preferred domestic steel supplier in the south and west than U.S.
It also allows us to effectively compete with imports, which inherently have long lead times and speculative price risk.
We have also made considerable progress concerning our raw material strategy for center.
As I mentioned, we completed the acquisition of a Mexican scrap company in August this is.
This is a critical step in our strategy.
The acquisition complements our current metals recycling bins business in both the U.S. in Mexico and.
And zoom is operations is strategically located near high volume industrial scrap sources through central and Northern Mexico.
Prior to our ownership they shipped approximately 500000 gross tons of scrap annually, but they have.
But they have an estimated annual processing capability of almost 2 million gross tons a year.
We plan to ramp up that volume quickly.
We believe our performance based operating culture, coupled with our considerable experience in successfully constructing and operating highly profitable steel mills positions us incredibly well to successfully execute the transformational Texas growth and investment.
We are not simply adding the flat rolled production capacity we have.
We have a differentiated product offering are you.
Our unique regional supply chain solution the signal.
The significant geographic freight and lead time advantage.
And offer an important import alternative to a region in need of options.
Our unique culture and the execution of a long term strategy continues to strengthen our financial position through consistent strong cash flow generation and long term value creation.
Clearly differentiating us from our competition and demonstrating our sustainability there.
This has clearly been demonstrated during the past two quarters.
Again, our commitment is to the health and safety of our people our families and our communities online.
All while supporting our vendors, serving our customers and sustaining our value creation journey.
Our team is extraordinary and I'd like to thank each of them for their patients resilience and commitment during these uncharted times.
They haven't indomitable spirit that drives us to excellent.
Additionally, a sincere and heartfelt thank you to the healthcare providers and their families within steel dynamics I know serving individuals across the world. Thank you.
Thank you B. say be well so.
So should I. Please open the call for questions. Thank you.
Thank you.
I would like to ask a question. Please signal by pressing the star key followed by the digit one on your T. telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
If you press star one earlier during todays call. Please press star one again to ensure our equipment has captured your signal also we ask that you. Please limit yourselves to one question if it's going to take time for everyone. Any additional questions can be addressed upon reentering the queue.
And our first question is from Seth Rosenfeld.
Rosenfeld with existing being BNP Paribas. Please proceed with your question.
Good morning, Thank you for taking our questions today.
If I can kick off please just with a question on kind of the the near to medium term outlook for demand in your prepared remarks, because of the quite an optimistic outlook on steel demand highlighting both autos in construction I can you just speak with regards to the outlook for Q4, how should we expect the tradeoff between kind of post could real demand recovery essentially offset by now.
Normal seasonality that we've seen in years past and whether we should we expect for shipments in your mills and fab businesses over that time period.
And then just a follow up on that with regards construction in particular your comments with regard to the backlog in particular can be much more positively heard last week from one of your peers can you speak a bit about the region or maybe the private versus public sector mix, that's contributing to the optimism. Thank you.
Certainly I I would caveat my comments that as I've said in the past.
You can I think always.
I think always clearly see what's happening in the marketplace through one's order book and I think.
And I think our order books across a cross our space are in pretty good shape.
But generally obviously flat roll demand is going.
Probably a strong momentum.
Is a robust market recovery their inventories are at almost historically low levels.
We have low import activity.
Although is diminishing the the arbitrage is still somewhat a unattractive.
So the supply side is very very tight lead times as you see are extending.
Mills ER.
Smells anyway.
Late deliveries.
All in all that's driving market pricing up significantly quite healthily.
[music].
That being said, obviously on our third quarter results were impacted by sort of contract pricing lag and that will reverse obviously in Q4.
But just specifically to the market times.
In automotive the U.S. producers have I think a achieved their their anticipated 90% run rate pre cobot run rates than I would.
And I would say that the U.S.P. and produces actually are exceeding that there are more than a 100% of a pre code for sure.
And Thats being supported obviously by.
Low inventory levels in the dealerships.
Dealerships that I talked to a struggling to get a to get product.
And I think if you look at just the automotive market in general.
It is it supports that used car prices are extremely high today.
And interest plane interestingly that somehow impact on the scrap market because hoaxer around the pick apart geyser.
Keeping their Uh huh.
Sales longer and it's.
And it's given a little tightness due to the scrap supply.
But nonetheless.
It's a good market environment, and we believe that's going to continue.
The low interest rate environment is obvious Paul obviously a positive.
As our low gas gas prices I saw just yesterday on our gas prices dropped to $1.95 and so that that tends to the to help certainly though the truck the truck sales.
And I think generally.
That's going to continue.
You know the sort of urban does deserve them.
People moving out of the cities.
Ride sharing and new business or not necessarily as a as available and people want people needing cause and I'd say automotive will remain strong as not just the.
Sort of a two month three month.
Replenishment of inventory.
In that environment, we've been fortunate we've been gaining market share.
And I think both in flat roll and in a in SBQ.
Generally Matt manufacturing is strong.
We see residential construction incredibly strong.
And I think that that's having an impact both the new construction and HPC and appliance and Garik door.
Products, but also kind of the do it yourself or renovation projects. This has been a change I think in consumer spending piece.
People are not going out as much they see themselves not going on vacations and so they are actually I think spending that cash closer to home and I think thats a.
Positive going into next year for sure and as.
Energy, you know low gas prices low energy prices.
Global demand is there so I think that's a that's going to be weak for us for some time to come.
A very very strong positive is non residential construction has been does in all honesty incredibly resilient.
We see that in a sort of heavy structural products demand fabricators a busy.
Silver centers processes are buying start off a floor.
And so I think there is generally a low inventory through the supply chain there.
And if you look at the steel Joist Institute information I think is incredibly persuasive.
In September steel Joist Institute bookings words third highest month in history.
Bookings are up 10% year over year.
And it's largely driven by a warehouse expansion.
And you keep seeing the E commerce, increasing ecommerce in.
First quarters around very 11%.
This quarter is about 16% so the.
So the Amazons of the world or the distribution distribution channel.
He is going to remain strong.
I think just yesterday on Bloomberg you saw Amazon reporting that they are going to be constructing about a thousand warehouses.
The next year or two so that so that business is going to be incredibly incredibly positive going forward.
And that's translating into sort of a record backlog for new millennium and.
And it's all honestly.
Called living into a strong building products on the flat rolled side of our business.
It's HPC HPC prepaying is very very strong.
So so I think generally it's a very very positive environment and we're very bullish.
It again, you can't tell what may happen as the as the pandemic continues to unravel.
But through our eyes through our order book today is an incredibly solid positive upward momentum so that the or your other questions related to the mix between private and public sector on the construction side I would tell you that it's very heavily weighted at this point to private sector, hopefully if maybe some things happen in Washington It could.
Get more to the public sector eventually, but we're not seeing that at this point to work earlier comment and from a seasonality perspective as it relates to volumes and we did come off record volumes for the fabrication I'm not sure that that will stay on as strong that we'd expect to see very strong shipments heading into the fourth quarter and the split on the steel side.
Really I think need to look at a split between long products and flat products.
It's our estimation it given the strong demand that is existing today <unk> flat rolled products I doubt, you're going to see a lot of seasonality I'm, where at least much less than you would see typically in the long pilots you're likely to see some but again I think coming off of the very weak second quarter, we would expect to see some momentum carry into the fourth quarter environment and.
Got seasonality impact.
That's great. Thank you both very much.
Thanks Seth.
And our next question.
He is from Chris Terry with Deutsche Bank. Please proceed with your guidance.
[noise], Hi, Mark and Theresa.
A question for me utilization rates are about 20% above the industry. I think you said you had market share gains in autos I'm. Just wondering if you could elaborate on that are there are product basis, so in markets, where you're getting those market guidance from thanks.
Well I think the.
The remote from automotive perspective.
We are the fact that we remain running.
Gave a customer base optionality.
And just the availability of product.
For one thing the second only.
The the Holy S.G. sustainability story, I think is planned incredibly well for us and for electric arc furnace producers.
Particularly with the Europeans in all.
Lastly, and as they see their the North American options.
The fact that we we.
We have a a a way.
Wonderful sort of recycling Sq story is is helping us though.
So I think.
In the in the market share.
Automotive is strong also SBQ and auto obviously, we install.
Constructed and ramped up or the smaller diameter mill that some years ago.
We're seeing some some positive market share gains there as well.
And I guess there are other component I would add is that with the advent of having reinforcing bar or other products that as we enter the market Leven team some positive momentum from that as well.
Thank you that's it for me.
Thanks, Chris.
And our next question is from Timna Tanners with Bank of America. Please proceed with your question.
Hey, good morning, guys.
Hi, good morning to you.
Wanted to dive in a little bit more if you could on the recycling in fabricated Evan I think my question that was maybe answered a bit but I'm just as were really strong rebounds.
When Chile, and an even strong from a trend basis says one hoping that you could tell us how sustainable those might be and that may have had a bit margin expansion on a low steel price maybe that reverses, but just in general terms like is that a good new run rate or you know what to think about going forward in those areas.
But well certainly for ferrous scrap Timna, we would.
I see that the going forward obviously.
Obviously in that business, it's a it's kind of a inventory flow you buy one month and you sell the next month.
So when you have a stable pricing environment.
One tends to do a lot of a lot better as opposed to.
Yeah, the the periods, where you just see progressive downward pricing trends Hum.
Month over month, and obviously volume played a big role in and recycling.
Yeah from a recycling perspective, I'd say that remember we did closed on the Mexican scrap company and in the first part of August which was actually a very beneficial we find that the Mexican market is a little bit different than domestic workers. So it might be a natural hedge going forward as well.
In addition to that lurks point, if domestic steel production space I'm very strong, which we expect to stay strong in the fourth quarter, you're going to see that volume comes in mills recycling arena. So we would expect it to be very steady I forgot improving and I think for the fabrication and you really kind of hit it a bit timna and Matt.
With the low raw material input cost it had it really did benefit from where the steel mills sort of suffered in the second quarter. So you will see that sustainable for a little while but as steel prices continue to increase its not likely that you're going to get a dollar for dollar margin expansion and fabrication, but we do expect to see still very strong volumes and good result.
Gotcha. Okay. Thanks, and then my second question was if you could just discuss a little bit more that outlook for capex as a couple of things I wanted to follow up on so one is you know that you talk about a little higher number than you'd said in the past believe 850 compares to 700 750 million in last quarter's so is that just kind of a drag.
Hmm this year, maybe a little lighter spending next year catching up and how do we think about you know further capital allocation beyond if if he could start to give us some thoughts on what you're looking at that.
Well from the Capex perspective, its not more capital, but to your your comment is actually a transfer so were expecting for probably spend about $100 million less than 2020 as it relates to listen no. It's just hard to project its when equipment arrives et cetera.
Nothing is delaying the project is just we believe that probably about $100 million will shift from the fourth quarter into 2021. So that's why 2021 total capital estimate today 850 versus the 750, it's simply related to timing Mark did you want to talk about the capital allocation or.
Well I I think tend to you know our strategy is not a is not going to change we've always been somewhat conservative.
Relative to the balance sheet and liquidity.
In a way we still remain very comfortable with our dividend profile is very manageable through cycle.
Will remain intact.
And you know during periods of excess cash flow will continue to share repurchase program to complement a that.
That dividend policy.
Right now.
We we see.
Uh huh.
Immediate strength and momentum in the in the markets and I think things are good, but we'd like to see higher things unravel for like three four months before we re re initiate any a repurchase program.
Yes, I would just add to that as a quick reminder, that our sustaining capital is only $150 million per year. So as we get on the other side of it they Texas steel mill and there will be a considerable cash duration, which we can you to Mark's point for continued growth both organic and inorganic.
Okay. Thanks, guys.
Thank you.
And our next question is from Andrew is welcome news or will you be yes. Please proceed with your question.
Thank you very much and just a follow up question for me I mean, you always you mentioned, the Texas Bell and you've talked about it before but in terms of where you intend to kind of capture market share a buddy, particularly now with a lot of integrated capacity down and for your pool point box guys Tony.
I just don't expect all of it back are there any particular products or where you see that you, Texas mill basin, capturing market share maybe on the auto side products that you weren't able to produce before but you will be able to produce with the new bills.
[music] effect, if you could just continue that box yeah, yeah, capturing trend if you will.
Well I I think we can garner market a share on several different fronts. Obviously, just pure economics. The you know the geographic location of that facility.
Freight savings to the customer a will be a very very persuasive number one number two we will be able to be a very strong auction for imports that flows through a houston.
So just just general economic so a a pricing or value to the customer will be will be massive.
And again is a yeah, we see a a 27 million ton market between south west the west coast import market and and Mexico.
But also you know the technology is.
It is going to allow us to.
To produce.
Combinations of grade strengths, and a and and dimensional characteristics that the on a totally on available today and less than the U.S.
It's a 84 inch mill although.
Although a let me rephrase that it's gonna make.
A real 84 inch wide coil.
You know the current 84 inch mills in the U.S.
Or just the the the width of the roll itself.
And so cannot make a 84 inch true width.
And you need 84 inch with <unk> to get into 26 inch.
Diameter pipe and so that is a very differentiating commodity, particularly when you can go to one inch thick 100, Kansai steels there.
The the technology as we've said in past calls a its a.
It's a thicker slab so.
So it's a it's going to allow a much.
Much superior surface condition and if.
And if there was a technology or many male technology they get into a you know exposed automotive this would be it.
Well no advertising that but certainly I would hope we get.
Hope, we get there one day.
But higher higher toughness high strength steels will will certainly differentiate the product portfolio compared to two what's available in the states today.
So I think from an end market perspective, I, what you'll see is that this will take market share along the lines, especially because we're starting with a paint line and galvanizing metal coating line will be in the appliance arena, especially in Mexico automotive in Mexico, H. Bakken metal buildings will be a big focus point as well and obviously when the energy.
Mark It comes back we'll be right in the middle of that arena.
That's very clear and in terms of our sourcing of raw materials I mean, you're obviously, you've got your garden coming in and you have scrap from Mexico, and so on a any thoughts on H.B. I haven't got always it seems to me shipyard capacity coming online in the U.S. and some of it might obviously spoken fall, but any thoughts on H.B. I, that's not going to be part of your product mix it up.
Great deal going forward.
Well, we we would contemplate all all raw materials a enormously.
I I think you have obviously.
Obviously nucor has been ER ramping up and.
Is is doing well now there you have cliffs will be starting there.
Starting their their facility.
And that likely would be ineffective for freight perspective to go all the way down to sentence.
It certainly will find its way into into the <unk> Midwest market and Uh Huh.
Just by association that helped the raw material a pricing environment.
Are those as a DRA orange Guy facility in Corpus Christi, and I wouldn't.
And I would imagine the symptom.
Bill would be a natural natural home for some of that material on so it again, if the if the value is right we would be consuming some of that material.
That is very clear. Thank you very much for taking my questions.
You want to you.
And again as a reminder, if anyone has any questions. You May proceed star one on your telephone keypad keypad doing so at least you indeed pushing Q.
The next question is from Chris Olin with tier four. Please proceed with your question.
Right Okay.
Oh, Hey, Chris Yep Yep.
Yep Yep, sorry about that [laughter].
Hey, I wanted to first see if I can get a clarification three so did you see.
The cash tax was 3% for 2021.
And then I guess I had to eat a mini follow up question regarding this whole market share issue.
Issue I guess my question is there with.
There was an Audi jeez I guess on planned if you will at some of the.
You will ask answer coating lines for your competitors and I guess I wanted to make sure there wasn't some type of.
Volume or mix benefit in the quarter that potentially goes away or we need to think about going forward. Thanks.
Well I'll answer the first question, Greg, Yes, our cash our effective cash tax rate for 2021 is likely to only be around 3% and that's just reflective of state taxes on because at least currently with the tax code with it and actually starting in 2000.
21 were able to from a tax perspective take the immediate depreciation impact for that and it's quite significant. So we would expect that to take care of all the cash requirements from a federal basis for 2021, and likely that would roll into I'm, having some protection into 2000.
And then 22 as well we just don't have that estimate at this point.
Okay.
Yes, and the <unk> regarding the demand yep, there's some shifting of products here and there between the the different players.
But the the market strength and our results are.
It's just the the underlying the demand pull.
Demand profile, there, which is going to remain in place for for sometime to come.
Okay. Thanks.
And that concludes our question and answer session I'd like to turn the call back over to Mr. Craney cuckoos remarks.
Thank you and for those remaining on the call seriously. Thank you for your support and your time today to listen to our prospectus.
To the customers that may be listening.
Sincere. Thank you on my behalf and on behalf of every one of the 9000 STR employees.
And their families you helped us through a challenging time.
And we will hopefully continue to on the on your business and to all our team members on the call again, one one a share regarding safety please double down on safety.
It wasn't a a disastrous quarter in any respect a severity continues to improve but nonetheless, we need to continue our improving trends there and.
Interest. Thank you for your passion your commitment.
Through this challenging quarter, it's it's been a crazy time, but are you folks have come through as a as always is a shining like superstars. So thank you you guys be safe and have a great day bye bye.
Once again, ladies and gentlemen that concludes today's call. Thank you for your participation and have a great and safety.