Q1 2021 Steel Dynamics Inc Earnings Call
Good day and welcome to the steel dynamics first quarter 2021 earnings conference call.
All participants are in a listen only mode.
After management's remarks, we will conduct a question and answer session and instructions will follow at that time.
Please be advised that this call is being recorded today April 22021, and your participation implies consent to our recording of this call.
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At this time I would like to turn the conference over to Tricia Meyers and Investor Relations manager. Please go ahead.
Thank you Darryl good morning, and welcome to steel dynamics first quarter 2021 earnings Conference call. As a reminder, today's call is being recorded and will be available on our website for replay later today, leading today's call are Mark Millett, President and Chief Executive Officer of steel dynamics, and Theresa Wagler Executive Vice President and Chief Financial Officer.
The other members of our senior leadership team are joining us on the call individually and we are all following appropriate social distance and we are all following appropriate social distancing guidelines.
Some of today's statements, which speak only as of this day, maybe forward looking and predictive typically preceded by believe expect anticipate or warrants a similar meaning they are intended to be protected by the private Securities Litigation Reform Act of 1995, and actual results turn out differently such statements involve risks and uncertainties related to our steel and metals recycling and fabrication.
And as well as to our general business and economic conditions. Examples of these are described and the related press release as well as in our annually filed SEC form 10-K under the headings forward looking statements and risk factors found on the Internet at Www Dot FCC Dot Gov, and if applicable in any later SEC form 10-Q, you will also find.
And he referenced non-GAAP financial measures are reconciled to the most directly comparable GAAP measures and the press release issued yesterday entitled Steel dynamics reports record first quarter 2021 result, and now I'm pleased to turn the call over to Mark.
Good morning.
And I'll start again, good morning, everybody.
Do you get folks on mute, but a welcome total first quarter 'twenty one earnings call. We certainly appreciate you joining us today.
I believe the entire steel dynamics team delivered a tremendous first quarter performance.
It was filled with the operating and financial records, including record net sales operating income and adjusted EBITDA.
It was an extraordinary performance, yet again, driven by the dedication and passion of our teams.
Incredibly proud to work with each of them. They are a special group accomplishing exceptional things.
Due to the continued commitment of our teams to one another on families and our customers. We continue to operate safely amidst COVID-19.
Operations have continued essentially unabated.
We continue to closely monitor the situation and adapt as necessary to ensure our teams health the health and welfare of our teams is our highest priority and I. Thank each of them for their continued commitment to our safety.
Because record results don't matter unless everyone goes home safely at the end of each day.
And the number of injuries and the severity improved and the first quarter 'twenty, one compared to last year.
The teams are focused on reducing hazards and practices that could result in significant injury.
Nothing is more important on the health and safety of our people safety is and always will be on number one and value.
Our safety performance continues to be significantly better than industry statistics, but our intent will always be the drive towards zero and incident work environment.
To achieve this we must all continuously aware be aware of our surroundings and I'll fellow team members keeping safety top of mind to control safety both on the traditional sense as it relates to keeping one another and good health.
Before I continue further Theresa will provide insights into on a recent performance so theresa.
Thank you Mark good morning, everyone I want to add my sincere appreciation and congratulations to the entire steel dynamics team and as Mark said, we achieved numerous milestones and delivered a record first quarter performance.
We achieved record revenues of $3 $5 billion drive from near record quarterly steel shipments record fabrication shipments and strong product pricing across all of our operating platforms.
And we achieved record quarterly operating income of $594 million and net income of $431 million or $2.03 per diluted share and we had strong cash flow from operations of $262 million with a record quarterly adjusted EBITDA of 664 million.
Truly and extraordinary performance on.
Our first quarter 2021 results included cost of approximately $20 million or seven cents per diluted share associated with the construction of our sinton, Texas flat rolled steel mill. Excluding these cost first quarter 2021, adjusted net income was $445 million or $2.10 Purdue.
You did share above our guidance of $1 94 to $1.98 due to stronger than anticipated March steel shipments and order activity remains very strong.
Our first quarter 2021 revenues of $3 $5 billion or 36% higher than sequential fourth quarter results with growth from all of our operating platforms and most significantly from our steel and metals recycling operations based on record flat rolled steel selling values and strong shipments.
Our first quarter 2021, operating income was $594 million $335 million or 130% hired and sequential fourth quarter results due to higher realized flat rolled steel pricing more than offsetting increased scrap cost.
And we discussed our business. This morning, you'll find we continue to see positive industry fundamentals for the remainder of 2021, and we are confident and our fourth coming and unique earnings catalysts for.
And for steel operations, we generated $641 million of operating income and the first quarter more than double fourth quarter sequential earnings that's flat rolled steel selling values increase significantly and our record levels throughout the first quarter driving expanded metal margins. We also saw expanding margins within our long products operations based on.
On higher prices.
First quarter steel shipments of $2 8 million tonnes were 6% above our sequential fourth quarter volume and only 25000 tons less than our quarterly records set in the first quarter of 2020.
Our steel mills operated at 93 per cent of their capability during the quarter well above the industry average of 77%.
As a reminder, we still have additional market share opportunity based on our existing annual steel shipping capability of over 13 million tonnes and when we finish on new Texas Steel mill and its fully on line will have over 16 million tonnes.
As domestic steel production increase scrapped and and strengthened and the first quarter, resulting in significantly higher scrap prices and resulting metals spread expansion operating income from our metals recycling operations was $54 million nearly 100% improvement sequentially. The team continues to effectively lever the <unk>.
Strength of our vertically connected operating model that I said, he and both our steel and metals recycling operations by providing higher quality scrap, which improves furnished efficiency and by reducing company wide working capital requirements.
Despite record first quarter 2021 shipments for our steel fabrication segment first quarter operating income was $10 million compared to sequential fourth quarter earnings of $25 million.
Lower earnings were the result of metals spread compression as higher average selling values were offset by significantly higher steel input cost.
As evidenced through our record shipments record order backlog and extremely strong continued order activity lower first quarter earnings is not reflective of a weaker demand environment and as a matter of timing as higher steel costs are being matched with a six month order backlog and which joist and deck prices were lower.
This will begin to reverse in the coming months as current steel joist and deck prices and increased considerably.
Our cash generation continues to be strong based on our differentiated business model and highly variable cost structure. During the first quarter of 2021, we generated cash flow from operations of $262 million operational working capital grew $411 million during the quarter driven by higher customer and.
And inventory values due to increased pricing and shipments.
During the quarter, we also invested $310 million and capital investments of which $254 million was invested and our new Texas flat rolled steel mill.
For the remainder of 2021, we estimate capital investments will be roughly $650 million to $700 million with the Texas steel mill, representing about $535 million and that amount.
This estimate does not include spending for construction of the recently announced for flat rolled steel coating lines. We believe the lay on the line will cost between 400 and $425 million combined and we will likely fund between $50 million to $75 million for engineering and Downpayments late this year.
The lines are currently planned to begin operating sometime in the second half of 2022.
And in February we also increased our cash dividend and 4% to 26 cents per common share based on our ability to consistently generate strong cash since 2016, we've increased our cash dividend over 85 per cent and and invested $1 $3 billion and our common stock representing over 15 per cent of our outstandings.
Shares.
We have $444 million that remain authorized for share repurchases. These.
These actions reflect the strength of our capital Foundation consistent cash flow generation strong liquidity profile and the continued optimism and confidence and our future. We're in a position of strength with liquidity over $2 $4 billion at the end of the quarter comprised of cash of $1 $2 billion and are fully available unsecured revolver.
Or at one point and $2 billion.
And our capital allocation strategy prioritizes responsible strategic growth with shareholder distributions comprised of a base positive dividend profile that is complemented with a variable share repurchase program, while also being dedicated to preserving our investment grade credit rating, we're squarely positioned for the continuation of sustainable optimized long term value.
Creation.
And we believe sustainability is a part of our long term value creation, and we're dedicated to our people our communities and our environment. We're committed to operating our business with the highest integrity and has been since our founding.
We produced steel using only electric arc furnace technology with recycled ferrous scrap as the prime primary raw material steel production technology. Currently has the least environmental impact is the most cost effective and provides and most operational flexibility.
With the addition of our metals recycling and fabrication platforms. We intentionally developed our vertically connected operating model, creating and almost closed loop manufacturing business, which both benefits us financially and reduces our environmental impact and.
And 2020, we shared our qualitative climate related goals and our most recent sustainability report.
This summer we also plan to adopt quantitative goals to reduce greenhouse gas emissions participate and greater renewable energy use and continue to invest and energy efficiency opportunities. We're currently and the process of assessing the use of renewable energy alternatives at our steel mills.
Our sustainability and environmental impact strategies and ongoing journey and we're moving forward with the intention to make a positive difference we plan to continue to address these matters and to play a leadership role and developing innovative ways to reduce our impact on the environment.
For those of you that use our detailed shipments for the flat rolled products for your models.
And the first quarter of 2021, we had hot rolled and piano shipments of 770.
<unk>.
774000 tons cold rolled at 149000 tons and coated of 996000 tons.
And on a personal note I just want to continue and thank the teams on for operating safely and for taking a careful and another from a health perspective as well Mark.
Okay.
Yeah.
Taken on our operating platforms and ton steel fabrication platform delivered a strong performance achieving record quarterly shipments, while navigating rapidly escalating steel input cost higher.
Higher steel costs compressed first quarter steel fabrication and earnings judo on matching six month order backlog to more current steel prices.
However, based on the strength of steel joist and deck and demand. We are currently placing orders at record prices.
Our order activity is extremely strong.
We ended March with a record fabrication order backlog and it is over 50% higher than our previous peak.
The non residential construction market remains strong, especially in areas that support online retail computing activities and health care.
Specifically represented by construction of large distribution and warehouse facilities.
Drew and largest part to changes in consumer behavior. We believe this dynamic will continue for the next several years.
We already have steel fabrication facilities located throughout the U S and and Mexico, providing us with and are advantaged broad based customer supply chain.
In order to serve increased customer demand, we will be expanding on production capability.
For us and it's not necessary to add physical assets, we simply will be providing jobs. Two additional team members to support increased operating hours and thereby further improving asset utilization.
These new crews will be trained and become active between now and late summer 'twenty, one increasing our annual production and capability by as much as 25% to 30%.
And we're over 100000 tons.
Our metals recycling operations and an extremely strong quarter with quarterly operating income was $54 million nearly doubling sequential fourth quarter earnings and over five times higher than prior year first quarter earnings.
<unk> ferrous demand and increased pricing related to higher domestic steel production drove strong performance.
From scrap index pricing increased over $170 per gross ton during the first quarter.
Prime scrap generation is strong based on North American manufacturer and.
And we expect North American scrap generation to outpace pace increased demand from steelmaking in 2020 one.
Obsolete scrap generation has also been strong post the extreme and February weather conditions.
Based on continued solid scrap generation, we believe scrap pricing will remain somewhat studies and the rest of the year.
As Teresa mentioned, the steel team had an outstanding quarter.
Were you, having numerous operating and financial records.
We achieved near record shipments and just 1% less and I'll first quarter, 2020 record and up 6% sequentially.
We achieved record quarterly operating income of $641 million.
And with 10% higher than our previous peak.
So many and contributed to these incredible achievements, including our commercial teams or other operating platforms suppliers and especially on loyal customers.
While the domestic steel industry operated on an increased utilization rate is 77% during the first quarter the strength of our differentiated business model combined with the passion of our people drove all steel production utilization to 93%.
Steel demand is strong across the steel platform, including both flat and long steel products.
However, the flat rolled steel markets remain especially tight.
Underlying demand for flat rolled steel products recovered much more quickly and they expected and the second half of last year and gain further momentum and this recent first quarter.
When coupled with historically low customer inventory levels across the supply chain flat roll steel prices have been supported at historically high levels.
And customers are placing orders for immediate demand requirements.
They have not bill.
Rebuild inventories since the speculative risk associated with the accumulation of higher price inventory as a significant deterrent.
Even if it was available.
Additionally, we believe current legislated steel trade policies will continue to moderate steel imports.
And the current U S administration has also come on to constructively concerning trade parameters and the issues with China.
From an end market perspective.
And the automotive sector has experienced the strongest recovery operating at very high production levels due to low inventories and coupled with strong consumer demand.
Mark just seasonally adjusted production represented almost 18 million units and inventories with close to 30% below the five year average.
We've been fortunate that our automotive order book has not seen any significant impact from the current electronic chip shortage.
The non residential construction sector remains strong with continued positive momentum as evidenced by record structural and rail division shipments record steel fabrication shipments and strong customer backlogs.
We expect this strength to continue through the rest of this year and certainly into next year.
Russell residential construction has also been strong producing high demand for related H B, a C and appliance products.
In addition to supporting high and nonresidential construction demand the growing online retail shift and supporting steel demand strength throughout the supply chain service providers, such as truck trailer and material handling.
We're also seeing healthy demand from mining and yellow goods customers at our engineered bar products Division.
And the energy sector soldiers are substantially growing market and we're also seeing some indications of improved oil and gas activity.
We continue on our successful track record of margin enhancing differentiated growth, we have executed numerous strategic investments across the company and the last several years and we continue to position steel dynamics for the future.
Our teams and our customers are extremely excited about all sinton, Texas electric arc furnace flat roll steel mill and vessel.
It represents a transformational step function increase and steel dynamics through cycle cash flow generation capability.
It provides next generation electric arc furnace steel production capabilities, new products and new customers.
The facility is designed to have product capabilities beyond that of existing electric arc furnace flat rolled steel producers compete.
Competing even more effectively with a higher carbon emitting integrated steel model and foreign competition.
It provides us with a broader steel portfolio and provides our customers with an even larger climate conscious supply option.
The teams and Wintom is unbelievable and to be a mild one.
You have and incredible depth of experience and the construction and startup and operation of large steel manufacturing assets.
Collectively we likely have more relevant and experience than any other company and the industry.
And construction is going extremely well.
The new 3 million tons stay on the on flat rolled steel mill will include two value added coating lines comprised of 550000 ton galvanizing line with gobbled and capability.
And a 250000 ton paint line.
And we plan for these two value added coating lines to begin operating and by the end of the second quarter 'twenty, one using flat rolled substrate ahead of full operations.
I'll Center and the electric arc furnace steel mill is adhering to the same stringent sustainability model as our other steelmaking facilities.
Utilizing state of the on environmental controls and processes to produce high quality sustainable lower carbon steel.
Our steel mills have a fraction of the greenhouse gas emission and energy intensity of averaging our average traditional steelmaking technology.
The town Center and provides a strategic location near Corpus Christi and.
We have three targeted regional commercial markets from your steel mill, which represents over 27 million tons of relevant flat roll steel consumption.
And the southern and Western United States and Mexico.
We also plan to effectively compete with steel imports.
Our customers are excited to have a regional flat roll steel supplier, we have four customers committed to locate on site representing over $1 3 million tons of annual processing and consumption capability.
We're still speaking with several other potential on site customers as well as those that are building facilities off site, yet and New York campus.
And location provides a significant freight benefit to most of our intended flat rolled customers.
The current domestic supply options, we believe the potential customer savings would be at least 20 to $30 per ton and some would be much higher.
Coupled with much shorter lead times, we can provide a superior customer supply chain solution.
It also allows us to effectively compete with imports, which is which inherently have long lead times and speculative price risk.
We've also made considerable progress concerning on raw material procurement strategy we.
We completed the acquisition of a Mexican scrap company last August which was a critical step for us the accident acquisition complements our current metals recycling business and both the U S and Mexico.
The operations are strategically located and high volume industrial scrap sources throughout central and Northern Mexico.
And have an estimate on annual scrap processing capability of almost 2 million gross tons.
We also acquired three small scrap locations and the Houston and Corpus Christi area to help serve Simpsons raw material needs.
Our poor performance based operating and culture, coupled with our considerable experience and successfully constructing and operating a highly profitable steel assets positions and positions us incredibly well to successfully execute this transformational growth.
As we've said before we're not simply adding and flat rolled steel production capacity.
We have a differentiated product offering a unique regional supply chain solution, a significant geographic freight and lead time advantage and offer an important sustainable.
And sustainable alternative to a regional and need of options.
We've also recently announced plans to add four additional value added from flat rolled coating lines comprised the two new paint lines and two new galvanizing lines with gobbled and coating capability.
Gobaloon products represent the fastest growing flat rolled steel market and the United States.
Primarily serving the mental building industry.
This market and has historically sourced as much as <unk> 45 per cent of the needs from foreign imports.
On a per food cost effective supply chain has resulted in an existing line consistently running at full capacity through both increased consumption and market share gain.
Two of these lines will be located in the southern U S region.
Two two.
To be comprised of a new paint line and a galvanizing slash governor in line with a combined annual coating capacity of 540000 tonnes.
Requiring an estimate and an investment of $225 million.
These lines will provide sinton with similar diversification and higher margin product capabilities is on Butler, and Columbus flat roll steel divisions.
The remaining two lines will be located in the Midwest and will also be comprised of a paint line and the galvanizing line with gobbled and capability with a combined annual coating capacity of 540000 tonnes and will require an investment of between 175 and $200 million.
These lines will support our regional flat rolled steel operations, providing them with more value added product diversification to serve our customer needs.
We currently believe these lines will begin operating and the second half of 'twenty two.
Our strategy and consistently places value added products and supply chain differentiation of the four and has benefited as well both through good and poor markets.
Okay.
And closing our culture and the execution of our long term strategy continues to strengthen our financial position through consistent strong cash flow generation and long term value creation.
Clearly, demonstrating our sustainability and differentiating us from our competition.
Our amazing teams provide the foundation for our success.
And I think each of them for their passion and dedication to each other and all our other stakeholders.
To each of you. Please remember that your health and safety is always the most important issue at hand.
Hi, Thank you for all you do your spirit of excellence drives us to success.
With that said Darryl would you. Please open the floor for questions.
Thank you.
And would like to ask a question. Please signal by pressing the star key followed by the digit one on your telephone keypad.
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Also we ask that you please limit yourself to one question to facilitate time for everyone.
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Our first questions come from the line of Chi.
Cash <unk> of Deutsche Bank. Please proceed with your questions.
Yeah, Hi, good morning, Mark and Theresa. Thanks for taking my question. So my question is.
It is on the flat rolled steel.
Steel pricing.
And the parts that you have indicated that the flat rolled steel pricing typically lags by two months based on your mix of spot or index based contracts.
And given the extended lead times delivery delays and maybe changes to the contract mix Oh, what would the lag be in terms of today's market.
And that's a great question cities, so and the first quarter are generally we're somewhere between probably 55 to 60 per cent contract business and in any given quarter related to just our flat roll operations, but because of the way the contracts have minimum and maximum.
On volumes.
And in the first quarter, we actually had a probably a little over 70 per cent of our mix was contract related.
So it was more than we typically would have however, going into the second quarter and you're likely to see that moderate back to a 60 to 65 per cent.
And so we think it'll get closer to what we normally see and the lag is generally around two months.
Okay, Oh, sorry, just one follow up question. If I may ask and then do you have like a target a baseload for the men and in terms of ongoing discussions with the other customers are would you be able to quantify what the potential incremental volume could be come back to the one point.
3 million tons already committed.
Well, we had the other day the customers that have committed to be on site. There's there's four and place today that representing just over 1.3 million tonnes were currently having discussions with at least two others and Mark I don't know if you want to comment on the additional volume that may come with that or not.
Well.
We would anticipate I think at the end of the day with seven customers on site and it's been absolutely incredible the excitement we've seen.
And we've been very very intentional as to the.
The type of customers, such and such that we have a a broad spectrum of processing capability. So light gauge processing capability heavy gauge hot band.
Automotive and also.
Consumers and another other fabricators.
So I would imagine at the end of the day again that that $1 3 million tons will grow again, that's not all consumption a lot of it is processing capability.
But it should end up being on perhaps one 4 million tons by the time with them.
And just to add to that cities.
We've actually had several customers that were not able to locate with us on site because of area constraints et cetera, but there are those that are moving on contingent or contiguous to the site. So there is a lot of.
Excitement among the customer group.
Oh, great. Thank you.
Yes.
Thank you our next questions come from the line and Seth Rosenfeld with Exane BNP Paribas. Please proceed with your question.
Good morning I.
And I got the following things with regard to center and can you. Please provide any update or more details on the ramp up schedule for the facility and when exactly you would expect to reach full utilization of 3 million tons. I think last quarter. You noted downstream line began to ramp in late Q2 up from early Q3 and.
Any update on those figures please.
Selling and I.
I think that the downstream lines as we've said in the past will come up before the the hot side.
But the paint line, the golf line and and Pickle line. We believe we will start commissioning in June with some limited shipments beginning in July.
Generally volumes are will be a little constrained through those three lines due to the <unk>.
Strong as the only backlog right now and then.
On a limited availability of third party volume and it was our anticipation some time ago that we would be transfer and tons Diana, but again, it's a it's a good and a bad situations. Our mills are absolutely jam packed with orders and again.
Again, it's tough to get third party supply, but those will be commissioned on time, and we'll start to see incremental shipments and and the.
Third the third and fourth quarter and.
And the Hot strip mill, obviously is of prime prime importance to get that up and running.
And then it will be commissioned in September.
And I would expect the shipments to commit commence and the Q4.
And one has to recognize that as we stopped the mill up well.
We'll be also having to build a work in process inventory. So not every ton produced will be will be shipped.
But I would imagine.
Volume to be around 150 to 200000 tons flu for the fourth quarter.
For 2022, the the expectation is still to ship the round about 80% of eventual capability.
So somewhere between 2.2 to $2 4 million tons.
And Seth from a full utilization and.
As we run Columbus, and Butler on basically at full or over full capacity. We don't see any reason why sit and couldn't achieve that and the and the 2023 time frame.
Thank you just to follow up with regard to the 2022 guidance is the view that you'd be at that 80% run rate on an annualized basis by the end of 'twenty, two or calendar 'twenty. Two you expect that to two to $2 4 billion tons out the door.
No. We we would expect to point to two to 4 million tons of actual shipments.
Wonderful thank you very much.
Thank you. Our next question is coming from the lineup Emily Chang with Goldman Sachs. Please proceed with your questions.
Good morning, Mark and Theresa on my first question and just around sort of the capital and capital allocation strategy.
The startup of sinton quickly approaching and and coupled with what looks like a phenomenal year for steel prices.
How should we be thinking about you know longer time and capital allocation policy should be.
<unk> mall growth spend above and beyond the coding line investments that you've recently announced or will that be maybe a more meaningful pivot to shareholder tons.
Well and things generally our cash allocation strategy has been pretty consistent over time, and we will continue to be so we're still be focused on retaining a a conservative perspective regarding balance sheet structure, and and liquidity and you know to fully.
Support our investment grade profile.
You know our through cycle cash generation capability will remain strong and obviously with center and and with the additional projects will increase dramatically.
And I think the from.
The the exciting thing is as you point out we're going to have a lot of cash to allocate.
We'll continue growth and we've announced on a for a new lines and again, a little sort of ahead of our own personal.
And sort of time frame.
To help diversify that that that that mill dramatically along the lines of Butler and Columbus.
Columbus.
But there will be significant cash remaining after that growth.
We will continue to have a positive dividend profile cash dividend profile and as you've seen in the past when we have a step function increase and through cycle cash generation capability, we do quite a meaningful bump so I would expect that to happen.
And and the future and next year.
And obviously.
To.
To supplement that that the shareholder return was continuing to to look at your share buybacks.
I would just add and so there are transactional opportunities as well and so and we are a growth company and so there is the organic side, which I think you know sit and represents the largest project and that we've had but as you think about transaction opportunities whether it's in manufacturing.
He says that utilize our steel as a raw material input or whether even be you know steel production assets, perhaps and that's something definitely if we can differentiate the business and improve the business and add a lot of value, we're still very interested and things like that as well.
That's very helpful and if I can squeeze and a quick follow up just on the infrastructure plan that are being floated and right now and any sort of early thoughts on what that could mean for steel demand and longer term and on and your views as to whether or not the sufficient capacity to meet this long time.
Well, it's difficult to tell exactly what that.
Sort of incremental volume is and how you see yeah, three 4 million tons are being bantered around and I can't say that we've we've felt from fully analyze that.
But obviously there will be improved demand.
There is obviously, a major sort of clean energy and aspect to it and so.
Solar I.
And I think will help help steel consumption and demand and certainly our activities at the steel West Virginia already benefiting.
From that.
I think beyond the actual.
Sort of steel consumption perspective, you know just the the overall AR and economic benefit from from that and from from other stimulus stimuli and the economy is going great guns today.
And it's just going to keep it going.
So it's an exciting time.
And I will take and that's really helpful. Thank you.
Thank you our next questions come from the line of David Gagliano with BMO capital markets. Please proceed with your question.
Okay, great. Thanks for taking my questions and just was wondering if you could switch gears to kind of current market conditions, and and and looking ahead a bit here.
And obviously, we've got this extremely tight mark at record high prices lead times still extend it and we've seen a lot of the I.
I think low hanging fruit on the capacity side, and now restarted and and and.
And everything's still very tight so you know typically the.
One of the ways yourself for this as imports and and I'm wondering.
If you could just comment on.
Why this time should be different with regards to you know import flows being somewhat constrained.
Given that we're at record high regional premiums I think there's very good reasons for it I was just wondering if you could share your thoughts thanks.
Well again from from our perspective, and there are those I saw some commentary on sort of questioning dumb and dumber.
And I had out there is absolutely phenomenal across almost every every sector.
Very very strong and it would appear to be there for the rest of this year going into a into next.
As you mentioned most of the if not all the reasonable production.
Capability and the U S has returned.
I I think.
Any further additions will be limited.
They're all.
Sort of additions coming in later this year.
And we'll start our shipments and the fourth quarter as I said, but nothing that nothing major on the on the plus side.
And it's gonna be offset in all honesty. If you if you look at the maintenance outages outages and the integrated industry and.
Some shutdowns on the Dominion mill side of things.
Supply side will absolutely remain tight.
So it's great balance will support the market.
The issue in the past has been and import increases and I don't think you'll see you're going to see material increase it is picking up there's no doubt about that.
But you've got a a world.
Our world economy, and our Europe is strong.
China is strong.
And most markets are and in great shape, and so the import availability today is.
And Theres not there you may get you know the arbitrage has become more attractive perhaps on the surface.
But the availability and the the lead times are stretched out and very few people are going to want to take that speculative risk.
You know buying whatever 1400 Bucks a day.
And just taking that risk for that too to tumble later and later in the year.
We don't see that though so we see strong demand tight supply.
Record low supply chain inventories are across the space.
And I think imports.
Moderate levels of imports.
We'll continue to be supported by the administration actually I'd say the commentary relative to trade is very very positive.
The they recognize that we've been at a kind of a financial war with China for a long time.
And they recognize the issues, though and I don't think that the the 232 tariffs will be on wire and.
In totality.
They take a slightly different shape L shape.
Trade constraint will remain and and the years ahead.
So I think it's a it's a remarkable remarkable environment that we're in today.
And I think it is just wherever you look you know anecdotally.
Housing.
There are no houses to be bold today, Oh, you saw you saw a pick up and the residential markets.
Mark it's and in March and that will continue and that's playing strength and no H B a C and appliance.
If you go and try and buy a refrigerator today or washing machine.
Are we going to have to wait four or five months for for one that you actually want.
So it's just everywhere you look from the supply chain and things of that stretched out.
And we'll kind of prolong the are these these cycles so.
So we're incredibly bullish on it.
A window for normal first quarter.
I think the second quarter as a is it going to be.
Multiples are phenomenal and it's gonna be a great year.
Alright, that's helpful. Thanks for the additional color there if I if I could just squeeze on more and as well just switching back to Theresa had said earlier about.
And the use of cash down the road and transactional opportunities I think you mentioned manufacturing business and or steel production assets.
Not going to put you on the spot on assets or anything like that just the question I'm I'm really wondering is you.
And you didn't mention organic steel production. So is it reasonable to assume that organic steel production incremental organic steel production is off the table for now.
And I would say are on the hot side for sure you know downstream coating are value add Ah theres still I think a myriad of opportunities for us.
But if you look at symptoms for for the.
And on investment that project is very very very unique.
Both from a product standpoint, but also a sort of a market or regional market standpoint and in that.
And that's what persuaded us to move forward. The I don't believe there are those types of opportunities are.
Available today.
Yeah, if there's a there may be incremental where we'll take our existing.
Hot metal capability and Uh huh.
Add assets to use that that existing capability, but I don't believe you'll see us why I'm pretty sure you wont see us building green and any more greenfield a hot sides.
Okay. That's helpful. Thanks very much.
Thank you. Our next question is coming from the lineup Andreas Bakken Hauser with UBS. Please proceed with your questions.
Thank you very much just a couple of questions from me and then following up on the last comments.
We obviously saw a.
Flat rolled steel shipments declined a little bit year on year I think you were at 1.9.
Not significantly below it but is that because you know production constraints.
The debt the shipments actually fell year on year, that's the first question.
And if so are you talking specifically about steel dynamics and our first quarter shipments yeah.
Yeah, and so it was a direct result of on two of our steel divisions, we actually had improvement over all of our operations, except for our Roanoke Bar Division and.
And their steel West, Virginia Division and never been some good improvements made there commercially and the team is doing incredibly well and they think youre going to them and see a big shift and change and that but that that specifically it wasn't anything that was noteworthy and it was only about 25000 tons different I think.
Yeah, no. That's the that's what I figured okay, that's very clear and the second question and I mean, obviously, there's been a lot of talk on the market and in recent quarters about the tightness of prime scrap and how you know the prime scrap market is going to grow even tied up on it but yeah. You have capacity that's coming on line and so on and so forth.
And I'm sure you've seen some commentary and some people, saying that you know you're actually going to be the next high cost producers and the market scrap price are going to keep routing and so on and so forth.
Do you guys come down on all of this I mean effectively and so this just a question about you go a little bit further on the radios and basically be collect a bit more prime scrap from auto manufacturers and then there's sufficient supply of prime scrap for anybody who's willing to go a little bit for the or do you see and actual amount of tightness in the market just given that you no matter of factoring, especially.
On the ultra production is on the pressure and the gifts com.
Well, firstly I would suggest that.
Scrap is a it is an incredibly efficient.
Mark It is probably the most.
Effective commodity.
Yeah.
I do believe that yes, there is additional capacity electric arc furnace capacity come on line.
But if you do the math you may need to find about.
Some of them around 4 million tons of additional prime scrap.
You also offset as the offset that a little bit because.
People forget the integrated mills, you use a scrap and they use prime scrap and so with the reduced capacity there because there's a little less consumed on the on the.
Integrated side of things.
But I think if you if you look at the the scrap market in general.
We even in these recent times we're exporting.
You know around 12 15 million tonnes, a year there've been times, when we've exported 20 million tonnes a year.
And so scrap is suddenly available.
And it may appreciate and and and price to some degree, but I don't believe you're going to see any significant issues from it from a profitability.
Or a cost perspective for the electric arc furnace community.
That is fine day.
And I'm sorry go ahead.
And we pulled together and what we believe to be scrap generation over the coming years, and we added in and.
New capacity related to electric arc furnaces, the scrap generation, both including and prime scrap as well as prime scrap substitutes and with a lot of the additional projects coming on line. We believe will outpace the increase demand and so I know, there's a different philosophy he's been tallied about out there right now but.
And that was our original promise and and we still believe in that.
Yeah, and that makes it a lot of sense and and I. Thank you for me didn't try to estimate it is very much and also in line with alcohol and so thank you very much for your comments.
And I think actually I I.
And one on one more thing because as they say necessity is the mother of invention and given the the remarkable spread between prime scrap and obsolete today.
All mills and I'm sure competition is doing the same thing but are they they are creating new mixes and the you know, we we've actually reduced our prime scrap requirements by over 10%.
And maybe maybe more at a flat rolled facilities, if the whole industry electric arc furnace flat rolled producing industry would do that and obviously, that's a meaningful meaningful reduction as well.
Thank you for that.
Thank you our next questions come from the line of Carlos de Alba with Morgan Stanley. Please proceed with your question.
Yeah. Thank you very much just on.
On the fabrication business.
I think last quarter. It was mentioned that the first quarter would be the bottom or the profitability cycle, there and if I understood correctly and you said you said that debt. These bonds will probably from these mountain on probably you're starting to see a margin expansion. So yeah.
You guys can you elaborate a little bit more.
And we fully understand where are we in the fabrication business and profitability cycle and.
Yep.
Absolutely and good morning, so from the steel fabrication, we're likely to see in March and April will be the trough months as we are working through or have worked through the order backlog today steel and steel deck steel joist and steel prices are actually at all time record high.
And demand is extraordinary so one should see that.
And starts to develop its already and to a record backlog, that's reaching into the fourth quarter of 2021, and you're likely to see a better second quarter, but and the second half of the year it could be quite.
Powerful from an earnings perspective.
Perfect and if I may just a clarification on the Capex.
It is not much but but then the Midwest and need to new coated lines are expected to cost I mean, it would be more than those in the in the south.
What is the reason for that if I may ask.
Yeah, Carlos it's actually opposite and and and we May have said it wrong and then.
The 225 million dollar lines are likely to be and the south.
And the $175 million to $200 million dollar lines are likely to be and the Midwest Mark do you want to talk about debt the technical differences between the sorts of lines and why one might be higher than the other.
Quite simply we want one has a slightly higher product capability.
The ones and the science tend to have some automotive capability.
Whereas the one on the Midwest will be more building product the targeted.
And I think has a little to do with the infrastructure, that's possibly required as well.
Alright, Thank you very much and good luck and Macquarie.
Yes.
Thank you. Our next question is coming from the line of Timna Tanners with Bank of America. Please proceed with your questions.
Hey, guys. Good morning, and wanted to ask and just really about production to follow up. So two things. One is your first quarter production flat rolled products were down year over year and I thought I heard you say that it was a result of Roanoke and West, Virginia, which are long products I was kind of confused I would assume and and thank the big question for a lot of people on.
The industry is why are the metals not running full out given record prices and and yet you guys were down year over year and down from third quarter in flat rolled. So just wondering you know what to think about that and how to model volumes going forward.
So first of all I'll just jump in and I thought Andreas was talking about shipments not productions, if I got that wrong that that was my fault Mark you want to talk about the productions on anything.
And suffice it to say Timna that we are running as hard as we can at both.
On Butler and Columbus, we are without some of our hiccups, along the way as well, but we've rectified those and yeah.
I think that I think and there's also an impact a little bit on profit mix and also on the shipments.
And from a standpoint of transportation and logistics.
On a little tough right now and we had we had a greater opportunity for shipments then.
Yeah.
He ended up but.
Okay. So the upside from Q on it sounds like and thank you for that and then on I was looking through my notes and I have a couple of years ago. So maybe it's data, but if you had said pretty clearly and and talked about being able to ramp up quickly. So we had modeled and you know of.
Little more aggressive ramp up to be honest on CIT and I have and my notes you said within six months you'd be at 80 per cent of that so I. Just wondering is there any reason for kind of day, the pushout and timing and also just on the 2020. Two forecasts you know you you touted in the past and ability to ramp up quickly and talked about your track record of doing so but I. So I was surprised that two 2.2.
And out of 3 million tons next year. Thanks.
Yeah.
Well two two to $2 4 million tons is 80% of our 3 million it's on capability Timna.
And I think.
The team hitting that will be a remarkable feat.
Okay. Thank you.
Yeah.
Thank you our next questions come from the line of Phil Gibbs with Keybanc capital markets. Please proceed with your question.
Good morning.
Good morning.
And Mark can you talk a little bit about automotive I mean, theres a lot swirling given the chip shortages and the downtime at the and <unk>.
The domestic and naphtha producers even globally you said your shipments remained strong and obviously the demand side of equation is very strong to your point.
So I'm just trying to trying to understand how this ultimately all plays out do you think the oes. Despite all this we're short on inventory that's why they continue to take volume.
You know, maybe maybe just help us think through this.
Yeah.
I think the the sort of and demand are for.
Nichols' today is incredibly strong and the.
A few dealers that I talked to.
Struggling to get inventory and feel that it's a debt that strength is going to remain for some time.
I think they would generally projecting somewhere between 17 and 18 million units for the year.
And the best per got Prognostications are that the chip shortage made my impact and that by a millions and millions on a half.
I'm not sure.
All I can say is as you know through on lens and it's it's it's quite a virtuous I guess, but the plants that are down and not ones that we supply.
So we really have not seen any material material impact.
From a from a shipping standpoint.
We have seen a slight impact on the scrap side, so I think youre going to see.
Well as we anticipated that softening at all but and allow.
Last month for.
So this month.
And I think prime scrap is probably going to be from maybe up a little.
But then again, it's too early to tell you know the buyer is still a couple of weeks here.
But no no major impact for us so far.
Thanks, Mark and then on the engineered bar side, you had a nice.
Pick up and volume are very strong sequentially and end up nicely year on year, how much of that do you think is driven by by automotive I can't remember how much of your mix. There is is and that there's enough silo and.
How much of that do you think is related to two.
To the to the yellow goods commentary you made.
Well I think there's a general impact.
Across the space, we've seen a little greater activity and sort of a seamless pipe for the from the energy Mark is yellow goods as stronger manufacturing is stronger.
But I would say that the principal growth and target for that growth. There has been and automotive I think we're around about 20 per cent of.
And there right now.
And if you remember some years ago, we installed a you know a <unk>.
Smaller diameter mill.
And that and utilization is picking up quite dramatically.
Thanks, Mark and if I could squeeze and one more here a lumber prices have been obviously astronomically high and the last six to nine months steel prices of have followed the trend.
And obviously.
I mean, how much how much and in some cases are you seeing substitution and to steel, particularly as it relates to your fabrication and book and maybe some some other things as competing products become more expensive as well thanks very much.
Well, we've not seen any at least I don't.
I'm not aware of C N and any substitution threat right now obviously all materials have come up together.
But then again, yes.
Steel products are a quite unique and to replace place.
And and it's the steel warehouse space, where they.
And they want large spans you obviously can't do that with with lumber you may see lumber substitution and and high rise buildings and the past.
But not not and the the the growth area of <unk>.
Distribution warehouses, and and that sort of thing.
Thanks Mark.
That concludes our question and answer session I'd like to turn the call back over to Mr. Miller for any closing remarks.
Well Super for those that remain on the call. We certainly appreciate your time today and and you supportive of our company.
For our employees are again hats off to you it was an absolutely phenomenal quarter.
And I ask you to to look after each other right, there and and be safe.
And again, we wouldn't be able to have a phenomenal quarter without our customer base. We got some loyal for normal people that we've worked with that we've partnered with over to us.
So thank you each and every one of you and.
And with that said make it a great day and be safe.
Once again, ladies and gentlemen that does conclude today's call. Thank you for your participation have a great and safe day.