Q2 2021 Steel Dynamics Inc Earnings Call
Good day and welcome to the steel dynamics second quarter 'twenty 'twenty, 1 earnings conference call.
At this time all participants are in a listen only mode.
After management's remarks, we will conduct the question and answer session and instructions will follow at that time. Please.
Please be advised that this call is being recorded today July 20th of 2021, 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 David Lipschitz Director of Investor Relations. Please go ahead.
Thank you Darryl good morning, and welcome to steel dynamics second quarter 2021 earnings Conference call. As a reminder, today's call's being recorded and will be available on our website for replay later today.
Leading the leading today's call are Mark Millett, Chairman, 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.
Some of today's statements, which speak only as of this day may be forward looking and predictive typically preceded by believe expect anticipate or words of similar meeting the are intended to be protected by the private Securities Litigation Reform Act of 1995 should actual results turn out differently such statements involve risks and uncertainties related to our steel.
The metals recycling and fabrication businesses as well as the general business and economic conditions.
Examples of these are described in 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 of ACA and if applicable and later FCC for 10-Q, you'll also find any referenced non-GAAP financial measures reconciled to the most of the.
The comparable GAAP measures in the press release issued yesterday entitled Steel dynamics reported record second quarter of 2021 results and now I'm pleased to turn the call over to Mark.
Yeah.
Thank you David and good morning.
Welcome to our second quarter of 21 earnings call. We appreciate your time and thank you for joining us today.
The entire student IMAX team delivered yet another phenomenal performance it was filled with operating and financial records, including record sales operating income cash flow and adjusted EBITDA.
The tremendous performance driven by the dedication and passion of our teams executing on our long term strategies that will continue to drive higher through cycle earnings.
The team is delivering exceptional results and I'm very proud to be among them.
Okay.
Due to the committed continued commitment of our teams to 1 another on our families and our customers. We continue to operate safely amidst COVID-19.
The health and welfare of on teams is Paramount and I. Thank each of them for their continued commitment to safety.
Record financial results for little important unless everyone goes home safely at the end of the each day the <unk>.
Number of injuries and associated severity improved in the first half of 'twenty, 1 compared to last year.
The teams are focused on reducing hazards and practices that could result in significant injury.
Nothing is more important than the health and safety of our people.
It is on number 1 value.
The safety performance continues to be significantly better than industry averages, but our intent will always be to have zero incidents to.
To achieve this we must all be continuously aware of our surroundings and I'll settle team members keeping safety top of mind in order to take control of safety.
Yeah.
Our commitment to all aspects of the sustainability is embedded in our founding principles woven into the fabric of our company valuing the health and safety of our teams partnering with our customers supporting our communities and minimizing our environmental footprint.
And the extension of this commitment is evidenced in our recent announcement concerning goals for greenhouse gas emissions reduction and renewable energy milestones Inc.
Clearly the goal for our steel mills to be carbon neutral by 2050.
We've been the leader in the area of sustainability for more than 25 years, and we plan to stay right in that position.
We're starting from a place of strength with already industry low scope, 1 and 2 carbon emissions yeah, we plan to do more.
As we progress on the strategic path, we will plan to share all of it comes with you.
But now Teresa will share insights into our recent performance.
Good morning, everyone I'd like to add my sincere appreciation and congratulations to our entire steel dynamics team as Mark said, we achieved numerous milestones attained record second quarter performance with record revenues of $4.5 billion derived from record quarterly steel shipments records.
Fabrication shipments and strong product pricing across all of our operating platform we.
We achieved record quarterly operating income of $956 million and net income of $702 million worth $3.32 per diluted share and record cash flow from operations at $587 million with record quarterly adjusted EBITDA of over $1 billion of truly extraordinary.
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Our second quarter 2021 results included cost of approximately $23 million or 8 cents per diluted share associated with the construction of our sinton, Texas flat roll steel now excluding these costs second quarter 2021 of adjusted net income was $719 million or $3.40 per.
Diluted share.
Our second quarter revenues of $4.5 billion by 26% higher than sequential first quarter result, with growth from all of our operating platforms, but most significantly from our steel operations based on record shipments and continued strong flat rolled steel selling values are.
Our second quarter 2021, operating income was $956 million, 61% higher than the first quarter result, also driven by strong flat rolled steel pricing and robust demand more than offsetting an increased scrap cost.
As we discussed our business. This morning, we continue to see positive industry fundamentals for 2021, and 2022 and we're confident in our forthcoming unique earnings catalysts.
Our steel operations generated over $1 billion of the operating income in the second quarter, 59% greater than the first quarter of sequential earnings that's flat rolled steel selling values continued to strengthen we also saw expanding margins throughout our long product steel operations due to improved pricing and volume we achieve.
The record quarterly steel shipments of $2.9 million tonnes, and our steel mills operating at 91% of other capability we.
We still have additional steel market opportunity based on our existing annual steel shipping capability of over 13 million tonnes and when our new Texas steel now its fully on line, we'll have over 6 million tons of availability.
Operating income from our metals recycling operations was $51 million aligned with strong first quarter performance as the domestic steel production improved further supporting ferrous scrap demand and pricing. The team continues to effectively lever of the strength of our circle on manufacturing operating model benefiting both our steel and metals recycling.
The operations by providing higher quality scrap, which improves the furnace efficiency and by reducing company wide working capital requirements.
Our fabrication operations once again achieved record shipments and expanded margins in the quarter as realized selling values more than offset continued higher steel input cost operating income was $28 million versus first quarter earnings of $10 million.
Steel joist and deck demand remains very strong as evidenced by our record.
Customer order backlog and continued robust order activity, we expect steel fabrication earnings to continue to increase through the remainder of the year.
Our cash generation continues to be strong based on our differentiated business model and highly variable cost structure at the end of the second quarter of we had liquidity of $2.3 billion comprised of cash of $1.1 billion and our fully available unsecured revolver of $1.2 billion.
During the second quarter of 2021, we generated record cash flow from operations of $587 million and $849 million. During the first 6 months of the year also of record.
Working capital grew over $700 million in the first half of 2021 due to higher prices, resulting in increased customer accounts and inventory values.
During the first half of 2021, we've invested $587 million in capital investments of which $489 million was invested in our new Texas flat rolled steel mill.
For the second half of 2021, we estimate capital investments will be roughly between $350 million and $400 million of which the Texas steel mill represents an estimated $300 million.
Regarding shareholder distributions, we maintained our quarterly cash dividend at 26 cents per common share after increasing at 4% in the first quarter of this year, we also repurchased $393 million of our common stock representing 3 per cent of outstanding shares.
In July we announced the board's approval of an additional $1 billion share repurchase authorization, demonstrating our confidence in steel dynamics future cash flow generation.
Since 2016, we've increased our cash dividend per share over 85 per cent and we've repurchased over $1.6 billion of common stock representing 19% of of our outstanding shares while during the same timeframe, we achieved an investment grade credit rating and maintained our growth company profile by investing $2.8 billion.
And organic capital investments and funding $720 million in the acquisitions. These actions reflect the strength of our capital Foundation and cause the consistently strong cash flow generation capability and the continued optimism and confidence in our future.
Our capital allocation strategy prioritizes strategic growth with shareholder distributions comprised of a base positive dividend that's complemented with the variable share repurchase program. We are squarely positioned for the continuation of sustainable optimized long term value creation sustainability as a part of our long term.
Value creation strategy, and we are dedicated to our people our communities and our environment. We are committed to operating our business with the highest integrity and has been since our founding.
First of all committing to this path, we recently announced greenhouse gas reduction and renewable energy goals, including the goal for our steel mills to be carbon neutral by.
2050 to increase transparency, we have is that interim milestones for 2025 and 2030.
As Mark said, we've led the steel industry with our exclusive use of D. E F technology circular manufacturing model and innovative solutions to increase efficiencies reduce raw material usage, we use secondary materials and promote material conservation and recycling.
We plan to sustain our leadership position by executing our sustainability goals through among other avenues implementing emission reduction projects, improving the energy management, increasing the use of renewable energy in developing and supporting new innovative technologies, we have an actionable path that is more managed.
And we believe considerably less expensive than what May lie ahead for the traditional blast furnace industry.
Our sustainability and environmental impact strategy is an ongoing journey and we are moving forward with the intention to make a positive difference we plan to continue to address these matters in the play a leadership role in developing innovative ways to reduce our impact on the environment.
Additionally for those that track our.
Individuals flat rolled steel shipments.
In the second quarter, our hot roll and our piano sales or shipments excuse me were 719000 tons.
Our cold rolled shipments were 150000 tons and our coated shipments were 1.055 million tons.
With that Mark.
Super Thanks Theresa.
Just out of a little more color to each operating platform.
The steel fabrication platform delivered a strong performance of the game.
Moving record quarterly shipments in almost tripling sequential operating income.
Based on the strength of steel joist and deck and demand increased product pricing is more than offsetting the continued rise in steel input cost.
Order activity continues to be extremely strong.
<unk> ended the quarter with a record fabrication order backlog.
All of us considerably higher than historical peaks.
The non residential construction market is strong, especially in areas that support online retail computing activities in pharmaceuticals.
Specifically represented by construction of the distribution of warehouse facilities.
We believe this dynamic will continue for the next several years as we see long lasting changes in consumer behavior.
As we mentioned last quarter, we've hired additional people and expanding operating hours of us several steel fabrication locations in order to meet increased customer demand.
These changes should increase annual production capability by well over 100000 tons.
Our metals recycling operations had an extremely strong quarter with quarterly operating income of 51 million loans.
The strong ferrous demand and increased pricing related to higher domestic steel production drove strong performance.
Prime scrap index pricing average the increased $60.70 per gross ton during the quarter.
Prime scrap generation has been solid based on strong North American manufacturing.
We expect U S scrap generation and alternative Iron unit production to keep pace with the increase the man from steelmaking in the coming years.
Additionally, we believe China's scrap reservoir will grow considerably over the next 3 to 5 years offsetting their expanding E F capability, while providing additional global raw material supply.
We believe metallics pricing in general has peaked and scrap will remain flat in the coming quarter.
The steel team had an outstanding quarter, considering to achieve numerous operating and financial records, including record shipments of $2.9 million tonnes and record operating income of over $1 billion.
For the domestic steel industry operators of the utilization rate of 81% of steel mills operated at 91% during the second quarter slightly lower than our first quarter rate of 93 per cent.
In June we experienced the burn through in 1 of our furnaces at our Columbus flat roll steel mill.
Importantly, no 1 was on the team was injured.
The resulting average though lasted about 10 days and patenting second quarter production and shipments by about 60000 tonnes and 30000 tons respectively.
Columbus has now regained fully operational.
If you don't mind is strong across our entire steel platform of long products steel operations achieve increased shipments at all of the locations for the structural and rail division achieved record quarterly volume.
The flat rolled steel markets remain especially tight straw.
Strong demand coupled with extremely low customer inventory levels across the supply chain continue to support flat roll steel prices of both historical peaks.
Customers are placing orders for immediate demand requirements and have not had the ability of the rebuild inventory.
Additionally, the speculative risk associated with the accumulation of higher price inventory is also a significant deterrent to procuring inputs.
We believe current legislated steel trade policies, such as the section 2 of lung cases imposed in 2015.2016, and subsequent anti circumvention restrictions will continue to keep steel imports of moderated levels.
The current U S administration as also commented constructively of concerning trade parameters and the issues created by China's steelmaking overcapacity.
Regarding the ongoing negotiations negotiations between the U S and the U U on revoke and 232 times. We expect the final agreement will include the import sewage protections to protect U S National security goals.
The aside from Turkey, Europe has never been a significant input source and we have a long thought.
And we have long thought collaborating with them against China, and other Asian export based economies.
The greatest contributors the global overcapacity is the most effective path of fair trade.
From an end market perspective, the automotive sector is operating at solid production levels due to low inventories coupled with strong consumer demand.
Current build rate forecast for 'twenty, 2 and 23 are at 17 million units, representing a very strong outlook.
Total inventories of 55% below the 5 year average and the lowest supply level and over 35 years.
Additionally, at this point, we've been fortunate that our automotive order book has not seen any significant impact from the ongoing electric and electronic chip shortage.
The non residential construction sector remains strong as evidenced by our record structural and rail division shipments record steel fabrication shipments on strong long product steel order backlogs.
We expect the strength to continue through the rest of this year and into next.
Residential construction has always been strong resulting in high demand for HVA see appliances and other related products.
We're also seeing healthy demand for mining and yellow goods customers at our engineered bar products Division.
And more recently, we're finally seeing some indications of an improved the energy sector as global energy prices have improved.
We've executed numerous strategic investments across the company of the last several years and we continue to position steel dynamics for the future.
We and our customers continue to be extremely excited about our sinton, Texas electric arc furnace flat roll steel mill investment.
Represents transformational competitively advantaged strategic growth with associated long term value creation for all of US study kudos to.
It provides lower carbon emitting next generation of the EF steel production capabilities, new products and new customers.
The 3 million tons state of the art facility is designed to have product capabilities beyond that of existing electric arc furnace flat roll steel producers competing even more effectively with higher carbon emitting integrated steel facilities and high carbon foreign competition.
It provides us with broader steel portfolio, while providing our customers with an even larger climate conscious supply option.
The electric arc furnace production route is by far the most sustainable environmentally friendly supply chain, having the lowest carbon footprint.
We are currently.
On commissioning of the 250000 ton paint line and we expect the 550000 ton galvanizing line with gobbling coating capability to be operational next month.
The entire sinton team is doing a tremendous job.
Could you the excessive heavy rains experienced in Texas over the last several months actual steel production at the sinton is not likely to begin until mid fourth quarter of this year.
Teresa shared our views concerning shipments and through cycle earnings capability of this new steel mill.
It is truly a transformational project and we are just at the edge of seeing the tremendous benefits it will bring to us our teams our customers and our stakeholders.
The town of Simpson provides the strategic location near Corpus Christi with regional commercial markets, representing over 27 million tons of relevant flat roll steel consumption in the U S and Mexico.
Customers are excited time afraid of advantaged regional flat roll steel supplier.
We currently have 5 customers committed to located on site, representing over 1.5 million tons of annual processing and consumption of capability.
Based on on location with much shorter lead times, we can provide a superior customer supply chain solution.
It also allows us to effectively compete with imports coming into Houston, and the West coast, which inherently have long lead times in the speculative price risk.
We've also made considerable progress concerning our raw material procurement strategy for syndrome.
We completed the acquisition of the Mexican scrap company last August of critical step.
The operations of strategically located in the high volume industrial scrap sources throughout central and Northern Mexico.
They have an estimated annual scrap processing capability of almost 2 million gross tons and.
And we also the quiet 3 smaller scrap locations in the Houston and Corpus Christi area, which we did the last quarter.
On performance based operating culture, coupled with our considerable experience in successfully constructing and operating highly profitable steel mills positions us.
Early well to successfully execute this transformational growth.
We're not simply adding flat roll steel production capacity.
We have a differentiated product offering a unique regional supply chain solution. The significant geographic freight and lead time of advantage and offering an important alternative to a region in need of options.
We also recently announced plans to add for additional value added flat roll coating lines comprised the 2 new paint lines and 2 new galvanizing lines with government Luna.
On the coating capability.
Our preferred supply chain has resulted in our existing lines consistently running at full capacity through both increased consumption and market share gains.
2 of the new lines will be in the southern U S regions to support symptom.
The other 2 lines will be in the Midwest and will also be comprised of the new paint line on galvanizing line, where the combined annual capacity of 540000 tons.
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 be beginning the will begin operations in the second half of 'twenty 'twenty 2.
Our strategy of consistently places value added products and supply chain differentiation of the for and as benefit as well.
In closing our business model and execution of our long term strategy continues to strengthen our financial position through strong cash flow generation, demonstrating our sustainability and differentiating us from our competition.
Additionally, our customer focus coupled with market diversification and low cost operating platforms. So point of our ability to maintain our best in class financial performance.
Our amazing teams on the spirit of excellence of the foundation of that success and.
I, thank each of them for their passion and dedication to 1 another and remember the Youll health and safety are always the most important issue at hand.
So thanks to all for you being on the call today and I appreciate you listening and their Darrell. Please open the line for questions.
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Okay.
Our first questions come from the line of Emily Chang with Goldman Sachs. Please proceed with your questions.
Good morning, Mark and Theresa Thanks for the update here on my.
My first question is around the full value add cutting lines.
I thought last quarter that the expected capex for these for.
For the value added lines range to between 400 and for $25 million.
But I think you've outlined of budget of $4.50 to 500 million today. So I'd be curious as to what has changed around the scope of the project or on all of the timeline that of may be driven side of this.
This increase yeah.
I think the 2 things as we delved into it we've got a clearer picture firstly the of the cost structure, but I think more importantly, it's just the the expansion of line capability added a little bit more.
It also is being priced on current steel values and so that appreciated that the total project cost as well.
That's clear.
And maybe just just to further this are the sort of line of questioning around growth. It sounds like you've got a pretty constructive view of the U S steel industry.
Clearly, providing some further opportunities for growth in the coming years and what else.
Do you think the.
That could be planned.
The steel dynamics of longer term beyond these for coating lines.
As it relates to growth within your capital allocation budget should it be for the organic growth in the downstream additional capacity.
How should we think about how you could be allocating capital here.
Sure well I think you will see going forward.
The continued sort of plan to invest downstream and value added the downstream processing.
That has been a key part of our strategy today, and we'll continue to do so and as 1 looks across our our sort of operating platform on the steel side.
We see continued organic growth the.
Capability the.
I do believe also.
We also.
I have a an incredibly strong balance sheet strong liquidity.
Cash flow generation capability continues to improve through the through cycle.
And there will be.
I think.
On a good balance sort of cash allocation.
The strategy the.
Transactional growth will certainly be part of that.
The the appears to be a strong pipeline of opportunity.
On both the sort of pull through manufacturing type operations.
On the market today.
Along with yes.
Steel steel assets.
Great. That's helpful color. Thank you.
Thank you. Our next question comes from the line of Carlos de Alba with Morgan Stanley. Please proceed with your question.
Thank you very much for everyone.
Mark perhaps for you you mentioned that you expect the.
The metallics.
Just to have peaked already on any views on the steel prices.
Giving you of what would you say about how 'bout metallics.
Yeah.
So I think the we remain incredibly bullish.
Of the market.
In the for the rest of this year and into into next year.
Yeah on on the demand side, it's just incredibly strong.
Oh, you have a tight supply side right now.
Inventories are at record low levels I think the MSCI data is 1.8 months.
Inc, incredibly incredibly low.
And there's no restocking capability.
The currently because theres just the lack of availability to meet present present demand.
Mill the lead times of stretched.
Have you yet imports of ticked up a little but there still are still of moderated.
In all honesty.
Despite the the the large arbitrage availability of near term availability for imports is still very very very tight so I don't see the being any ability for a surge there too to take things.
So over the top.
And if you look at the second half of this year.
There are a myriad of the mental outages.
Both for just regular.
Maintenance outages, but also for installation of the new equivalent.
Delta Garrett on those of those mills as they plan on the future expansion.
So there's going to be a lot of steel actually coming offline in the second half of which is going to just tightened the supply supply demand balance even even more so I think for the rest of this year.
It's it's a it's a bullish market for the for us.
Alright, thanks for that so so basically you expect the increase in margins.
As of scrap prices go down.
The steel prices remain high what are the implication on maybe for yourself for for working capital given that it was.
Cash flow generation was very solid.
But what she kept that obviously for obvious reasons the.
Of course, you consume cash during the first half the issue do you continue to see that.
Basically at the same level.
In terms of the days of working capital, maybe accounts receivables and inventories in terms of the days of sales that cost.
The other levels than what we experienced in the second quarter.
You know I think we should see that moderating because I'm from the perspective of pricing Mark cracks you know we've had very strong steel pricing and volumes of increase but now that we're at this level I don't see there being significant draws for the second half of the year, Although we will be increasing working capital as it ramps up.
It could be as much as $150 million to $200 million of working capital in the next call. It 6 to 9 months, but I don't think that youre going to see as significant of a draw and working capital of the second half of the years, we experienced in the first half of the year.
All right excellent. Thank you very much.
Thank you. Our next question is coming from the line of Southeast CASM Nathan with Deutsche Bank. Please proceed with your question.
Yeah, Hi, good morning, Mark and Dave Thanks for taking my questions on.
My first question is on the steel fabrication segment.
The second quarter.
Shipments of at record levels, but if you look at on on a quarter on quarter basis. The shipments were only up 3%. Despite the record backlogs and your guidance in April on adding more growth.
So just wanted to get the sense of what was there any weather related impact in Tokyo, and how should we look at the shipment progression for the rest of the year.
Well as you point out that the did increase, albeit incrementally quarter over quarter, but at the the additional folks that we've brought on board obviously, the <unk> been ramping up and they need to be trained and you won't see.
The wouldn't have seen a massive increase the second quarter, but you will see that ramping up third and fourth quarter.
Okay, Alright, thank you for that and you mentioned about the planned outages at some of your peers I just wanted to get a sense of if you have any any outages planned within the within your system.
For the second half of the door on 'twenty 1.
Well both of the I believe Columbus, and Butler will take the the normal kind of for day outages.
And the third and fourth quarter.
Third and fourth quarter of OCA.
Thank you for that and good luck for the next quarter.
Thank you.
Thank you our next questions come from the line of David Gagliano of BMO capital markets. Please proceed with your question.
Great. Thanks for taking my questions just on the capital allocation side of it.
First of all the historically the mix over the last 5 years of being kind of 65.35 between growth versus shareholder returns.
Should we expect that mix to change meaningfully in the in the in the out years.
On a related question.
I noticed the long product utilization rates are now creeping up close to 90%, which is pretty amazing and end and I'm. Just wondering if you can speak to.
If you think about capital allocation plans.
Or are you interested in expanding on your line of products capacity given the utilization rates at this point in the in the positive outlook.
And if so would that more of like what the organic or inorganic opportunities. That's my first question. Thanks.
Well.
Dave from a shareholder.
Distributions and capital allocation. So you know first and foremost we definitely are a growth oriented company and we intend to stay that way but.
But we believe it's important during these periods of excess cash flow generation to provide increased distributions to the shareholders and as we said in the past we like to keep our dividend in the very manageable level. When sitting is up and operational you will see a significant increase in the dividend at that point, because we're gonna have significantly higher through.
Cycle cash flow.
But and you know until that time and as we're generating excess cash we will be utilizing this year buyback program as well we think that's an important tool. However, we are very much focused on growth I know Mark mentioned there are transaction opportunities today, there's quite an extensive pipeline of the teams are very busy.
<unk> focused on manufacturing businesses as well as potentially steel production assets as well you are correct on the long products. The utilization has improved nicely and we're seeing a lot of both good demand and then we've also of the commercial teams have been doing a good job of of cross selling those products and we've gotten some market share gains out of that as well mark.
Would you like to address the question of whether or not we want to grow on long products.
Yeah, but the.
Just to touch on David.
Youre right the.
The the long products market sort of got in credit.
We hope here.
Right.
Certainly.
You'll see on that in the margin expansion you know the there's been a change.
The.
Whereby.
Yeah pricing tended to be adjusted in lock step with any change in scrap but.
But as you've seen over the last few months, it's become a market based the math.
Land based the sort of pricing.
Scenario and margins of the increased 150, some sometimes 200 on certain products. So it is a it is of very very strong market for for us today for sure.
The across the space merchants beams rail is stellar.
On the engineered bar in all honesty, I think we're pretty well closed then from an order book perspective for the rest of the year and going into next year. So so of great Gray market.
That said.
If you look at the kind of the.
Capacity.
And merchant shapes and beams in particular relative to through cycle of consumption.
That's 1 area.
That is it.
Kind of of.
The overcapacity situation.
Through it through the cycle.
And therefore, I wouldnt envision us, having any meaningful increase in and sort of.
Oxide production of shapes.
You'll see.
US utilize excess hot metal capability that we've got in the colored bar mills on.
The long product side, but the but again it won't be a massive increase in capacity.
Okay. That's helpful. Thanks, and then just.
My second my second question on switching gears, a little bit on the on the cost side.
If we if we kind of try to back into conversion cost in.
Obviously, there's different moving parts of there, but it does look like there.
Of crops.
I'm fairly meaningfully higher.
I was wondering if you just speak to the cost creep. There was that was that mix driven or are there underlying cost pressures and and you know how should we be.
Modeling conversion cost relative to what we just saw this quarter on a forward looking basis. Thanks.
So David I know, how you're on you try to back in the conversion cost and <unk>.
Got it.
And in the World, where now we have a lot more processing versus just steel production is going to be harder and harder for you to back into that number that way. So we had a considerable amount of more of substrate coming into the system and having that coated versus directly from the steel production itself and so we're and as that makes it look like there's incur.
<unk> conversion cost there's actually not its just that we are processing more outside tons, because there's such strong demand.
And we can maybe try to unpack that a little bit better from quarter to quarter, but there were no significant increases in conversion cost.
Okay. That's helpful. Thank you.
Yeah.
Thank you our next questions come from the line of of Gordon Johnson with G. L. J Research. Please proceed with your question.
Hey, guys. Thanks for taking the question.
Hum.
I just wanted to get your thoughts on comments made by the president yesterday that the economy is booming.
And looking at some of the survey data that came out of Michigan last week with respect to.
Hum home buying trends in car buying trends home buying trends.
Being the worse based on the survey since the nineties thing for cars.
Clearly things are great right now, but do you guys see any potential for some pullback in the second half and then I have a follow up.
Well the simple answer to that is no.
The the demand is incredibly strong across all our sectors.
We can't make enough steel, there's massive pent up demand, particularly on the automotive side.
And as I said on earlier, if you if you look at our inventories right there.
There are.
Very very very little levels on the historic basis, and there's a there's a pent up demand.
You've talked to the the large dealers at the.
Yeah.
They just cannot get enough product and they would suggest there's going to be a couple of years before they actually catch up.
So we are we remain incredibly bullish for the rest of this year going into next year, there's absolutely no doubt about it there's a lot of this.
There seems to be this this cloud over people's minds or or heads.
But we're in the trenches with talking to customers each and every day.
I'm told them to customers each and every day.
I think with we have the.
Good finger on the pulse.
And it's got legs Theres no doubt about it.
Okay. That's helpful and then on the flip side, you know theres been fears around and this isn't my term, but I think we all know it well still make yet.
And a lot of the incremental capacity, but a lot of people expect to come on line.
But based on our estimates of lot of that capacity as either redundant or has been pushed out.
Do you guys share that view and on the positive side do you see the potential for the maintenance you know cliffs has taken a mill down here pretty soon it's gonna be down for a while there are some other mills coming down do you think the actually the potential for prices to moving even higher from here. Thank you for the questions.
Yeah.
Well we are.
We've had of.
As many of you on the call know I've had a very long long standing and contrasting of you too to the.
The the overcapacity.
A few of situation.
And what people have not been able to figure out or understand is.
Is that the U S is 1 of the 1 of the few if not the only countries that as steel short.
Additional capacity is not a problem.
In fact, our industry is doing the right thing is the knee.
Needs the reinvest needs to get state of the art the.
Equipment on board.
Both from a from a global competitive cost.
Perspective, because if you look at the China <unk>.
85% of Chinese capacity today is less than 15 years old its model.
So our industry needs to invest and it needs to continue to invest in electric arc furnace type of production routes from a sustainability standpoint.
In my humble opinion, when you have a.
And industry, the arguably has somewhere around 95 to 100 million tonnes of the production capability.
And the need in a normal a normal market of at least 120 million tons.
Production K really is not the issue of imports of the issue and controlling them and I think of as I said earlier, we do believe the the tools are in place section tool 1 will maintain the a sort of a barrier.
Even if the.
The $2.32 of tariffs.
<unk> got a road.
So I am not a I'm not concerned about over kind of Q.
The 1 little bit.
Some of the older antiquated high cost the <unk>.
Integrated.
On the capability.
We'll remain offline and I think we will offset the somewhat 6 million tonnes of so of new flat rolled coming come into our marketplace.
Hey, Thanks again for the questions.
Thank you our next questions come from the the line of Phil Gibbs with Keybanc capital markets. Please proceed with your question.
Hey, good morning, Congrats on all of the progress.
Thanks Bill.
Mark I just have I'm. The first question is just on the demand side with automotive and oil and gas I know auto spin a strong kind of the first the lead us out of of the whole last year.
But recently IHS has kind of taken down their forecasts on demand and the the semi chip issues kind of wondering.
Just what you're seeing there in terms of pull from your customers and then secondarily you did mention oil and gas getting better.
At the margin you know maybe just expound upon on what you're seeing there and if your customers are trying to prepare you for a hell of a.
The strong bounce back in 'twenty 2.
So again, Phil from from our.
Intelligent people are looking at the.
17 million ton build rate.
This year next year.
Next year sorry.
<unk>.
That's an incredibly strong number.
The.
And I think as of as I suggested when we talk to the dealers are the when we look at the inventories.
That is going to be.
The the demand of a pent up demand out of the that's going to sustain things the chip shortage for some may are the.
Sort of of entering the shipping capability as I said earlier very few of our auto platforms or have been affected to date.
So we've been fortunate.
But if you if you think about it okay. So chip shortages slow things down a little bit the demand there's still pent up is still there and it's just going to help extend the this incredible cycle that we're on.
Okay.
And on and then on the oil and gas side Mark Yes.
Yes, the strength of whispered that across the cycle.
No worries mountain of hurry.
On the energy side, it's a little bit of a mixed bag, obviously global pricing of energy prices have come up with little rig counts of coming up a little.
We're seeing.
The improved kind of downhole Oc T G I.
The requirements so at engineered bar for instance, we supply.
The road bar into the seamless to market.
It has been picking up.
The little slower, though on the kind of the infrastructure of the distribution of pipeline.
Is a is still very soft and the cancellation of.
A couple of the pipelines here of the last few months of less inventory in the supply chain, that's trying to get the sort of reallocated.
Across the country.
So oh, CTG downhole strengthening our infrastructure distribution line pipe.
There's going to be a little soft for probably at least for another 12 months.
Okay I appreciate that and then just a follow up here on the.
The Capex side, I think Teresa you said capex of $3.50 and of the $3.50 million to $400 million.
And.
In the second half was there something pushed out into next year, because I thought last time, you had talked about making some pre stage investments for your tandem ones.
Yeah based on engineering and some of the more detailed plans that we've received on the for airlines some of that it's likely to be pushed from the fourth quarter end of the first quarter. So next year without doing our detailed planning yet you're likely to see capital expenditures of probably somewhere.
Between 550 and $600 million.
Terrific. Thanks, so much I appreciate it.
Thank you. Our next question is coming from the line of Tristan Gresser with Exane BNP. Please proceed with your questions.
Yes, hi, good morning, and thank you for taking my question.
Regarding the the new environmental targets.
Are there any capex associated.
So I guess on what's the timeline if you have already identified new initiatives to cut emissions by 2025 and 2030.
And if you can what is roughly the contribution from each focus area I think he talked that new technology.
<unk> C, but also the renewable.
If you have debt that would be helpful as well.
Thank you.
Good morning. Thanks for the question that was the very detailed question I'm not sure I'm going to be able to go into all of it at this point in time, we do have some things that we can't discuss yet they're very exciting on the renewable energy side of the equation there will be of some.
The dollars, obviously spent as we look at efficiency projects and as we move toward more renewable energy and the carbon reduction itself. We really don't have estimates to be able to discuss this morning, because theres still a lot of projects that are being vetted them, we will be disclosing those items as well.
Move forward.
But we have a theory of the and this is that the thing that we want everybody understand how we're trying to differentiate ourselves and our carbon goals and in our renewable energy goals is that we're being very transparent on there is a clear path on how we're going to achieve 2025, and 2030 and as we're able to disclose some of these projects.
We absolutely trust and we will be sharing these projects, but at this point in time, it's just too early to do so.
Alright, no problem, maybe a follow up on.
The real material.
Can you talk a bit about how you will material strategy will evolve.
Both the context of capacity expansion goals for decarbonization as it has an impact on for instance scope 3.
How do you think your raw material mix for the coming.
Coming years. Thank you.
Well the the raw material strategy and really it is consistent from the perspective at least of what we're looking at today and that's we use really only about 20 per cent to 25 per cent pig iron in our flat rolled malice and so it's not as much as being advertised mm bye.
Maybe some of our peers today and that is being sourced them. Obviously internationally. So today, we use of mix of H B I as well and we'll continue to do that moving forward, but I don't see the strategy at this point in time of at least over the next near term changing dramatically Mark.
No I think we are.
The game of executing on our on plan that we've had in place for some time.
Fortunately, we have a very very good sort of foundation through our only source recycling platform. The has the capability of some 6.7 million tons of capability.
So supply of scrap is not going to be an issue.
For us for sure.
We're adding to that capability of as I said.
Mexico and some of those are some of those tons of flow up to Simpson in 2 of Columbus Mill. So I think we're in good shape on it.
On the scrap side of things.
The.
We as Theresa suggested we are using the H B I.
<unk> been using the a little bit more of that the of late.
We have I the eye that people seem to forget that.
Very very the.
The effective use for for our Butler mill in particular, it's making about 260000 tons of liquid iron that we put into our electric arc furnace.
Each year.
And just the just the emphasize if you if you look across our steel platform.
Total pig iron is only a I think it's less than 8% of it.
Total input.
So yes, it's it has an impact.
But not a lot of mass of form.
Thank you.
Thank you. Our next question will come from the line of John Tumazos very independent research. Please proceed with your question.
Congratulations on point $7 million on a quarter.
Hum.
Looking at your.
Capex strategy for the next 2 years it looks like the.
The focus is to maximize.
Complete the painting line is the golf galvanizing get all of the squealing pig.
Is it fair for us to expect.
The next big capital expenditure initiatives.
<unk> 2020 for 2025 completion.
<unk> began a little sooner.
Your focus right now is making hay, while the sun shines and getting everything out of the 3 million ton New mill.
Well. Thank you John good to hear from you the the there's absolutely no doubt that the the.
The the team's focus has been the execution of symptom.
It's a very large scale facility.
You can actually if you jump on our website, we have a drone.
Drone video of that gets up the updated I think once a month and it's the.
The call also for novel.
The facility, that's being built by the team down the.
And so the focus for sure has been execution execution execution.
Nonetheless.
We have other folks on on our team that can continue to look at the.
The transactional activity.
And also the the individual mills, we have very talented teams that continue to look at the areas of organic growth.
So I think Youre Sony C. Just a continuation of that net organic growth that you've seen on the last 2 months.
The 25 years or so.
From a simple standpoint, the the new lines that you mentioned.
Yeah.
Sort of parallels or just.
The supports our long term strategy of.
Fully utilizing all of building a high levels of of through cycle utilization and.
So not only of those for new lines.
Very effective uses of the Capex with the very very very good returns. It allows those capital intense steel mill assets to run at a higher utilization as I said through the cycle and I think we've demonstrated clearly the bed.
That strategy allows us to.
The 2 have superior.
Shipments of production capabilities in any market environment.
So there could be a big project before 2000 for 25 or a transaction.
We would imagine and I think I've stated in the past.
We don't see a symptom ask.
Greenfield project.
On the horizon.
The transactional activity there could be something meaningful debt.
Thank you very much and congratulations.
The 3 billion annual rates of amazing for profit.
Thank you John we got a great team.
All of it of a market tailwind is not not hurt on either but.
Thank you. Our next question is coming from the line of Michael Glick with J P. Morgan. Please proceed with your questions.
Hey, Thanks for sneaking me in.
You you mentioned talking to customers in the auto customers in particular, but the inventories across our beyond auto. We're also pretty low any census of what the game plan is for your non auto customers in terms of rebuilding of inventories once they have access to more supply.
Well I don't think this is really any any.
Higher right now to rebuild.
The.
First of firstly people just can't get enough steel to satisfy their immediate needs the number 1.
Domestically and number 2 the.
The speculative risk associated with the accumulating inventory.
And in today's sort of Mark and the environment is.
Every of pretty gutsy call.
Yeah.
The imports.
As I said, despite the high arbitrage.
The business is very little available currently the.
The global market of very strong in most of the material is being consumed within those markets.
So there's not much available even if they wanted to.
That said.
The the the speculative risk of material flowing in an important delivery times or November December January today.
People don't want to take that risk.
So I don't see any rebuild.
In the near to them.
And again, that's just the.
Another factor that's going to extend the cycle.
Understood and then I think you noted 475 to 500 million of incremental through the cycle EBITDA once in the value of outlines our complete could.
Could you walk us through some of the spread assumptions there. So we can understand the moving parts a bit better.
Yeah.
Michael that we won't go through the details by themselves will tell you that the spreads are based on mid cycle spreads so definitely not what we're experiencing today and we're starting with the base of hot rolled 2 of them.
Prime scrap kind of mixed spread and then we build the the value added product mix off of the off of that and we are using what we've experienced historically and then also looking forward at what the expectations are in those individual markets on the mid cycle basis. So I'm, sorry, we can't give you specifics spreads but.
It is showing that I'm sitting on our expectations are that the volume operates very much like our Columbus and Butler facility.
Facilities operate that means that production and shipments tend to be at or near capacity on the mid cycle basis.
Got it thank you.
Thank you our next questions come from the lineup Sean <unk> with Deutsche Bank. Please proceed with your questions.
Hi, Mark and Theresa and congratulations on another great quarter here.
A couple of housekeeping items, and I apologize, if you've mentioned needs but.
On taxes.
Recognize you had a shield related to certain I think it's supposed to.
And it will work in your favor.
Could you maybe touch on that and sort of expectations for working capital for the year. Please.
Yeah, absolutely so, yes, sitting well they're expected to provide the tax shield. This year as we're able do of the year of operations be able of expense that fixed asset investment it likely will shield upwards of 350 plus million dollars. However, our earnings are so strong.
On that you know, we're still having tax payments that are required this year and I think we're estimating our effective tax rate to be about 15%.
From the perspective of working capital of citizens likely the build working capital as it starts operations.
In the next 6 to 9 months of somewhere between 150 and $200 million outside of that I would expect the rest of our operations working capital to.
The remained fairly steady just given that our volumes of already picked up and pricing has been really strong as well. So I don't see a lot of additional movement in working capital.
Great. Thank you that's helpful.
And then just in terms of you know opportunistic.
Use of cash flow and you have 1 billion of cash on the balance sheet, you're going to continue to generate cash going forward, you've obviously tenant of nice job outlining the V.
Various ways you can use that cash.
But I guess my question is do you think it's prudent to keep.
Our solid cash balance of air should an opportunity of right.
Or should you know the market turn at some point instead of you have the ability to go out and make these transactions.
It's a good question our balance sheet is extraordinarily strong so even if you look at our our net leverage of our gross leverage of either metric. It solidly in the investment grade Arena, we have additional.
The significant additional debt capacity and the capital structure, and so where it is yes. It makes sense to keep some cash on the balance sheet. We also have you know things that we can spend that money on whether its additional share repurchases as we expect to make to the second half of the year and it still won't hinder them all of the growth.
Expectations or projects that we think are available to us on the transaction side. So on.
Yes, we do keep dry powder at the same token mm theres still debt capacity as well.
And I guess kind of I just.
Is that if you look hopefully.
When you look at our.
The experience of of growth.
Over the use of it.
Always been very very intentional.
I would say I would also say it's also a very disciplined.
And we we won't do a transaction.
Ludicrous numbers, we always look at that through cycle. So if we were to do a transaction today.
It's a it'll be a good investment through the cycle not just based on on today's crazy.
Crazy profitability.
My House.
Right now the that makes sense of I'd say like you've demonstrated that over time as you scale this business out of China.
It was easy for 2 that I guess, just my last question just touching on something you said earlier Mark when you think about you know the U S market sort of being in the deficit.
And the deficit for years.
I guess philosophically do you believe that eventually domestic producers will evolve to fill that demand GAAP, where do you think we will always have a component of the imports coming into this country.
But I think the there will always be some element of inputs for sure. It's been a long long long long time.
Thank you.
I don't know mid Seventy's already of whenever when the imports where the de minimus.
We were not going to be a country that the self satisfies the demand in total so imports are always going to be there.
Today, we typically need a.
20% of demand as a as an important need we just don't need 30.30 million tons.
30% of imports.
I think if you.
All of the discussion has been relatively near term.
Yeah, when I say near term you know 6.9 months into enter into next year.
The people.
No I don't I don't believe anyway of recognizing that the industry is in transition and I think theres some paradigm shifts the occurring.
They're going to retain the law higher sort of health market health and in our industry.
And of much higher.
Margins going forward.
You look at the the leadership minus mindset today on the count of consolidation.
The integrated industry is really focused on returning shareholder value.
They are.
Totally focused on sort of consolidating and rationalizing their assets to make good good business sense and the.
That's going to bring I think the market health market strength long long term.
U S MCA.
Has I think Sony for us.
Been a market change in dynamics, where you see particularly the European automakers are shifting their supply chain from from imports to the.
The domestic sourcing.
Again, we've been of a very very large beneficiary beneficiary of that.
So the the.
The market is changing for sure.
And in this country.
And.
As I said earlier it needs more capacity it needs state of the all the technical.
Technological capability low cost sustainable low carbon footprint production rates.
And so I am not fearful for a second.
At the the capacity come on line it's needed.
And it will benefit the the North American.
Manufacturer.
Base.
In spades going forward.
I appreciate that the very thoughtful answer to a pretty difficult question, but.
But thank you very much and good luck going forward.
Thank you.
Thank you that does conclude our question and answer session I'd like to turn the call back over to Mr. Millett for any closing remarks.
Thank you Darryl.
I would just emphasize the well firstly. Thank you for those that are still on the call. Thank you for listening in today, 2 of our thoughts and opinions anyway.
It was an incredible quarter.
We believe the next quarter is going to be better even so.
And that has driven.
Certainly by the market the tailwind that we're experiencing but it's also more importantly, driven by the the most phenomenal steel metals team in the world. They are incredible a bunch of individuals'. We number of 10000. There. If you include there are the the wives and partners on Kids you know, we've got I don't know.
25000 people on the STI family today, they all contribute to.
To our success. So thank you to each and every 1 of them. Thank you to our customers we can't do what we do without you.
Have some incredibly loyal support and I wish we could support of uneven.
Even more today.
Because of the they are struggling to meet meet all the needs. So thank you everyone make it a great day and be safe take care.
Once again, ladies and gentlemen that does conclude today's call. Thank you for your participation and have a great and safe day.