Q3 2021 Steel Dynamics Inc Earnings Call
Good day, and welcome to the steel dynamics third quarter.
<unk> 2021 earnings conference call at this time, 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 this call is being recorded today October 19th 2021, and your participation implies consent.
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 Investor Relations. Please go ahead.
Thank you Kate good morning, and welcome to steel Dynamics' third 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.
During today's call are Mark Miller, Chairman 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 date maybe.
May be forward looking and predictive typically preceded by believe expect anticipate or words of similar meaning they are intended to be protected by the private Securities Litigation Reform Act of 1995 should actual results turn out differently such statements involve risks and uncertainties related to our steel metals recycling and fabrication businesses as well as to general business and.
<unk> a condition. 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 if applicable in any later SEC Form 10-Q, you'll also find any referenced non-GAAP financial measures.
<unk> reconciled to the mostly directly comparable GAAP measures in the press release issued yesterday entitled Steel dynamics reports record third quarter 2021 results and now I'm pleased to turn over the call to Mark.
Yeah.
Got it.
And economics as the operator, Mark are you still with us.
I'm, sorry, I'm, sorry, let me, let me repeat I was on mute.
They were keeping me quiet, but then but no seriously good morning, everybody welcome to our third quarter 'twenty One earnings call. We appreciate your time today.
And as I was saying.
Steel dynamics team delivered another exceptional financial and operating performance, including record sales operating income cash flow and adjusted EBITDA.
Aided by the market tailwind it was a tremendous accomplishment driven by the commitment and passion of our teams executing on our long term strategies that continue to drive.
The entire higher through cycle earnings.
The team is truly delivering exceptional results and I'm proud to be among them.
Due to the steadfast commitment of our teams to one another our families and our customers. We continue to operate safely amidst COVID-19.
The health and welfare of our teams is Paramount and I, thank each of them for being the brothers.
<unk> is Cuba.
Record financial results are no import of our teams do not remain safe.
Our safety performance continues to be significantly better than industry averages, but our intent will always be to have zero incidents.
Since our founding over 25 years ago steel dynamics has been intentional.
And citizens and our resources sustainably for the benefit of our team's communities in our environment.
Whereas steel industry leader in sustainability.
Operating exclusively with electric arc furnace technology.
With a differentiated circular manufacturing business model.
As our journey continues we're committed to the reduction of our climate footprint.
Print, including a practical and achievable goal for us steel mills to be carbon neutral by 2015.
We're starting from a position of strength you plan to do more.
We're competitively positioned and focus toward generating long term sustainable growth for all stakeholders.
But before I continue Theresa will share some insights into our recent performance.
Teresa.
Thank you Mark good morning, everyone.
I'd like to add my sincere appreciation and congratulations to the team we continue to achieve new milestones throughout the business attained record third quarter performance.
With record revenues of $5 $1 billion drive from strong product pricing and volumes.
Across all of our operating platforms.
Record quarterly operating income of $1 $3 billion in net income of $991 million or $4.85 per diluted share and record cash flow from operations of $631 million and adjusted EBITDA of over $1 $4 billion.
A truly extraordinary performance.
Our third quarter 2021 results included cost of $30 million or 11 cents per diluted share associated with the continued construction of our sinton, Texas flat rolled steel mill. Excluding these costs third quarter 2021, adjusted net income was 1 billion.
Hours or $4.96 per diluted share above our guidance due to stronger than forecast September steel and fabrication earnings.
Our third quarter 2021 revenues of $5 $1 billion were 14% higher than sequential record second quarter results with improvements in all.
All of our operating platforms, but most significantly from our steel operations based on increased flat rolled steel selling values and strong shipment.
Our third quarter 2021, operating income of $1 $3 billion was 38% higher than second quarter results also driven by increased flat rolled steel pricing and continued strong demand.
More than offsetting increase raw material ferrous scrap costs.
As we discuss our business. This morning, we continue to see positive industry fundamentals for the fourth quarter and 2022, and we are focused toward our continued transformational steel growth initiatives.
Our steel operations generated record operating income.
And $1.4 billion in the third quarter, 33% greater than the second quarter sequential earnings as flat rolled steel selling values strengthened and our lagging contract business represented over 80% of our flat roll volume in the quarter.
We also saw expanding margins throughout our long product steel operations.
Come of improved pricing.
We achieved strong quarterly steel shipments of $2 8 million tons with our steel mills operating at 93% of their capability.
We have additional volume opportunity based on our existing annual steel shipping capacity of over 13 million tonnes and when our new Texas steel.
<unk> do you fully online we will have over 16 million tons available.
Our metals recycling business had operating income in the quarter of $47 million aligned with strong second quarter performance as higher average pricing result in improved ferrous margins. The team continues to effectively lever the strength of our circular.
<unk> operating model benefiting both our steel and metals recycling operations by providing higher quality scrap, which improves furnace efficiency and reducing company wide working capital requirements.
Our steel fabrication operations once again achieved record shipments and significantly expanded margins in the quarter.
As realized selling values more than offset continued higher steel input costs operating income was a record $89 million more than triple our second quarter earnings of $28 million.
Steel joist and deck demand remains very strong as evidenced by continued robust order activity, resulting in another record.
<unk> order backlog at the end of the quarter based on our backlog and customer sentiment. We expect steel fabrication earnings to continue to increase even further in the fourth quarter and into 2022.
Our cash generation continues to continues to be strong based on our differentiated business model and highly variable cost structure.
Structure at the end of the third quarter, we had liquidity of $2 $3 billion. During the third quarter of 2021, we generated record cash flow from operations of $631 million and $1.5 billion. During the first nine months of the year also a record.
Working capital has grown one.
$2 billion in the first nine months of 2021 due to higher selling values, resulting in increased customer account and inventory values.
During the first nine months of 2021, we've invested $802 million in capital investments.
Of which 666 million was invested in our new.
One point is flat rolled steel mill.
For the fourth quarter, we estimate capital investments will be roughly $220 million.
Based on early forecast capital investments for the full year 2022 could be in the range of $700 million inclusive of a significant portion of investment for the four.
New flat rolled coding lines to be placed in sinton and heartland.
Regarding shareholder distributions, we maintained our quarterly cash dividend at <unk> 26 cents per common share after increasing 4% in the first quarter of this year, we also repurchased $338 million of our common stock representing 3%.
Of our outstanding shares.
Since 2016, we've increased our cash dividend per share over 85% and we've repurchased almost $2 billion of our common stock representing 21% of our outstanding shares.
While during the same timeframe, we achieved an investment grade credit rating and maintained our growth company.
[noise] profile by investing over $3 billion in organic capital investments and funding $720 million and acquisitions. These actions reflect the strength of our capital Foundation and consistently strong cash flow generation capability and the continued optimism and confidence in our future.
Our capital allocation strategy.
Strategy prioritizes strategic growth with shareholder distributions comprised of a base positive dividend profile that is complemented with a variable share repurchase program. While also dedicated to preserving our investment grade credit rating. We are squarely positioned for the continuation of sustainable optimized long term value creation.
Sustaining.
Sustainability is 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.
Further committing to this path, we recently announced greenhouse gas reduction and renewable energy goals, including our goal for our steel mills to be carbon.
By 2050 to increase transparency and accountability. We have also set interim milestones for 2025 and 2030.
We have led the steel industry with our exclusive use of electric arc furnace steelmaking technology, our circular manufacturing model and innovative solutions.
To increase efficiency reduce raw material usage, we use secondary materials and promote material conservation and recycling, we plan to sustain our leadership position by executing our climate goals through among other avenues implementing emission reduction projects improving energy management increased.
Increasing the use of renewable energy and developing and supporting new innovative technologies. We have an actionable plan that is more manageable and we believe considerably less expensive than what may lay ahead for our traditional blast furnace industry peers.
Our sustainability and climate strategy is an ongoing journey and we're moving forward.
The intention to make a positive difference we plan to continue to address these matters and to play a leadership role moving forward.
And for those of you that track them more individually our flat rolled shipments.
For the third quarter of 2021, we had hot rolled coil.
Piano shipments of 676000 tons cold.
Cold rolled shipments of 145000 tons, and finally coated shipments of $1 million and 37000 ton.
Mark.
Thank you Theresa.
While the steel fabrication platform delivered.
Tremendous performance, achieving another quarter of record shipments and more than tripling sequential operating income.
Based on the strength of steel joist and deck demand increased product pricing is more than offsetting the continued rise in steel input costs.
<unk> and order activity remains extremely strong resulting in another record order backlog.
At levels considerably higher than historical peaks.
The nonresidential construction market is strong, especially in areas that support online retail computing activities in pharmaceuticals, specifically represented by construction of distribution and warehouse facilities.
We believe this will continue for the foreseeable future.
Permanent changes in consumer behavior.
Our metals recycling operations had a strong quarter with sequentially higher ferrous metal margins somewhat offsetting marginally lower volume.
As we suggested on our second quarter call prices moderated in August and September after rising through the first half of the year.
Judah export prices may support pricing near term, but auto recovery will ease prime scrap pressure and compressed prime obsolete spreads to move to more normal levels here in the near future, but I do believe.
The steel team had another outstanding quarter, achieving record operating income of $1 4 billion.
During the third quarter, the domestic steel industry operated at a production utilization rate of 85%, while our steel mills operated at 93% due to our product diversification high proportion of value added mix and supply chain differentiation.
From a steel end market perspective, the automotive sector is.
Operating at production rates lower than normalized levels due to the continued electronic chip shortage.
Fortunately our specific auto model awards have not been materially affected and we've not yet experienced any significant impact to orders related to the chip shortage.
The longer term outlook for the auto industry is positive auto.
The automotive build rate forecast for 'twenty, two and 'twenty three continued to be solid at over 15% and 17 million units respectively.
Vehicle inventories continue to be at historically low levels.
Approximately 70% below the five year average and at the lowest level in over 35 years.
The nonresidential.
Construction sector remained strong as evidenced by the strength of shipments and order backlogs at our structural and rail and steel fabrication businesses. We expect this strength to continue well into next year.
Residential construction has also been strong resulting in high demand for HVA C for appliances and other related products.
We're also seeing healthy demand for mining and yellow goods customers at our engineered bar products division and as oil and gas prices increase we are seeing improved energy sector demand.
These positive market dynamics that are driving strong steel demand across the platform.
The steady demand coupled with continued historically low.
Absolute inventory levels throughout the supply chain continue to support strong steel selling values, especially within the flat roll steel market.
We also believe current legislated steel trade policies.
The section 201 flat rolled cases launched in 2015 and 2016 with our.
Subsequent circumvention restrictions.
We will continue to keep steel imports at moderated levels.
The current U S administration as also commented constructively concerning trade parameters and the issues created by China's steelmaking overcapacity.
Okay.
Regarding the ongoing negotiations between the U S and the EU on.
And 232 tariffs we expect the final agreement will include a steel quota mechanism to protect U S national security goals and eliminate import surge risks.
Aside from Turkey, Europe has not been a significant steel input source.
We strongly believe that collaborating with our European allies against the real.
Turbo traders of global overcapacity in the industry represented.
Represented by China, and other Asian export based economies is the most effective path to free trade.
Steel dynamics is a dynamic growth company, increasing through cycle earnings and cash flow to support continuous value creation.
On reveal the most significant growth initiatives to date is that the cusp of unleashing transformation transformational change for us and our customers is our new Texas Electric arc furnace steel mill, starting production before the end of this year.
The excitement generated by this project from our teams and customers continues to grow.
This investment represent.
Represents competitively advantaged strategic growth for steel dynamics, and our teams with associated long term value creation for all our stakeholders.
This growth initiative represents lower carbon emitting next generation electric arc furnace steel production capability.
Providing differentiated products and supply chain solutions for existing.
And for new customers.
3 million tonne state of the art facility is designed to have product capabilities beyond that of any existing electric arc furnace flat rolled steel producer.
Competing even more effectively with higher carbon emitting integrated steel facilities and high carbon foreign competition.
It provides us with a more diverse steel product portfolio and benefit our customers with an even broader climate conscious supply option.
The team shipped their first painted coils in September we.
We anticipate shipping galvanized products early in November and commencing hot rolled coil production before the end of the year.
<unk> the team is doing a terrific job.
Is truly a transformational project and we are on the verge of seeing the significant benefits it will bring to our company our teams our customers and our other stakeholders.
The China Sinton provides a strategic location near Corpus Christi with underserved regional commercial markets representing.
Over 27 million tons of relevant flat roll steel consumption in the U S and Mexico.
Our customers are excited to have trade advantaged regional flat roll steel supplier.
We have six customers committed to locate onsite, representing $1 8 million tons of annual processing and consumption capability.
Five of these customers have already broken ground.
Based on this geographic location, we can offer shorter delivery lead times, providing a superior customer supply chain solution.
We will also effectively compete with steel imports, arriving in Houston and the West Coast.
Benefiting consumers in these areas with lower logistics costs.
While removing the ocean Trans transit price quality and delivery risks.
We've also made considerable progress concerning our raw material procurement strategy per center.
We completed the acquisition of Mexican metals recycling company in August 2020, a critical step.
The reception.
<unk> operations are strategically located near the high volume industrial scrap sources throughout central and Northern Mexico.
We also recently acquired three strategic recycling locations in the Houston and Corpus Christi area further supporting raw material supply for sinton.
Our performance based operating culture.
Recycling, coupled with our considerable experience in successfully constructing and operating highly profitable steel assets positions us incredibly well to successfully execute this transformational growth.
As I've said before we're not simply adding flat roll steel production capacity.
We have a differentiated product offering a unique regional supply.
Supply chain solution with.
A significant geographic freight and lead time advantage and offer a sustainable alternative to imports in our region in need of options.
We also plan to construct for additional value added flat roll coating lines comprised of two new paint lines and two new galvanizing lines with Gobaloon coating.
Yeah.
Our unique value added coating supply chain strategy has resulted in our existing lines consistently running at or near full capacity.
Our existing customers right just lay awaiting the volume from these new lines.
The galvanizing line in pre paint line will be located onsite to benefit our new sinton steel mill while.
While the other two lines will be placed at our Heartland flat rolled division located in Terre Haute, Indiana.
Each site will thus increased coating capacity by 540000 tonnes to further support our regional flat rolled steel operations, providing them with more value added product diversification to serve our customers' needs.
We expect these lines.
Ability will begin operating in mid 2023.
New process steel has been a significant customer for these value added products.
In fact, they have grown to be our single largest flat rolled steel customer in recent years and importantly, a majority of their business relates to high margin coated flat rolled products, which are further manufactured.
Lines with the AC appliance store and automotive applications.
Our plans to purchase a 45% minority interest in your process provides the security in supply and these OEM customers.
More importantly, the partnership provides steel dynamics more exposure to non automotive value added manufacturing in Mexico.
For HPE strategic objective to develop additional downstream pull through volume, which will help support our NUCYNTA steel mill.
As the majority owner and operator, new processes, new processes CEO, Richard fan and his management team.
We'll continue to control the day to day operations, including all decisions concerning steel purchases and.
Product sales.
In closing our culture and the execution of our long term growth strategy continues to strengthen our financial position through strong cash flow generation.
Demonstrating our sustainability and differentiating us from our competition.
We are a growth company the team will continue to identify.
But by and execute high return organic and transactional growth opportunities, while providing attractive shareholder returns.
Our people and our spirit of excellence provide the foundation for our success and I. Thank each of you for your passion and dedication to each other our customers and our communities.
And two our teams remember that you.
Identify safety is the most important important issue at hand, and thank you for the exceptional job you do.
So everyone. Thank you for joining us today and Kate will you. Please open the line for questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star.
Your health and on your phone at this time, we do ask that if you are listening via speakerphone. Please pick up your handset for optimum sound quality. Once again, if you have any questions or comments. Please press star one on your phone at this time.
Our first question today is coming from cities CASM Nathan.
At Deutsche Bank Your line is live.
Yeah, Hi, good morning, Mark and Theresa Thanks for taking my questions. My first question is on growth strategy.
In the last call you mentioned that you don't see any sinton type Greenfield projects on your horizon.
Since then we have seen a couple of new Greenfield projects announced by your peers a few more.
Acquisitions on the raw material side. So just curious on what's your latest thinking regarding organic growth and M&A.
Yes, it's a teach them I mean.
Not sure that our strategy has necessarily changed because I've been recent announcements from competitors I would say that we're very focused on high.
In Oregon organic investments, where we can be differentiated through value add or supply chain are both a solution and so that's what the floor coating line.
Provide from the flat rolled side of the business from an acquisition perspective, we're still very focused and we believe there's a lot of options available now and likely.
Lee into next year as it relates to both media high end manufacturing businesses that help us with our pull through volume for our steel mills as.
As well as there might possibly be some tuck in scrap acquisitions as it relates to building out.
Areas around our steel mills from a strategic perspective and a.
Geographic supply of scrap.
As well as potentially their steel assets as well, but we're very busy from a growth perspective, Mark do you have anything to add.
Not really I think that.
T J.
As demonstrated over the years and continues to demonstrate that.
So we or.
Always grow in a differentiated way.
And so the the.
The new projects that are coming online the changes in the scrap market.
Don't change that outlook.
Okay. Yeah. Thanks for the additional color and my second question is on Sinton can you talk about the ramp up.
Profiled in detail. It seems you have trimmed your volume guidance for 2022 by 200000 tons when do you expect.
Syngenta, what your full run rate. Thank you.
Yeah.
Yeah, we did our cities based on the delay and the startup which mark can talk about.
And they're still doing incredibly well given the circumstances, but we decided that we could probably pull back our estimate from two two to $2 4 million tons next year to the two to $2 2 million tonnes. So it's not a huge reduction, but it's a reduction take into consideration the ramp will start a little bit later in 2000.
In 'twenty, one than we expected, but mark maybe you can give some details on when setting will be fully operational.
The actual trajectory of the ramp remains on changed is just the starting point has been delayed a little bit.
And I would emphasize.
Teresa.
Team continues.
News to do an absolutely phenomenal job.
And bringing such a huge scale project.
Online we.
Have had.
A couple of issues just recently.
This delayed into into late November early December.
We have a crane delivery issue that.
Slipped.
Just literally last week.
Buy up by a couple of weeks.
Covid.
The recent Covid wave.
And in Texas impacted.
The number of contractors available answer each day.
To be honest.
As his areas of opened up just.
Just recently on the electrical side, we've had a tough time getting night shift electricians onboard two to complete it.
In mid November so it has it has slid here another two to three weeks, we're still confident.
And a year startup.
The paint line has been running running quality product.
Coil in September.
We expect the galvanizing line to it.
It's up going through final commissioning and should be shipping coils here early in November.
And so to answer your last question.
Question, we would expect that they would be at a full run rate likely by midyear of 2022.
Okay, great. Thank you.
Thank you.
Thank you everyone. Our next question today is coming from Martin Engler at Seaport Research.
Seaport Research partners your line is live.
Hey, good morning, everyone.
Good morning.
Do you expect that lagging flat rolled contracts will remain around 80% of your flat order book into <unk> and then moving into next.
And then maybe if you can also touch on the contract dynamics, specifically the potential elimination of discounts on the lagging contracts for next year.
Ah yes.
Likely finish the year at around about on flat roll around about 80%, 75%, 80% on the on the contract side.
Year as sinton picks up steam next year that would probably.
The slides are around about 70% of the flat rolled base.
Relative to sort of terms of contracts. Obviously those are discussions are ongoing we have finalized a few.
And the contract terms all.
Somewhat advantaged over over our.
Purest.
Past periods.
Principally on the range the volume ranges or contracting so that we have a greater control of the order book.
Market fluctuates.
Okay. Thanks for that color there.
Some of this you touched on in your prepared remarks, but can you kind of discuss your metallic strategy. If that's changing heading into next year, specifically, there's three flat rolled eas mills that are ramping capacity near term of what youre going to require.
Scrap <unk> substitutes do.
You feel that there is ample north American supply of crimes or loyal more imports of substitutes, we required or some other strategy.
Well I've been in the business for 40 years now.
And.
Brian for you people are worried about whether you can get scrap the next year as the.
Industry has continued to grow and you know today the industry.
It's around about 70 grown to 75% or thereabouts.
I do believe.
Some of the recent.
Alternative iron units.
Almost $1 8 million tons of whatever from Cleveland cliffs certainly helps.
And I would imagine that over time, we'll see more investment in those in those products.
Going forward.
I think you'll also.
Ever see a reduction of prime scrap required by the the electric arc furnace community.
We've been very successful over the last well since last March reducing our prime scrap a bush link and a bundle requirements from 60% of the mix.
Also going down to 40% of the mix.
Through better processing and a scrub facilities.
So that will certainly ease the easily.
Any volume demand.
So we think it will grow.
The scrap.
Volume, which is growing.
Mix bulk step with increased capacity.
It may take a few more dollars.
To draw out the obsoletes obsolete grades that's historically been very elastic.
And as you know as.
As you saw recently with a higher and higher pricing.
Obsolete grades.
And flowed very very well.
What specifically changed with your scrap processing that dropped it from 60% to 40% of crimes.
Well I'd be giving away trade secrets, if I told you the detail there, but obviously just better separating techniques.
Okay I appreciate the color there and congratulations on the results and the positive outlook.
Super. Thank you very much team did a great job. Thank you.
Thank you. Our next question today is coming from Emily Chang at Goldman Sachs. Your line is live.
Good morning, Mark and Theresa My first question is around capital allocation I believe in the past you've mentioned that you'd be looking at increasing the dividend comes on line can you, perhaps give us a sense of the magnitude of that bump than perhaps when we should be expecting that to take place.
Magnet for magnitude perspective, that's difficult.
I appreciate the question, but that's a board decision I would tell you. If you looked at history. When we've had transformational growth that we believed provided sustainable through cycle cash flow increase such as when we purchased the Columbus flat Roll Division and we were finished.
Welcome transforming that early in the kind of 2016 timeframe you would have seen several 20% increases in our dividend profile at that point in time I don't think that that is unreasonable at all as far as the timing I would fully expect to see something happen in the early part of 2022, but again.
Finished that's a board decision and so I guess more to come on that.
Uh-huh, great that makes a lot of sense and then a follow up just around sort of the acquisition strategy that can you perhaps talk around the rationale around the acquisition of a 45% minority ownership of new process still rather than perhaps a full 100%.
Can that ship, though.
I will leave it at that thank you.
Well again, as we mentioned a new process has grown to be our largest customer.
It has a particular concentration.
Our value add prepaying to OEM customers and we wanted to to ensure security.
And that supply chain going forward.
But as importantly, if not more importantly, they have a strong focus on downstream manufacturing, particularly in.
Mexico.
And that is.
Aligned with our strategic.
Desires and objectives to increase pull through volume.
And so that would add support to our sinton facility.
Okay.
The minority position really allows that management team and Richard to continuing to run the business.
Basically unchanged and that's something that was attractive to us at this point in time.
Got it that makes sense. Thank you.
Thank you. Our next question today is coming from Michael Glick at J P. Morgan Your line is live.
Good morning.
Costs are obviously top of mind for the market right now you've already hit on scrap but could you talk a bit about where you are seeing on the cost.
Side outside of scrap including.
Energy and raw materials, and any supply chain issues, you're monitoring or working to mitigate.
Well I think the.
Energy pricing here has risen.
To some.
But again, you know natural gas cost is a very very small.
Percentage of our overall cost structure.
On the raw material side.
Ferrosilicon is the only item that we're actually watching.
<unk> taken steps to.
Some degree of ensure a secure supply, though actually throughout the supply chain, especially on the steel side, but in the other operating platforms as well with the supply disruptions that everyone's experiencing across any industry. At this point in time, whether it relates to logistics or just lack of supply chain stability.
Buddy.
Actually been doing a very deep dive into looking at the relationships, we have with suppliers and to have redundancy and suppliers et cetera, and it's something that we do regularly.
But we're refocused on it as well and at this point in time, we feel very good about the alcohol and consumables the supply of consumables, obviously natural.
The Bill is very highly priced and going into the winter months I think a lot of people are expecting that natural gas might continue to rise obviously it isn't your rest of the world, but possibly in the U S as well, but that means that as Mark mentioned being 100% electric arc furnace. It's only a couple of percentages of our cost profile. So we're feeling pretty good.
Gas into 2022 at this point.
Understood. Thanks, and then on the fabrication business, you talked about the record backlog and pricing.
But curious what sort of order of magnitude youre seeing in pricing versus what you posted this quarter just given the lead times associated with that business and really just trying to get a handle on the staying.
<unk> of the earnings in that segment.
Yeah.
What are the.
Yes.
The staying power or the health of that industry is.
In my mind phenomenal.
Number one.
Southern my earlier remarks.
There certainly has been a permanent change in consumer.
Sort of mindset.
And so.
<unk>.
The online retail purchasing.
Driving a massive distribution warehouse type construction.
Computing cloud computing activity likewise.
Power and what we're seeing.
Projects in all honesty being pushed out 10 months, our backlog is even longer than 10 months.
And you might say.
People are concerned about.
Labor shortage and those sorts of things but.
In a strange way.
Helping extend this whole economic cycle.
And pushing those those projects are.
So we are very very very bullish.
In that arena for 2022, you asked the question about how much further pricing could move so I.
We're not we can't give you specifics, but its a meaningful.
<unk> increased because as they have the backlog that mark mentioned that almost a year out.
You already have that product pricing substantiate it and so that's why in my opening remarks.
People may not have picked it up but I made mention of the fact that we do expect to have increased fabrication.
It's actually in the fourth quarter.
As well as into 2022, and that's based off of the record comparison of the third quarter. So there was substantial earnings uplift that we're expecting from the steel fabrication segment.
And I would just add I think I saw one wont comment this morning, but.
Earning maybe there was a change in tone of our press release.
I would just want to emphasize that we are we're as bullish if not more bullish.
For the fourth quarter and going into next year as we ever have been.
Awesome. Thank you.
Thank you. Our next question today is coming from Carlos de Alba at Morgan Stanley. Your line is live.
Thank you very much good morning, Therese and Mark So I wonder if you could comment or elaborate a little bit more on your growth strategy and how would you.
Either rank order or prioritize potential.
Investments in additional capacity.
Above and beyond.
Thanks, Nick Florida residents.
Besides the core quarter lines that you have already announced.
Scrap.
Cost of similar size and location.
Quiet recently.
Yeah.
And then the Greenfield something that you would prioritize over more targeted acquisitions.
Or for their downstream.
Investments.
Yeah.
Well I'm, sorry cost I had we had a tough time understanding the whole question. There. So if I don't answer it.
Just come back and hit me again, but on the on the recycling side, I think you were suggesting or asking whether or not we.
A major plans in transactions or growing that business.
I'd say as we.
Again, we've said this in the past we're not interested in growing.
Another R recycling platform for the sake of just growth.
We will continue to identify a.
Regional.
Assets.
That complement.
Our steel mills.
Such as we did in.
In the southwest.
Doing pushes in those other three are.
Yards, and then also the Zimbra acquisition in Mexico.
But theres not theres not a wholesale change in our recycling strategy whatsoever.
We will continue.
Sorry go ahead.
Yes.
Okay sorry.
Bob I interrupted you Mark, yes, and what about.
Further investments after symptom and crude steel.
Capacity.
So what Carlos is asking is apt after sitting incomplete and after we have the four value add lines are processing, what greenfield might come after that.
Sorry.
Yeah.
Well I do believe.
We will continue to focus on value add opportunities downstream.
More so than processing.
The Greenfield.
Project syndrome.
A very.
The opportunity at least in.
In my eyes.
Combination of differentiating ourselves relative to product.
New supply chain solutions to our customer base.
And having a very very unique sort of geographic location to serve those customers.
We wouldnt, we wouldnt build a.
Other greenfield facility.
Unless it's it had.
Truly differentiating characteristics and it's difficult to see that.
That will avail itself in the U S. Today.
Alright, Thank you very much for that.
Okay.
Sorry cost and then the the other sort of strategic path we've continued to.
Chase.
Downstream sort of fabrication manufacturing.
We'll be looking to do that.
In the U S and in Mexico.
Perfect. Thank you very much Mark I'm convinced if I may ask you how do you see working capital in the fourth quarter and clearly prices are still very high raw materials are increasing.
Pork is Florida for the fourth quarter and for another record.
So if you start to assume.
Both of them at a higher working capital levels, but do you have a sense of the magnitude of how much cash that would consume in the last quarter of the year.
Thank you.
Youre welcome Theres, a few things happening at the same time in the fourth quarter. So.
We'll have higher average.
Selling values simply because of the carryover in the lagging contract business that we mentioned from the flat roll group.
In addition to that we will be ramping up sinton and so we'll be putting additional working capital both through steel substrate and through scrap on the ground as they begin to produce so.
I would expect to see a continued use of cash in working capital I don't expect it to be close to the same magnitude that we saw in the third quarter.
Also in the third quarter had some building at certain as well. So I would expect maybe a couple of hundred million dollars build but nothing beyond that again, it's a very difficult thing to.
Steel monitor when prices continue to rise, but I think that's probably a good estimate at this point.
Alright, Thank you very much all the best.
Thank you.
Thank you. Our next question today is coming from David Gagliano at BMO. Your line is live.
Alright, Thanks for taking my questions I, just have actually a few numbers related questions I think in the Q&A last quarter, you indicated a preliminary 2022 capex of $550 million to $600 million.
And I thought I heard you say on this call earlier that you now expect capex to be 750 million for 2022.
And I also noticed that the rolling mill.
It looks like it's been pushed out into 2023 versus what I thought was mid 2022 previously so my first questions are.
What is the driver for the higher 2022, Capex, if that's correct and B what is the driver of a portion of the rolling mill startups to mid 2023 versus <unk> 2022 previously.
Okay. So to address your last question.
First have you are speaking about the rolling mill, David are you talking about the sinton will we know.
Hi.
But effectively there was commentary back in April I think it was and then again in the last quarter that.
That just in general the foregoing those would be starting up by mid 'twenty 'twenty.
Question, perhaps I got that wrong.
Yeah.
Oh the value added line no. So the value add lines, we had hoped to be in the second half of 2022, but given the.
The engineering of the lines and just did.
Delivery the delivery of equipment at this point in time, it's pushing us back.
So we think those lines will be operational in the first half of 2023. So you are correct that is a change but that has to do with the engineering and the equipment delivery time timelines as it relates to cap.
Capital spending for 2022 Youre correct on the last quarter call you would've given something closer.
Back to $900 million range, but thats prior to us doing the deep dive that we do every fall.
Two capital projects and as you'll remember there is so much of <unk>.
All of our team members compensation, that's at risk to performance on high return investments. They always put together a wishlist a very good investment opportunities.
That's the piece that would result in higher compensation for them. If they have higher returns. So we went through that process and at this point in time that added probably about $100 million to the capital that we expect to spend next year and that would be projects that we believe will have a very good return profile to it some of them will start next.
<unk> some of them will just have the money spent and then kind of roll into 2023, but theres no. One significant project, that's adding to that most of that $700 million is actually tied to the four value added flat roll lines.
Okay. So for value as lateral lines that were pushed to 'twenty to 'twenty, three and I apologize I call them rolling off I apologize.
Next year value added flat roll by that were pushed I think to 2023, but okay, but then theres other projects in there that raised the total from 550 to 600 to 750, so $150 million to $200 million higher versus last quarter on <unk>.
Some other projects is that right that's.
Before so they're high return projects and theyre spread throughout fabrication, the steel mills, our adding some inspection lines likely down at our <unk> facility. So there's just a lot of individual projects like that David that art.
Significant individually, but as they added together is the.
Correct number.
Okay, great. Thanks, and then just one other one for me operationally shipments overall were down 5% of third quarter. Obviously production was not as great as shipments were down 5% in the third quarter on a quarter over quarter basis can you just talk about what was the main driver for the quarter over quarter decline and what's a reasonable assumption for shipment.
A higher number in terms of a quarter over quarter change in the.
Typically seasonally weak fourth quarter.
Well I don't I don't think we typically will project future shipments but.
Youre right.
Shipments in the third quarter or offer a little we built inventory.
Shipments really.
As a matter of transportation, just getting rail and trucks to move that material.
Would you expect for sure, though that to move that in the fourth quarter.
Okay. That's helpful. Thanks very much.
Thank you.
Thank you. Our next question today is coming from Curt Woodworth Credit Suisse. Your line is live.
Thanks, Good morning, Mark and Theresa.
Good morning, good morning.
You know Mark I wanted to get your thoughts on some of the different demand verticals. Obviously, we're hearing a lot of issues with.
With respect to the supply chain chip shortages in auto.
Very long lead times in appliance HVAC and.
You kind of made the point that you felt the labor shortages to some degree we're actually bullish for fabrication, just because it's kind of get long, gaining maybe the pace of which.
These projects are going to get completed so.
The market it seems like it's softened a little bit here with lead times coming in you know there could be some seasonality. So I was just wondering if you could maybe briefly walk us through.
You know what Youre seeing on your some of your key demand verticals. Thank you very much.
Kubica Sony will game.
We are bullish.
Firstly, why not virtually across all across all our.
All our sectors.
As you said and as I said, the construction that that cycle has been extended I do believe.
Incredibly healthy.
And.
The in Pompe, because those projects are just getting pushed out because of a shortage of labor and with the.
With a contract that was in the bill as I I told to across to come.
They are all experienced the same thing and they are all seeing long term strength. So that's on the on the non res construction side.
We think it's very very very strong.
And in a way.
The automotive arena.
You've seen a similar thing except it's the the chip shortage that is slowing things down and will in my humble opinion extend that that cycle dramatically.
Covid itself.
Itself cost us about $4 5 million units.
And that has to get caught up the the pent up demand out there if you listen to the deal is absolutely phenomenal.
I was just talking to one day last week. He typically would have 1600 vehicles in inventory right now.
And you can only manage to get 100.
And that that experience is being shared with other dealers across the country.
And the the the desire the pent up demand is absolutely there and so that will maintain strength in the automotive arena and in my humble opinion when the.
The chip shortage relieves itself are.
Or are they going to do is just ramp up and maximize the output for.
For the next couple of years, because there's that much demand out there in my mind.
And then across other areas residential was strong HVAC appliance.
Okay.
Strong.
We're seeing a little strength little more strength in the energy sector.
More downhole kind of with the drilling rig.
As opposed to distribution pipe, that's still soft and it will be soft.
Another year of probably.
Is yellow goods has been pretty strong and just engineering bar and in general the customer base is expanding a 20% increase a.
Year over year, so it tends to.
Give us.
Some positive support too.
So just generally.
A very very very strong.
Demand scenario.
And then a quick follow up.
With respect to the buyback.
Look the free cash flow profile and the balance sheet, I mean, yet very significant capability too.
Continue to buyback stock here in your stock.
At least on my numbers.
Strong at the cheapest level I think it's ever traded.
So just curious to kind of get your thoughts on maybe how you see the buyback going forward will be opportunistic or more steady.
And I'll leave it there thanks.
Great question, Yes, we're we feel very good about the capital.
Trading and the foundation now the teams have been able to put into place.
You've seen us be we think very active in the buyback with the buyback program in the second quarter with very similar activity in the third quarter I think one should expect to see us continue to have a very steady pace unless we were to come up until.
The timeframe, where we believed that there might be a better use for those funds through strategic growth.
Either organic or inorganic opportunities. So at this point in time.
We believe we will be very active in the buyback program.
Okay. Thank you and congrats on all the success.
Thank.
Thanks.
Thank you. Our next question today is coming from Andrea spoken wiser at UBS. Your line is live.
Thank you very much just a quick follow up on the auto demand. So youre ultra volumes of ultra steel volumes are pretty solid obviously.
Chip shortages is weighing on production.
There's been some talk about the Eas in the U S. Capturing market share from integrated is that is that partly what's happening here are you seeing yourself, capturing ultra steal market share from the integrators.
At this point in time.
Well we've.
The last couple of years has steadily grown market share, particularly particularly out of our Columbus facility.
Butler has always been around <unk>.
28%, 30% automotive.
Columbus, when we purchased it.
2015 had just.
The incremental amount that's grown to probably.
Hello trees of 400, 300, 400000 tonnes a day.
And.
I think we've got some unique products that bring value to the automotive supply chain.
But probably as importantly today.
Is the the sustainability story.
Particularly with the European auto maintenance without a whole lot of traction with BMW with VW with Mercedes and in particular.
And they they view our sustainability model on all carbon footprint as being among the best in the world.
And so that is a sort of.
Considerable business.
And we're also benefiting and honestly from the U S MCA.
Uh huh.
That increase in domestic content from 50% to 70%.
Necessitated those European.
Franchise to source.
Internal to the U S.
And that's driven a lot of our success success as well.
Okay, that's very clear and then maybe as a follow up I mean, obviously, there's some in the ultra contract negotiations going on I'm not going to ask about pricing, but just in terms.
Timing.
What extent are you involved in all of this and when do you usually see these things wrapping up.
I didn't hear.
Sure.
Yeah.
Yeah.
Thank you.
You know typically or historically automotive was a the per view or the bastion of the integrated mills, because they necessitate or mandated.
Sort of an annual fixed price.
Contract scenario.
And with the the variability.
And those aren't markets or the volatility in scrap markets suddenly the electric arc furnace producer.
Couldn't stand.
But given the volatility in 2015, and 2016 and pricing the automotive folks saw that they left a lot of money on the table and.
So they they hedged between integrated and an electric arc furnace, our supply chain today.
The.
The the propensity of the automotive contract negotiations.
In the fall with the integrated producers not necessary that the electric arc furnace producers.
That's very clear. Thank you Mark I appreciate you taking my questions.
Youre welcome.
Thank you.
Our next question today is coming from Tristan Gresser at Exane BNP Paribas. Your line is live.
Yes, hi, Thank you for taking my.
And maybe following up on the previous one.
Youll see it near term targets you catch your emissions.
Carbon emission and some peers in Europe have tied their decarbonization savings to.
To create new commercial offering of low carbon steel products.
That sale.
My question with good demand from companies and keep looking at to cut their scope three emissions.
Is that also something you would consider.
And do you see a similar market emerging for low carbon steel products in the U S.
Okay.
Well you have seen just recently.
Premium folks are pursuing that that direction are I would say for STI to date.
We've been the beneficiary of the gain capturing greater market share.
And haven't necessarily.
<unk> leveraged that to higher pricing as of this moment in time.
I would.
Uh huh.
So with the overtime.
You could see a differentiation there.
Alright.
That's helpful and maybe just one question on market conditions.
Pricing is the outlook you have imports surging in U S inventory.
My building I know of course, this new capacity is going to ramp up the.
The forward curve.
<unk> is around one.
1300 bought by March next year.
I think in previous school you you were a bit more probably bullish on the near term has anything changed your.
Entries into supply and demand.
Dynamics at the moment that could warrant this drop in steel prices.
Well, there's absolutely no doubt.
Demand is there.
I wouldn't necessarily.
I characterize the imports.
The surging unnecessarily.
Suddenly gobaloon prepay.
Prepaying Gobaloon is very very strong I'll give you that.
But you know.
They are.
We saw some office from Vietnam for our April may delivery.
So the way way way out.
At around $500.
So I would imagine.
Pricing will turnover.
Uh huh.
To some degree or I use the word erode.
But it is not is not going to be a.
They are massive reduction.
The the market cynics out there.
Suggesting that you know average pricing for the year was 740 bucks a ton or some of them if they do.
I, just can't see that happening with the demand picture the way it is today.
Alright, Thanks, a lot.
Yeah.
Thank you.
Our next question today is coming from Timna Tanners at Wolfe Research Your line is live.
You have a good day, everyone hope you're well.
Just wanted to follow up on new process I'll just ask one question.
Two parts, if I could new processes are big and I guess, it's a bit of a deviation. It's acquiring one of your customers or at least partly and I know in the past there's been some trepidation over that partly because you kind of compete with your other customers. So I just wanted your thoughts on that and on the one hand, if you're concerned about the message.
With other customers and second I wanted to ask if this is a new opportunity for John M is to continue to move downstream into kind of more of the processing going forward with further capital.
Allocation in that regard thanks.
Yeah.
Right.
I'd wanted to emphasize that.
It sounds I wouldnt necessarily.
We look at the acquisition as a change in strategy for US, we certainly don't want to get into service on a business per se.
We would be probably lousy.
And the service center business to be honest.
The as I said earlier.
The two principle objectives.
Objectives, one new process grew.
Grew too.
A very large customer and the value add pre paint sort of supply chain.
And just wanted to secure that supply chain all that outlet to Oems.
Oems.
Wait until.
The future.
And then secondly, we were looking for a sort of a platform of growth for manufacturing.
Downstream manufacturing.
And that.
The lines, new process aligns well with our strategy, particularly in Mexico.
Okay, great. Thank you.
Thank you. Our next question today is coming from Andrew Ketchup at Barclays. Your line is live.
Hey, good morning, just one to put a finer point on the capital allocation priorities here, but.
Theresa you have gradually been refinancing the old bonds and <unk>.
One left that's callable here in the fourth quarter should we expect that refinancing trend to continue or I guess, considering the outlook for cash flow is there any consideration to possibly just paying that down to get yourself to an even stronger.
<unk> balance sheet position.
Yeah.
So it's a great question you're right.
It's a 400 million tranche on it has I think a 5% rate attached to it on the investment grade market has been very.
Supportive of Geodynamics, and and we're very excited to be in that market.
So we are very comfortable I guess, the first point with the debt structure that we have a we really manage to a through cycle basis at a leverage of two times or less so obviously, we're much less than that today, but.
But we're managing to through cycle. So I can't give you specifics because I I would get.
Well, if I did but there is an opportunity to either repay or refinance and we'll meet we'll be making that decision here in the near term.
Got it thanks a lot.
Okay.
Thank you this.
This concludes our question and answer session.
I'd like to turn the call back over to Mr. Millett for any closing remarks.
Well, thank you Kate.
Just would like.
I'd like to emphasize to everyone on the call.
Our customers are service providers.
And particularly our team.
Thank you for your support it was announced.
The trouble is phenomenal quarter, we're going to see another one in the fourth quarter.
And it's the only driven by by again, each and every one of US supporting all companies steel dynamics.
We will endeavor to continue our growth trajectory.
Going forward and creating even greater shareholder.
Absolute value and well so thank you and everyone be safe.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.