Q1 2022 Steel Dynamics Inc Earnings Call
Statements involve risks and uncertainties related to our steel metals recycling and fabrication businesses as well as to general business and economic conditions. Examples of these are described in the related press release as well 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 SEC Dot Gov.
And if applicable in any later SEC Form 10-Q .
You'll also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel dynamics reports record first quarter of 2022 results and now I'm pleased to turn the call over to Mark.
Thank you David.
Our first quarter earnings call and as always we appreciate and value your time with us This morning.
Record results are no import of our teams did not remain safe.
Before beginning this morning, I want to pause for a moment to acknowledge the recent workplace fatality that occurred at our Heartland flat roll Division.
We are deeply saddened.
Our thoughts and prayers were signed with his family and friends.
The reason I always begin on calls with the topic of safety.
Because it can never be overemphasized.
Safety is our number one value and first priority.
Nothing is more important.
Sustaining a safe environment for our employees.
We must all be continuously aware of our surroundings and our team members.
Must actively think about safety at all times, keeping that top of mind in active conversation.
Simply safety comes before everything.
With this backdrop, it's difficult to celebrate and otherwise with normal performance.
So we're here this morning to share what the team accomplished in the first quarter.
Congratulate them.
The revenue performance. This quarter was another extraordinary achievement driven by the commitment innovation and passion of our people.
Executing on our long term strategies diversified value adding growth.
Thank the whole team the entire team for your dedication to excellence in every pursuit.
We are committed to operating our business in an environmentally responsible manner and have been since our founding.
We've always been and continues to be a leader in production of sustainable low carbon emission steel products.
We encourage the use of new technologies and processes to reduce our impact on the environment.
Including our strategic focus on carbon emissions mitigation with a goal for our steel mills to be carbon neutral by 2015.
Our sustainability strategy is an ongoing journey, we are starting from a leadership position within the industry and plan to stay there by doing even more.
But before I continue with more market commentary treatable.
Teresa will share insights into our performance.
Thank you, Mike and good morning, everyone.
It's exciting to continue into all of the new milestones and continually reach throughout the company our personal thanks to our teams and congratulation.
Performance resulted in another record quarter for steel dynamics.
Net income of $1 $1 billion or $5 71 per diluted share for the first quarter of 2022.
In the quarter, we incurred costs of $84 million or 31 cents per diluted share for the continued commissioning and startup of our state in Texas.
Got.
Excluding these costs first quarter 2000, <unk> adjusted net income was $1 2 billion or $6 <unk> target related share.
First quarter 2020 to record revenues of $5 $6 billion and record operating income of $1 5 billion were both 5% higher than sequential fourth quarter results driven by higher realized selling values in our steel fabrication business and continued strong performance in our steel and metals recycling operations.
We also achieved record quarterly cash flow from operations of $819 billion and adjusted EBITDA of $1 $6 billion I truly exceptional performance.
We see positive industry fundamentals for at least the remainder of 2022 and believe our second quarter 2020 results can achieve yet another new record performance.
Our steel operations generated very strong operating income of $1 $2 billion in the first quarter achieving record shipments of $2 9 million tonnes of which <unk> contributed 50000 times.
Earnings from our steel operations was 15% lower than sequential record fourth quarter results related to metal spread compression and our flat rolled steel operations as realized pricing declined more than raw material costs. In contrast, our long product steel operations experienced metal spread expansion based on rising product price.
Mrs.
Despite hitting record volumes, we still have additional steel shipping capacity much of which is within the long products steel group.
Clinton is fully operational it will contribute an additional 750000 tons per quarter of availability.
Operating income from our metals recycling operations for the first quarter were strong at $48 million based on improved metal margins as both average ferrous and nonferrous pricing improved in the quarter.
The team continues to effectively lever the strength of our circular manufacturing operating model benefiting both our steel and metals recycling operations by providing higher quality scrap, which improves efficiency and by reducing companywide raw material working capital requirements.
Mark will expand on the meaningful benefit of our steel and metals recycling teams working together to reduce our cost of raw materials as well.
A huge congratulations to our steel fabrication team they almost doubled their previous record results achieving a new record high quarterly operating income of $467 million.
Glimpsing the entire full year of 2021 results by almost 30% in just one quarter.
These earnings were driven by record pricing supported by near record shipments of 210000 tons.
Steel joist and deck order activity remains incredibly strong our steel fabrication business continues to operate with a record backlog considering both forward product pricing and volumes, which currently extends through the first quarter of 2023.
Based on this strength, we expect steel fabrication earnings to continue to increase even further as the year progresses.
Our cash generation continues to be consistently strong based on our differentiated circular business model at the end of March we had liquidity of $2 4 billion comprised.
Comprised of cash of $1 $2 billion, and our fully undrawn unsecured revolver.
During the first quarter of 2022, we generated record cash flow from operations of $819 million working capital grew $757 million due to higher customer account values stemming from higher prices and volume coupled with the payment of our 2021 company wide profit sharing.
<unk> a $360 million.
We also funded $159 million in organic capital investments.
Full year 2022 capital investments will approximate $750 million than adult majority of which relate to our four new flat roll value added coating lines to be located in Sydney and Heartland.
We also finalized the purchase of 45% of the equity interest in new process deal on February one.
We increased our first quarter cash dividend by 31% to 34 cents per common share based on the additional ongoing through cycle free cash flow expected from our new Sinton steel mill.
We repurchased 390.
Excuse me, we repurchased $389 million of our common stock in the first quarter, representing 3% of our outstanding shares as.
As we exhausted our previous program, we also announced the board's approval on an additional $1 billion to $5 billion share repurchase authorization further demonstrating our confidence and steel dynamics future cash flow generation.
2017, we've increased our cash dividend per share by 143% and we've repurchased $2 $7 billion of our common stock representing 27% of our outstanding shares.
Our capital allocation strategy prioritizing strategic growth with shareholder distributions comprised of a base positive dividend profile that is complemented with a variable share repurchase program also dedicated to preserving our investment grade credit designation.
We're squarely positioned for the continuation of sustainable optimized long term value creation sustainability as a part of that long term value creation strategy and we're dedicated to our people our communities and our environment, we're committed to operating our business with the highest integrity.
So as they're committing to this path in 2021, we announced greenhouse gas reduction and renewable energy goals, including the goal for our steel mills to be carbon neutral by 2050 to increase transparency and accountability, we have all sorts of interim milestones for 2025 and 2030.
We had allowed the steel industry with our exclusive use of electric arc furnace steelmaking technology, our circular manufacturing model and our innovative solutions.
We plan to sustain our leadership position by executing our carbon reduction goals through among other avenues investing and emission reduction projects, increasing the use of renewable energy and developing and supporting new innovative technology. As an example, we're incredibly excited to recently invest $25 million in the equity of alien.
Aam's, a producer of renewable bio carbon products that replace fossil fuels and reduce emissions and large global industries, including the electric arc furnace steel industry.
We have an actionable path towards carbon neutrality that is more manageable and really we believe considerably less expensive than most of our peers, our sustainability and carbon reduction strategy is an ongoing journey and we are moving toward the intention to make a positive difference we plan to continue to address these matters into play a leader.
Ship role moving forward.
For those of you that like to track our detailed flat rolled shipments for the quarter.
Hot rolled and pickled and oiled shipments were 736000 tons.
Cold rolled shipments were 162000 tons and coated shipments were $1 million and 65000 tons.
Yeah.
Thank you Theresa.
Our steel fabrication operations executed another exceptional quarter.
The earnings power of this platform and this environment still has not been completely displayed as customer demand and pricing continue to be strong.
While steel joist and deck order backlogs remain at record volume and forward pricing levels.
Spending well into the first quarter 'twenty three.
The nonresidential construction market remains solid.
Hearing the trend we've seen over the last year, especially in areas that support online retail specifically represented by construction the distribution warehouse facilities, along with data centers schools and health care.
Our steel fabrication operations provide a significant natural hedge to our steel production operations and a stable or moderating steel price environment.
They also support our steel mills during periods of weaker steel demand is already internal customer what we call pull through volume increasing the through cycle utilization of our steel mills.
The steel fabrication facilities located throughout the U S and in Mexico, providing us with an advantage broad based customer centric supply chain.
As I'm moving to metals recycling.
A moment to thank Russ room.
Given his impending retirement.
Her time in July .
A truly significant contributions he has made to to that platform over his 10 years 11 years tenure.
Help transform that business today, we're operating at the same volumes.
<unk> hundred.
Let's see.
So the consolidation and rationalization has been excellent and I got massive face and Miguel Alvarez.
As leading that platform is a great place that is going to continue that trumps transformation and do great things with our business. So Russ my sincere thanks to Mike.
But those recycling operations also performed well in the quarter with steady operating income of $48 million as.
As one of the largest ferrous and nonferrous metal recyclers in North America with operations throughout the U S and Mexico, we have a competitive advantage in providing the highest quality cost effective scrap steel.
Steel mills, and so all of the customers.
In today's environment.
Vantage is having on our metals recycling platform is even greater.
During the last 18 months a recycling of steel teams have worked closely and developing a higher quality shredded scrap that can be used in place of prime scrap.
The combined efforts resulted in our Butler flat roll steel divisions, reducing its need for prime scrap from 65% of its mix to only 40%.
While achieving the same steel qualities.
We are currently rolling this out to our Columbus and central steel divisions.
For a lower cost readily available low residual scrap supply.
Additionally, given the historically high spread between prime and obsolete grades there's around 70 $170 a tonnes a day.
Juice prime scrap requirement as it provided a significant cost savings.
Teams are also working together as global pig iron and supply chains have been disrupted with the advent of the invasion of Ukraine.
Our flat rolled steel operations and reduce the amount of pig iron usage, while maintaining the highest level of steel quality through changes in our operating practices and the health of our metals recycling team and sourcing alternatives inputs.
We have sufficient resources for our steel production to continue operating uninterrupted.
Additionally, a particular note.
Butler flat roll Division has the advantage of volume dynamics and onsite liquid pig iron production facility that supplies almost all the buttons and requirements.
Roger liquid pig iron into the electric arc furnace also significantly increases productivity and reduces melting costs.
We developed the technology years ago, and it's the only existing facility of its kind today.
We are currently in the process of pursuing opportunities to become even more appealing and self sufficient for the future.
You'll see them had an outstanding quarter as well achieving record shipments and operating income of $1 2 billion.
During the quarter the domestic steel industry operated production utilization rate of 80%.
Our steel mills operated at a rate of 93%.
We consistently operate at a higher utilization due to our value added product diversification well.
Differentiated customer supply chain solutions, and the support of our internal manufacturing businesses.
Our core pricing moderated during the early part of the first quarter.
Prices have recently firmed with extending order lead times across the product set.
Especially in coated products.
Continued strong demand, we believe steel prices will remain strong based on higher raw material input costs globally flat roll steel supplier disruptions related to the Ukraine, Russia conflict and lower steel imports.
Throughout our company history, we are intentionally grown our value added steel product portfolio and created valuable customer supply chain solutions to mitigate the impact of price volatility.
Today at least 70% of our steel sales are considered value added.
This differentiated business model will continue to provide best in class financial metrics and through cycle cash generation.
Looking forward, we remain optimistic.
The automotive sector steel consumption is expected to grow with production through 2020 for returning to over 17 million units supported by an extreme lack of automotive dealer inventory and strong pent up demand.
The nonresidential construction sector is strong as evidenced by the strength of our customer backlogs within our long product steel group.
Our structural rail and Roanoke bar divisions, both achieved record quarterly earnings in our engineered bar products Division is operating at historically strong volumes.
And Additionally, as we discussed steel fabrication operations are operating I'd never seen before levels.
Residential construction is also good resulting in high demand for each of EAC appliance and other related products.
Strong energy prices continue to push up the rig count and we are seeing solid demand for energy products.
In aggregate still order backlogs and order input strength.
With broad optimistic customer commentary and general market momentum drivers to conclude the steel market dynamics will remain strong throughout 2022.
The allowance as a dynamic growth company, increasing through cycle earnings and cash flow to support continuous long term value creation.
Our most recent significant investment represented by new state of the art Electric arc furnace front, we're still mill located in Sinton, Texas.
This differentiated strategic investments facilitate significant through cycle operational and financial growth.
<unk> customers vendors and shareholders.
This electric arc furnace steel mill represents next generation lower carbon emitting steel production capabilities, providing differentiated products and supply chain solutions.
3 million tonnes steady out facility is designed to add product capabilities beyond that of any 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 a more diverse value added steel product portfolio and benefits our customers with an even broader climate country's supply option.
This is a strategic location centralized in the underserved still consume a region that represents over 27 million tons of relevant flat rolled steel consumption in the U S and Mexico.
We also shorter delivery lead times, providing a superior customer supply chain solution for the region.
We will also effectively compete with steel imports, arriving in Houston and the West Coast.
We have seven customers locating on our site.
Presenting up to $1 8 million tons of annual flat rolled steel processing and consumption capability.
Or are already operating.
And the other two have broken ground.
For the three and the broken ground nicely.
This represents a unique closed loop process as we provide them onsite steel and cement simultaneously reclaim the scrap to be rerouted into new steel products.
We have an advantaged raw material procurement strategy for sinton.
Our acquisition of the Mexican metals recycling company in 2020 provides a critical source of prime scrap supply.
These operations are strategically located near high volume industrial scrap sources throughout central and Northern Mexico.
Definitely provides a differentiated product offering.
Unique regional supply chain solution with significant geographic freight and lead time advantage and offers a lower carbon alternatives to imports in our region in need of options.
We currently expect 2022 shipments from symptoms to be over one 5 million tonnes, achieving utilization of approximately 80% by the end of the third quarter and over 90% before year end.
In addition, our previously announced additional four value added flat roll coating lines are still on schedule to begin operating mid 'twenty three.
In support of our sins of steel mill, and our Heartland flat roll operations.
The four lines are comprised of two new paint lines into new galvanizing lines with gobelin coating capability.
Our unique value added coating supply chain strategy has resulted in our existing lines consistently running at or near full capacity.
Existing customers are anxiously awaiting the volume from these new loans.
We're the largest domestic nonautomotive coda of flat steels with an annual coating capacity of over 6 million tons and these four lines will increase that capacity by an additional $1 1 million tonnes.
Closing a sustainable symbiotic operating platforms.
Customer centric supply solutions demonstrate our financial and operating stability.
Differentiating for any competition.
We are not the same company, but we were nearly five years ago, we're not just a steel company.
Our average annual free cash flow has more than doubled and is still growing.
The consistency and the industrial strength of our earnings is clear and we are investing through transformational growth.
Our people and their experience the spirit of excellence provides the foundation for the success.
And I think Egypt. Thank you each and every one of your.
Passion and dedication.
And remind you that safety is always our most critical priority.
So everyone. Thank you for joining us today, and we will open the lineup for questions.
Thank you if you would like to ask a question. Please say don't by pressing the star key followed by the digit one on your telephone keypad.
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Also we ask that you. Please limit yourselves to one question to facilitate time for everyone. Any additional questions can be addressed upon re entering the queue.
Please hold a moment, while we poll for questions.
Your first question for today is coming from Emily Chang with Goldman Sachs. Emily Your line is live.
Good morning, Mark and Theresa. Thanks for taking my question today. My first question is just around your raw material update there.
Kind of what the raw material mix as what was previously before the shift to using more obsolete versus prime scrap.
The amount of IDI that your liquid pig iron that youre, using and perhaps how we should see that changing over time.
Well Ivy is consistently running at about a 260000 ton right.
As we speak.
It's been very very consistent for many years now and after the.
Original pioneering efforts or challenges that we have many many years ago is an absolutely solid solid solid technology for us and again as I mentioned.
All big on the needs of others.
From that facility.
And only one way to look at it from this shift that mark talked about from going to from prime scrap to an upgraded type of obsolete scrap.
Trying to 65% to 40%. So is that we're able to be accomplished with Columbus and Butler. If you just make high level assumptions that generally we reduced approximately 20% of pig iron.
And then the rest would be more geared toward that prime scrap.
From a volume perspective, it could be as much as a million and a half to 2 million tons shifting from prime scrap to a higher grade. So if you apply any spread to that today I think mark mentioned, it's like around $170 per ton, which is higher than normal even if it's $100 $150 per ton that could be a significant.
Ange once.
If all three mills are fully operational.
Great. Thanks, I'll jump back in the queue.
Your next question for today is coming from Michael Glick with Jpmorgan, Michael Your line is live.
Yeah, just just on the cost side beyond scrap how should we think about energy costs more broadly just given some of the recent moves we've seen in <unk>.
Several of the regional power hubs in natural gas prices as well.
But just as a reminder, from a natural gas perspective for electric arc furnaces are joining us specifically.
Is it a huge part of the cost structure. It ends up being somewhere around two or 3% of the cost of manufacturing of steel products, but obviously it is impactful.
We're likely to see increasing prices across the sector from a natural gas perspective, but nothing that we believe is necessarily a significantly impactful.
And from a power perspective across the spectrum of their operating all different grades and so it's very different in some areas or in the open market and others, we actually have contracts in place. So there should be some escalating prices, but nothing that we think will be material at this point.
And I think if.
If you look at it from a global.
Our global perspective, obviously energy prices in other parts of the world have appreciated the follow up.
Greater than a third in the U S along with the other commodity pricing.
Issues and so the actual global cost curve.
His wisdom and should support support pricing further.
Obviously, given our low cost.
Physician advantages sealant Alex.
Got it great.
Your next question for today is coming from David Gagliano with BMO capital markets. David Your line is live.
Hi, Thanks for taking my question I, just wanted to ask a little more about that.
The fabrication business.
Unbelievable how much this has exploded higher.
Over the last year I know, it's directionally, not new but again another doubling in basically the profit contribution this quarter.
Which is fabulous, but it's there's a lot of moving parts embedded in that business.
And in mind, you the visibility towards longer term is still fairly low.
I'm just trying to see if you could give us a little more information on that segment.
Can you talk more about how this business is priced are there cost pass throughs are there lags between those pass throughs and contract prices I know theres a lot of different pieces within that business, but if theres any more visibility I really appreciate it.
If it's really just to summarize if you could just give us what you think your view is on that on a normalized go forward EBITDA contribution basis from this business beyond the first quarter of 2023.
Several points.
Somewhat collected maybe but firstly demand as is at historic highs.
If you follow the Joist Institute.
<unk>.
It's at peak levels for sure.
And it is driven.
Largely by the change in retail going online retail distribution has us along with the data centers.
So that arena is truly pushing massive demand.
Secondly, I think it needs to be recognized that the industry since prior peaks.
Has changed dramatically.
It's a rationalized consolidated industry today.
And our lives.
It's just the.
Changed dynamic allows us to highlight I think creative pricing strength.
And as a realized <unk> today.
The value of the product is a lot higher than people.
I would suggest in past history.
That product is going to sell at higher levels going forward no matter no matter, where we are in the cycle.
Good morning Ann.
Good morning, David just a couple of other points to add to what works with guidance. So if you are looking at a backlog for the fabrication business versus a scale business. It's very different so once a project enters our backlog in our fabrication business. The entire project has been highly engineered and it's part of a bigger.
Construction project overall, and if you look at this deal costs that are involved in these large projects that we're participating in is really not a large percentage of the tie in of the entire project. So.
They are the customer base, if you will.
It is not as sensitive to scale pricing as one would think and then I think you saw that in the first quarter, where even though flat rolled steel prices had a couple of months of weakening and.
It didn't change at all what we're putting in the order backlog and our fabrication business and so that's one thing. The second thing is because our backlog is out much longer than it typically is with typically with your backlog and maybe four to six months now it's out and that would be a very good backlog and you know we're out into well into 2023.
We changed some of the contract terms as well to try to ensure there's more security and what I would say is more visibility and certainty around the backlog.
So we believe that we have a great deal of visibility, we know where we're pricing today and Mark mentioned in his notes that that forward pricing is higher.
And what we didn't realize at this point in time and that's why I had the confidence in my notes that say that we expect earnings from the fabrication business to continue to increase throughout 2022.
And so im not sure. There is no specific you asked about pastures of course, Brazil specific surcharges et cetera, like you might see in some of these steel businesses in fabrication.
But all of that once it hits the backlog has already guaranteed from a price perspective, so I'll just pause on that and see if Marc and I have addressed your question.
Yes.
Very helpful. Thank you. This just again I'm trying to gauge what the comfort level is around a normalized.
The EBITDA contribution out 20 X.
What it was historic average for <unk>.
Well over five years in that 'twenty X increase happened.
And four quarters, so I'm just trying to figure out as we go out beyond 2020.
<unk> and <unk> 23.
Some of this is structural and some of it not I'm trying to figure out what what do you think a normal sort of contribution should be for a business thats relatively low visibility.
From my perspective.
So David I would tell you that and I can't answer you specifically at this point, but what I would tell you is that it's certainly not like the last five years, where amicus might play into some structural changes.
Within the industry itself from consolidation and other <unk>.
Avenues as well as in the construction market in itself and what it's doing so there has been some structural change, which I think will makes that normalized earnings moving forward are higher than we've seen historically as well as what we've done internally the fabrication team and he's really done an incredible job and I know that you've been to some of our operations.
And we're looking to further automate and do some really exciting things in the future as well.
But it's also not like we're experiencing today from a normalized level. There are some specific things that happened with the extended steel prices with a very strong construction market. We think that market will continue and it is specific to large concentration in warehouses at this point.
But we will do our best in the future to try to give you a little better idea of what normalized might look like.
Okay. That's helpful. Thank you.
Your next question for today is coming from Seth Rosenfeld with BNP Seth Your line is live.
Good afternoon, Thanks for taking my questions today.
Two follow ups, please with regards to the raw materials strategy first.
Thanks for the color on your efforts to cut your reliance on prime scrap and pig iron.
Can you just talk a bit more about those markets and the outlook into spring <unk>.
Squeeze in March are you not seeing any signs of some softening of those markets as availability improves.
And a follow up. Please you commented quickly in your prepared remarks with regards to interest become more self sufficient for pig iron what might that include I'm, just going to be organic or inorganic in nature.
I'll start there please.
Firstly on the on the.
The pig iron opportunities.
So not too.
Onto that just suffice it to say that we have plans.
Relative to and I apologize I didn't necessarily.
The first question yes.
The questions and good morning relates to pricing around raw materials, and what we're seeing kind of in the near term and longer term for scrap and maybe for pig iron Okay.
Obviously the.
On the national Human tragedy.
And UK Ukraine.
Ukraine, sorry is.
To be at the forefront of everyones mind.
The.
The consequences of that on our industry.
Asleep.
Massive.
Okay.
On commodities in general all commodities.
If you look at the pig iron.
I believe the typical global trade is around about 12 million tons merchant training.
Roughly seven maybe 8 million tonnes of them were originating from Russia and Ukrainian Mills.
Theres been a big chunk of availability of local supply taken out.
The.
I cant speak really for.
Other minerals.
I think they followed suit.
We scrambled we've as an industry.
Cover all needs.
For the rest of the year into 2023.
From other sources, we were very successful in procuring material from.
From Brazil and from India.
In particular.
And at the same time changing sort of operation operations in our process.
The lower B.
The need or the requirements of that.
So typically where our mill is around about 22% big on input.
In our mills today are running around about 14%.
So in combination.
<unk> got us into 2023 from a an uninterrupted.
Opted the supply.
Consequence of all of that though.
Asleep pushed pig iron pricing up.
Peaked at around about EUR $100 a ton.
And that drew.
Particularly prime scrap up with it.
Scrap today.
Some 75 ish.
Yes.
Hey, Guy and there is a turnover.
Turned over transactions are in the kind of the very low 900 range today.
And we foresee that pressuring scrap pricing for Darren.
At least sideways, but more likely pressure on it going forward into the into the summer.
On the flip side on the obsolete side when you have pricing at these levels.
And as Theresa suggested.
Theres a record spread between obsolete shredded grades to prime a variety of about $170 a ton historically that was only about $40 a tonne.
But at these trading levels.
Everyone is well.
The pickup trucks pick them up.
It would cause a node refrigerators and so the the obsolete stream.
His considerable today.
Flow is very very very high.
And we feel that is going to pressure scrap pricing over the next few months as well.
Great. Thank you if I can just one follow up please within your recycling.
Recycling doesn't notice of a ferrous shipments were down year over year quite considerably keep touch on whats driving that decrease and how you would expect that to transpire into Q2.
So from affairs perspective, the shipments were down in the first quarter.
It wasn't structural per se.
Had to do with where raw material inventories were at the end of the year heading into the first quarter and there were some no outages during the first quarter as well.
Heading forward Edwin.
Traditionally youre going to see seasonality kick in and based on where we see steel demand and how that translates then into raw material demand as well, we would expect to see increasing volumes.
Second and third quarter from ALS recycling.
Great. Thank you very much.
Your next question is coming from Timna Tanners with Wolfe Research Timna. Your line is live.
Hey, good morning, guys.
Good morning, good morning.
So first off wanted to just get a little bit more color on the new guidance for.
Starting up.
I think now $1 5 million and it was previously 2 million is it possible. There's just you know further delays can you give us a little more color on that and you know what.
What's happened there.
Sure absolutely and I would say just emphasize the progress at Simpson is remarkable.
The the reduced volume and I think we gave that.
At.
In our January I'm trying to recall it was still a little higher than that.
Before the start of the hot side of the cost of them.
The cash that was delayed.
Just.
The startup itself.
But since then the.
The mill is running extremely well.
As we commission.
All of the different sort of bells, and whistles and commission.
Capabilities.
So we've already been I had two.
$84 six inch.
Coil and we've already been dying to own 60 on high strength low alloy grades.
And the Heartland itself.
As it was.
Describe for me. This morning is from our customers is beautiful.
So I think it's going well to be honest.
And confident that we.
We will exceed that $1 5 million tonnes at all just being conservative.
Perhaps for trucking.
I would say that we just had our national sales.
Flat rolled sales meeting at Simpson for the last two weeks.
Today's sorry.
And the the China. There is the customer interest is absolutely off the charts.
As I said, it's such a under underserved marketplace today.
And the product differentiation of that that facility is going to be insane.
And the fact that we have those seven facilities for which are already operating will be.
Massive sort of pull through.
Volume for that facility.
So we couldnt be.
We couldnt be.
Happier.
Yes.
So 90% of the IPO.
Last December .
But.
The good side and the.
I can't remember, which one of you suggested.
A slow ramp.
All that bad.
The supply demand dynamic right now anyway.
And if you consider.
Our ramp up is going to be solid through the rest of this year and we went through 2024.
Five operation just this Monday.
We would just commissioning sort of 12 hours a day.
On base.
The gallon steel obviously is.
<unk>.
Ramping up there and others not so.
Net net it's a.
It's a good thing.
Okay.
So David and I decided where we're going to start a fab shop I'm I'm I'm joking, obviously, but we would I did want to ask you how hard it would be to.
See any competitors there in that space right given that prices are now higher than $4000, a ton and historically I calculated 13, 50, I mean, even with the higher cost or is there a pretty nice margins. I know you said, it's consolidated but how hard would it be to see a new entry entrant, there and how long how much of that could be a risk. Thanks again.
But the the.
The cost of entry from an asset perspective is not massive.
As we've seen.
We described in our last call.
Uh huh.
We substantially increased productivity and volume capability from from our facilities.
With almost almost no cap.
Capital expense because simply it's.
It's people online is more than the actual capital assets.
The reengineering of that product is intense.
To engineer.
Cost effectively.
It's.
Yes.
Prior to your kind of.
Intellectual.
Hello.
Evolution of many many many many years.
For someone who jumped in fresh.
Nothing is impossible.
Absolutely no way they could emulate.
Productivity and our efficiency.
And they wouldn't be able to penetrate in my mind the marketplace.
Just to add to what Mark scene. If you think about it you have to have the architecture and the firms that customers are willing to design and to some extent for your products et cetera. So it's not something that someone can just get involved and have all the constituents.
Right off the bat right Mark today, Tyler well.
Understood, Thanks, guys and I'll take that one.
Last thing I'll add.
So as to create that.
The cultural.
The culture for those facilities is absolutely phenomenal team does an incredible incredibly well.
The visit of Joyce plant.
It's almost a choreography of action and activity and it's very very difficult to replicate.
Thanks Ian.
Your next question is coming from Carlos de Alba with Morgan Stanley Carlos Your line is live.
Yes, Hello, everyone. Good morning.
Just a couple of questions the first one.
Are there.
Could you talk about any potential.
Additional cost in this enhances shredded scrap.
But you are creating.
Charging your meals with.
Maybe I'll go down the spread which obviously is the big incentive for you to move down to the strategy.
Are there any any costs that you incurred that maybe we should take into consideration just besides the spread and the cost of scrap.
And then my second question.
If I can add is could you remind us or provide us an updated capex.
Capex guidance for this year.
Particular areas is there any changes on the Capex for <unk> syndrome given.
This lower ramp up and the delay on the <unk>.
Well I'll take the scrap one and essentially call outs I would say somewhere around 10 Bucks a ton.
Alright. Thanks.
Thanks, Brian .
And how.
Good morning.
I think that was a very short response.
From the perspective of guidance for Capex for this year and we're still expecting around $750 million. In your question was specific to us thinking and specific to certain we don't expect anything of significance for additional capex related to the delays there was additional expense, which he saw closer.
The first quarter already due to the delay in just manpower and maintenance and things associated with that delay, but not from a capital perspective, there for certain words, though at that $2 billion, Mark which honestly is incredible given what the teams have gone through for them to be able to maintain their budget, while being able to make.
Through Covid and whatnot and everything else so.
We're not expecting anything for the rest of the year. In addition from a certain perspective for our capital.
Alright, thank you.
Thank you.
Your next question is coming from Curt Woodworth with Credit Suisse. Kirk Your line is live.
Yes, thanks, good morning.
Good morning.
Mark with respect to the $1 8 million tons on site at midnight or operating three under construction, but when would you expect that to be fully operational and then also when you look at that.
Sort of localized manufacturing capability.
Have a sense of.
How much of that would be a potential onshoring capability I E sort of demand.
Or are those facilities.
Replacing existing sites within North America, That's my first question.
Well I guess.
The the on campus development.
Is firstly evolved.
Much quicker than we anticipated has been absolutely incredible to see the faces of our customer base.
Coming to and investing in our sort of dreamed of.
And secondly, I was just saying wanted.
I say intentional we wanted to make sure.
We differentiated our supply chains and.
Each of those onsite customers per se.
Our.
A different field. So we have everything covered from.
Automotive to light gauge coated.
Two.
Heavy gauge.
Cut some length of lateral length.
We have a pipe producers.
We have a couple of producers that actually.
So that's a it's a good spread good array of activity to support our supply.
Supply chain to customers.
And obviously, it's a huge benefit to them.
So we're able to firstly deliver about that material to them.
Free of charge.
200 as well as.
More than 200 yards.
As a big site.
A mile down the.
We can track, we can deliver very very effectively at low cost.
If you see and span besides one of our coils there is absolutely room.
Marketable difference in size between a 22 ton coil 52 ton coil.
That's giving those customers.
Massive operational benefits.
Yield benefits.
So that's a blip and it also obviously just the elimination of that growth rate is 25 30 $35 a ton.
Savings in your supply chain.
We see it as a very very very effective solution, it's going to allow us to penetrate markets.
Nothing much much quicker.
In addition to what Mark said and we are getting a lot of excitement from customers on those customers that are on site is that it removes.
Considerable amount as it greenhouse gases associated with delivery and movement of material.
We'll be able to take their scrap as well as with almost a perfect closed loop environment that here in Q4 really hasn't been available so it'll be interesting to see how that develops from a marketing perspective as well.
Okay.
And then with respect to iron dynamics, I mean, it seems like that facilities related.
The viable asset to the company I know in the past.
Had some issues are you evaluating potentially building another facility like that at some point I know in your prepared remarks, you said you were evaluating potential further investment into pig iron just curious kind of how you can see the evolution of that going forward. Thank you.
I prefer not to.
<unk> strategy on big on supply right now.
Understood.
But I appreciate the question [laughter].
Once again, if there are any questions or comments. Please press star one on your phone at this time.
You do have a follow up question coming from Seth Rosenfeld Seth Your line is live.
Hi, Thanks for taking the follow up.
One more with regards to working capital. Please obviously very significant investments in Q1 weighing on free cash flow can you give a bit more color on the split perhaps how much of that was tied to strengthen steel prices volumes versus growth in raw materials inventories, perhaps there was a need to build particularly elevated inventories of raw mats, just given the supply chain disruption.
And then looking forward into Q2 or the back half what should we think about the sequencing of working capital investment potential release since it begins to ramp up.
<unk>.
Certainly from the perspective of working capital of one big draw, which I'll just reiterate even though I had it in my opening comments is that we do pay our company wide profit sharing in March in every year. The following year. So there was a $360 million payment to the profit sharing.
Clearly excited to be able to provide that for their retirement.
All of our teams.
As you know on 8% of pre tax earnings.
So that was a big part of the lever the other piece of it really related to fabrication and.
Customer account values and volumes and that was really wants to do with inventory so inventory was fairly flat.
Specifically as it relates to certainly move in in building working capital mode. It increases working capital in the first quarter.
Somewhere around $150 million to $200 million.
You'll see that continue it might be another $100 million to $150 million in the second and third quarter combined and then we should really be reaching that that capacity point outside of any big movements in inventory valuation itself when customer evaluations themselves.
<unk>.
From a consolidated perspective.
Throughout the year again, we're heading into a seasonally strong environment second and third quarter.
Youre not going to see as big of a build as we saw in the first quarter. Because you won't have the same movement in payables and accruals and so I would say, it's going to be muted and then likely you'll see some working capital give back in third and fourth quarter.
Great. Thank you very much.
Thank you Scott.
Your next question for today is coming from Alex hacking with Citi. Alex Your line is live.
Yes, good morning, Mark and Theresa.
I got dropped off the call for a little bit so I apologize. If this was asked.
And I also appreciate it if you kind of give me the same answer that you just take Kurt you talked about.
Yes, scrap and pig, how does cri hei potentially fit into your raw material strategy.
We we currently are.
Our purchasing and procuring there aren't run up there on <unk> and.
And have been for many years.
For us it tends to be what we call a valley.
And use kind of a economic.
Our calculation is that if it makes financial sense.
To put it in the mix them up then we will buy it.
<unk> tends to be.
For your product for the electric arc furnace.
Slows productivity there.
It's low yield.
<unk> energy consumption.
So it's never it's never a preferred preferred material.
At the right price.
Makes sense.
And so we do have a small but steady diet to keeping it keep in mind within that supply chain.
Our furnaces actually at symptom.
We're converting.
Columbus.
Two sort of inline charging which allows allows higher.
Volumes.
They are <unk> to be added to the front us if need be.
Thanks, a lot.
That concludes our question and answer session I would like to turn the call back over to Mr. Millet for any closing remarks.
Well again.
Certainly appreciate your time.
And hopefully I see some some off.
Just recognizing the strength of our business model.
The vertical integration.
The downstream supply chain solutions that we have diversified value added mix that we have.
Simpson coming on are coming online in another four lines soon thereafter.
So we truly in my humble opinion.
The team has truly transformed this company over the last five six years.
A different company today.
We're not just the steel company.
I see that some of you are recognizing that and I think with time and is my is my mom always used to say proof is in the pudding.
Well, we're making the pudding.
Moving it and I can't be proud of the team. They are a phenomenal team I asked them to be safe, each and every day and looking after each other.
Thank you for the customers for your faith and support from our vendors, particularly the vendors that have gone far beyond the call of duty so to speak in and putting Simpson together they've done a phenomenal job. So thank you.
And thank you to our shareholders who support us.
So with that said, thank you and have a safe and wonderful day.
Once again, ladies and gentlemen that concludes today's call. Thank.
Thank you for your participation and have a great and safe day.
Okay.