Q2 2022 Steel Dynamics Inc Earnings Call
Speaker 1: just $517 million worth of the companies' common stock representing 3.5% of our outstanding shares in the quarter. So we're staying true to our repurchase programs. We are certainly beneficiary of a strong market tailwind, but I'm incredibly proud of our 11,000 strong team. They are the foundation and the catalyst of our success. They are the ones driving the superiors' results. It's their culture of excellence and the strategic positioning executed over the last 10 years that allows us to exploit the current market and will continue to produce high lows and higher highs through the cycle. I've said it many times before, but none of this matters without keeping everyone safe. Often employees are described as a company's most important asset. For us, they are more than that. They're part of the SDI family, they're people, and we're always striving to provide the best for their health, their safety, and for their welfare. They're actively focused on safety at all times, keeping it top of mind and an active conversation at every level within the organization. We're certainly better than industry averages, but we're not going to rest until we consistently achieve our goal of zero incidents. We're continuing to see material market share gains driven by our ESG profile and industry leading low-carbon footprint for flat-road products. We will continue our journey to an environmental excellence through a defined and achievable plan to be carbon neutral by 2050. Our recent AMIUM investment, and our joint venture, is a perfect example of that. It's an exciting opportunity to reduce greenhouse gas emissions through renewable biomass replacing fossil fuels in our electric arc furnaces. We have the test of the product, and it works beautifully. We believe it will also work within our own operations.
Speaker 1: Initially, it will be 160,000 metric tons per year and the capex is estimated to be around $125 to $150 million. It will reduce our scope-1 steelmaking greenhouse gas intensity by some 20-25% with even further potential upside from the use of the bile gas.
Speaker 1: With that said, Theresa, would you like to give us some thoughts?
Speaker 2: Thank you, Mark. Good morning, everyone. This marks that an incredible week. So we announced our aluminum strategy on Tuesday and now we're sharing our record results. I sincerely thank you for the entire SDI family. Your performance resulted in record sales, earnings, and cash flow, a truly exceptional performance. Our second quarter, 2020 unit income, was $1.2 billion, or six dollars and 44 cents per deluded share.
Speaker 2: Inclusive of costs of $77 million or $29 cents per deluded share, associated with the continued startup of our St. Texas flat-rolled steel mill.
Speaker 2: Excluding these costs that included 2022 adjusted, net income was $1.3 billion or $6.73 per deluded share.
Speaker 2: Revenues improved across all of our platforms to a record $6.2 billion driven by record steel shipments and record pricing volume in our steel fabrication business.
Speaker 2: Our second quarter, 2022 record operating income of $1.6 billion improved 8% versus first quarter result driven by a record field fabrication earnings.
Speaker 2: Our steel operations generated very strong operating income of $1.1 billion in the second quarter with record shipments of 3.1 million tons of which Sinton contributed 171,000 tons.
Speaker 1: failures that are typical of commissioning an integrated line. The supply chain is aggravating that a little bit because when you have a when you need a part instead of getting it in a matter of hours sometimes it takes a day or two. So we are wrestling with those alligators. Not atypical of a startup of a new new plan but we expect substantial resolution of these issues over the next few weeks. So the July issue may have cost us a hundred hundred fifty thousand tons of production for the year we think. To allow you to tell because July is not over yet but certainly moving in the right direction and we clearly expect to the EBITDA positive in the Q4. We continue our growth. We have the four value-added coding lines under construction and progressing well. They're targeted for the second half of 2023 to start up. And as you know we again it's the strength of our overall strategy and the product mix but we are the largest non-automotive coder of flat-roof steels and now have an annual coating capacity of over six million tons. Four new lines will increase that capacity by an additional 1.1 million tons. We've created unique supply chain solutions for our customers and these lines are almost always fully utilized with our highest margin products.
Speaker 1: So switching now to aluminum dynamics, it's been an incredibly exciting week. It has been incredible. I said it earlier, it's been staggering. The initial support that we're seeing from all our customers and a massive number of new customers. of new customers.
Speaker 1: To recap, it's a 650,000 metric ton a year flat road facility that's going to be located in the southeastern US.
Speaker 1: They have on-site melt and cast slab capacity of roughly 450,000 metric tons.
Speaker 1: It's a full, fully equipped, flaro mill with two cash lines, coding line and downstream processing and packaging capability.
Speaker 1: It's going to be supported by two satellite recycled aluminum slab casting centers, one in the Southwest US and one in Mexico.
Speaker 1: And we expect the mill itself to start up in the first half of 25, the Mexican slave casting center in 2024, and the Southwest slave casting center in the end of 2025.
Speaker 1: The financial impact is a total project cost of some $2.2 billion.
Speaker 1: That expenditure is going to be spread over four years of the project.
Speaker 1: There's going to be 100% funded with available cash and cash flow through operations.
Speaker 1: And it's expected to add a good $650 to $700 million through cycle consolidated annual EBITDA per year.
Speaker 1: And we certainly anticipate no requirement to add any additional debt.
Speaker 1: From conversations on the call and subsequent conversations, it appears to be some skepticism regarding our EBITDA of a ton, targeted of $1,000. The EBITDA of a ton, targeted of $1,000.
Speaker 1: We are confident of that number.
Speaker 1: And it speaks to, or is driven by, a myriad of things. But firstly, it's a greenfield facility.
Speaker 1: Everything is happening essentially on one site, all the rolling, processing, coating, heat treating.
Speaker 1: It lies through an optimum.
Speaker 1: site layout and flow of material and logistics.
Speaker 1: and you can quite easily reduce the labor, the manpower input because of that, and with robotics and automatic storage and retrieval systems. And with retrieval systems. and retrieval systems.
Speaker 1: So labor input is going to be dramatically less than the current industry. So the labor input is going to be much more more.
Speaker 1: We will not be burned by aged facilities and legacy costs.
Speaker 1: Energy because of the The state of the art equipment that we'll be installing is going to be a lot lower. The state of the art equipment that we'll be installing is going to be a lot lower.
Speaker 1: yield improvements will dramatically improve the cost structure.
Speaker 1: but pushing higher scrap content levels.
Speaker 1: and transportation given the
Speaker 1: satellite slab casting centers transporting solid dense slab as opposed to scrap is going to be a significant improvement. So we're very, very confident of that cost projection.
Speaker 1: from an investment premise standpoint.
Speaker 1: Obviously we see a very clear...
Speaker 1: Gap in the supply demand that there's a current and growing deficit supply deficit
Speaker 1: We see a very close sort of overlap for business alignment.
Speaker 1: And essentially...
Speaker 1: If we filmed a steel mill and a aluminum mill in black and white, most people on the call today wouldn't be able to tell the difference.
Speaker 1: All it is is a different metal. We clearly will be able to execute the project well.
Speaker 1: It's incredibly cost-effective growth given the opportunities that are in the marketplace today and the exorbitant motor balls that are expected from sellers. This is a very very capex efficient growth project.
Speaker 1: As I said, we've got absolutely great customer support.
Speaker 1: And at the end of the day, our success has always been driven by the SDI culture, by our employees.
Speaker 1: It drives higher efficiency than anyone else. It drives lower cost.
Speaker 1: And if you look at that industry, it has a very, very steep cost curve. And that will obviously, if you're at the lowest, the lowest quartile, that's going to support, support margin through the cycle. So we're incredibly excited by the opportunity.
Speaker 3: So in general,
Speaker 1: It's been a phenomenal week. It's been a phenomenal year for SDI. That will continue through the rest of this year. That will continue through the rest of this year.
Speaker 1: Our team provides our success, the foundation for that success, and I thank you to them for their hard work and their commitment.
Speaker 1: I remind each and every one to remember safety is always our first priority.
Speaker 1: We're going to continue to focus on providing superior value for our customers, for our company, team members and shareholders alike.
Speaker 1: And we look forward to creating new opportunities for everyone in the years ahead.
Speaker 1: So with that said, I'd like to pass the call over for questions. Marley While I leave this press conference, there are
Speaker 2: Thank you. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you press star one earlier during today's call, please press star one again to ensure our equipment has captured your signal. So we ask that you please limit yourselves to one question to facilitate.
Speaker 2: cost exposures across the portfolio. Can you highlight to us what is hedged or fixed price power and what still remains on spot? Is Cintin actually exposed to market prices or have you since put some hedges in place there?
Speaker 4: Emily, we have across the portfolio for the steel mills, we have a mix. So for example, and to be able to split it out in a manner on a percentage basis, I'll have to kind of go back and talk to the team. But I would say it's probably at least 50 to 60% that's contractual and they tend to be long-term contracts of two to three years that have escalating factors included in them.
Speaker 4: and the remainder is spot. There is some that we hedge. Sinton right now is a little bit difficult simply because of Mark mentioned, you know, we're in startup and they actually constructed a massive substation on our behalf in the region. And so I think most of Sinton at this point is still on a spot basis because of the stop and starts that we've been having right now in July .
Speaker 1: And Emily, that's the electrical power on the natural gas side of things. We typically...
Speaker 1: hedge around about 60% of, 60, 65% of our consumption.
Speaker 5: Great, that's very clear. Thank you.
Speaker 2: Your next question for today is coming from Seth Rosenfeld with VNB Parabass. Seth, your line is live.
Speaker 6: Good morning, thanks for taking our questions. If I can ask one of the cards that looks for fabrication and non-resue activity, the time of Q1 results I think you noted still record backlog and now it's changed that way to a near record. Can you use any color for housing risk and of a contraction and backlog? Tons or duration hasn't realized. And on the pricing side, you commented earlier, aggregate price realizations will increase coming quarters. But on the most recently one, the orders, are we seeing the downward inflection of late?
Speaker 4: Thank you. Thanks, Seth. So, as it relates to the fabrication business, we said near records just because we have people fact-checking all the time and if it's not a record, we have to say near record. There has been some contraction from the peaks, but we're still having a backlog that's well into 2023, so it's not something that we're concerned about or we think is endemic of anything changing significantly. So, we're still having a backlog of things that we're concerned about or we think is endemic of anything changing significantly. So, as it relates to the fabrication business, we said near records just because we have people fact-checking all the time and if it's not a record, we have to say near record. So, as it relates to the fabrication business, we said near record.
Speaker 4: From a pricing perspective, we're still having very strong price support and there is still increased pricing that is included in the backlog. So we're feeling very good about the non-residential market, specifically for our steel fabrication business. Mark, do you have anything to add? I don't know. I don't know. I don't know.
Speaker 6: Okay, thank you very much. I'd like a separate question please. On the working capital side, I think on the call earlier this week you had a potential tailwind from working capital release moving forward and Q2 you saw another quarter of large investment. Can you give us any color on your expectations for second half as steel and raw materials prices declined? Thank you.
Speaker 4: Absolutely, Seth. We're still—so I don't—I guess I wouldn't call it a significant increase. I think the increase in the second quarter for working capital was just a little over $100 million. So, not that that's small, but given the size of the working capital at this point in time, it was incremental. But we would expect a pretty significant working capital release in the next probably two to three quarters. And it has to do with not necessarily just, you know, halving some weakness, as Mark mentioned, or some softening.
Speaker 2: Your next question for today is coming from Carlos DiAlba with Morgan Stanley . Carlos, your line is live.
Speaker 7: Great, thank you. Good morning, Mark and Teresa. I'm just questioning, it's on the CAPEX progression for the aluminum project announced. How do you see the CAPEX for these years and for the coming years until the project is ready to start up?
Speaker 4: Carlos, I'll point you to the presentation that's still out on the website that we provided on Tuesday. But from a CAPEX progression standpoint, we believe we'll spend somewhere between $200 and $300 million on the flat-roll aluminum project in 2022. That would be additive to the number that I gave you earlier for the estimate for the rest of 2022 of being in that $350 to $400 million range.
Speaker 4: And then the bulk of the spend will be in 2023 and 2024, each of those years being around $750 to $800 million. Each of those years being around $750 to $800 million.
Speaker 4: And then finally, we would have the remainder, which is around $300 to $350 million in that 2025-2026 timeframe. So it's over a period of four to five years where we'll be spending the investment. And that's why Mark was very clear, and I've tried to be clear as well, that this will readily be funded through cash flow and cash flow from operations.
Speaker 7: Now, fair enough. Thank you. And if I may just throw another one quickly. Have you seen any particular pricing pressure in the steel Southern markets or Northern Mexico with the ramp up of Sinton as well as the ramp up of – steel ramp up of Turnews facility as well as Mital's facility a little bit further south in the Mexican market?
Speaker 1: Well I think Carlos you saw generally a sort of erosion on the hotband, the hot recoil pricing across
Speaker 1: well across the US in general, and it was a little stronger in the south because of the reasons you suggest. As I suggested, we were seeing our order activity on hotband recently pick up dramatically. And so I think there's no support there in that product category.
Speaker 7: Thank you very much, good luck!
Speaker 8: Thank you.
Speaker 2: Your next question for today is coming from Timna Tanner's with Wolf Research. Timna, your line is live.
Speaker 9: Hey, hey, good morning, everyone.
Speaker 9: I wanted to ask a little bit more if I could. I know on the last call when we've spoken to you, you mentioned that you were looking at a pig iron alternative kind of leveraging your iron dynamics operations. So if you could expand on that. And then if I could throw in one more just I thought it was interesting that you mentioned the market is pessimistic, but your customers are optimistic. So I was just hoping you could also elaborate on that. Thanks.
Speaker 1: Well, from a pick-eye perspective, we certainly would like to pursue some level of captive supply and self-sufficiency.
Speaker 1: And not unlike the last call, we're pursuing or exploring whether the I&Dynamics technology or an autotov technology is best suited for us. The
Speaker 1: But that's a sort of a project in process going forward, Timner.
Speaker 1: If there were to be a project again from a capital perspective, that's not a huge, huge issue.
Speaker 1: I'm sorry, I didn't catch quite the second comment for question.
Speaker 9: Thanks on Iodine Dynamics. That's helpful if that doesn't sound like a big capital use then. Is that what you're saying?
Speaker 1: Absolutely not.
Speaker 1: Thank you. You had a market question?
Speaker 9: Yeah, if you wouldn't mind elaborating in the release you talked about how there's a prevailing pessimism, but your customers are optimistic and then you you talked about hot rolled order entry improving recently, and I'm just wondering if you could elaborate a bit on how that contrasts with the pessimism and maybe some elevated inventories.
Speaker 10: Please.
Speaker 11: Well, I guess the...
Speaker 1: All we can do, all I can do is look through the lens of our water book, as I mentioned over the years, a wise man told me that the water book tells all.
Speaker 1: But it tells all for us. I can't speak for the rest of the industry.
Speaker 1: But we haven't seen a dramatic structural change in underlined demand. Water activity is remained pretty strong. There was a little softness in hot-roll coil, and that's rebounding, I think. And so when I say silver motion in the marketplace, there seems to be a cloud out there that you got recessionary pressures and all these things.
Speaker 1: going to drive the market down. I was just pointing out right now, through our order book, we don't see it.
Speaker 9: Thanks very much.
Speaker 8: Thanks, Tom.
Speaker 2: Your next question for today is coming from Phil Gibbs with KeyBank. Phil, your line is live.
Speaker 12: Hey, good morning.
Speaker 13: Only film.
Speaker 12: Mark, you mentioned spot prices for pig iron are clearly coming down and we see that too.
Speaker 12: But are you are you would all locked into to hire numbers in that prevailing spot if you chose to hedge a lot more forward during the war? I think you chose to hedge a lot more forward during the war.
Speaker 1: We had, I would say a mix, there were right at the onset of the conflict. click<|mi|><|translate|> the conflict.
Speaker 1: We did buy a couple of boats that were at the high end of that range that you saw there But we now have a kind of a mix of material. I think the highest we may have paid is like $900 or so for a ton. We got a couple of boatloads of that.
Speaker 1: but then we have a lot more material coming in at lower pricing and the forward votes are attending to be indexed against the market price so shouldn't should be a major impact for us.
Speaker 14: Okay.
Speaker 12: nanna
Speaker 12: Teresa, the normal mixed dispersion on sheet if you have it.
Speaker 4: Absolutely, Phil. The Hot Rollin P&O number is 861,000 tons.
Speaker 4: cold-rolled, 131,000 tons, and the coated products are 1,132,000 tons. The coated products are 1,132,000 tons.
Speaker 12: Thank you, and if I could sneak in one more here, just on.
Speaker 12: Sinton, have you all changed your thought process on what it's going to do this year in terms of volume contribution to the second half? I'm just trying to...
Speaker 12: Trying to read what you're all put down in terms of having lost production in July , but having got to high amount of utilization at one point. So just trying to think through.
Speaker 12: what the next few months look like here because we're getting to the tail end of the year.
Speaker 1: Got it. And again, it's, we're wrestling alligators a little. I guess sometimes you don't know when you're gonna win. But I suggest the earlier July issues probably cost this 150,000 tons film. And probably cost this 150,000 tons film.
Speaker 1: And again, it's a wrestling alligator's level. I guess sometimes you don't know when you're gonna win. But I suggest earlier, a July issue is probably cost this 150,000 tons film. Uh, uh-oh, one of my weapons.
Speaker 1: from our annual projection, and we were around 1.5-ish, so you can do the math though.
Speaker 12: Okay, but that number was relative to the 1.5. That's kind of just what I wanted to hear in terms of understanding that. So, that's kind of just what I wanted to hear in terms of understanding that.
Speaker 12: And then last question from the housekeeping standpoint, is just what the updated CAPEX numbers for this year, if I'm missing, because I know you got the aluminum project and some other things that you had done there. Thank you.
Speaker 4: So, Phil, for the second half of the year, excluding the aluminum project, we estimate CapEx to be somewhere between $350 and $400 million. The majority of that relates to the four new flat rolled coating lines.
Speaker 4: If we look at what we may spend on the aluminum investment, we'll likely spend an additional two to three hundred million dollars. So the total second half of the year is likely to be somewhere between five hundred and fifty and call it.
Speaker 4: Yeah, around $5.56 million.
Speaker 14: Thank you.
Speaker 2: Your next question for today is coming from Andrew Ketchis with Barclays. Andrew, your line is live.
Speaker 15: Hi, good morning. Teresa, I don't want to belabor the point, but I want to try and ask the capital deployment question from earlier in the week in a slightly different way. So you have the two turns of net debt threshold out there, but the reality is you've been operating at about half of that for the past year or so. And you made the comment, I think it's obvious, that without buybacks you'd eventually find yourself net cash, and you also don't want to go to the bottom end of that range. So what keys you wanna RapText is for you to try and Dad dog all the fishes every time. and how to buy fewwar