Q3 2022 Steel Dynamics Inc Earnings Call
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Good day and welcome to the steel dynamics third quarter 2022 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.
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Please be advised this call is being recorded today October 22022.
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At this time I would like to turn the conference over to David Lipschitz Director Investor Relations.
Please go ahead.
Thank you Ali good morning, and welcome to steel Dynamics' third quarter 2022 earnings Conference call. As a reminder, today's call is being recorded and will be available on our website for replay later today, leading today's call are Mark Millett, Chairman, President and Chief Executive Officer of steel dynamics, and Theresa Wagler, Executive Vice President and Chief Financial Officer.
The other members of our senior leadership team are joining us on the call individually.
Some of today's statements, which speak only as of this date may be forward looking and predictive typically preceded by believe expect anticipate or words of similar meeting.
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 integrating are starting up new assets. The aluminum industry use of estimates and assumptions in connection with anticipated project returns and our steel metals recycling and fabrication businesses as well as the general <unk>.
Is this an economic conditions example of these are described in the related press release as well as in our annual filed SEC Form 10-K under the heading 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 reconciled to the most directly.
Comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics reports third quarter 2022 results and now I'm pleased to turn the call over to Mark.
Sorry thank.
Thank you David I forgot to turn the microphone I'll now as always but thank you everyone for being with us on our third quarter earnings call.
It's the only was an exciting quarter with great performance by the team and growth on many fronts.
Firstly, a great welcome to the roka team centered in Monterrey and <unk>.
Combination with the former Zimmer group Omni source, Mexico now is a significant recycling presence within Mexico that will support their existing Mexican customer base, while providing strategic sourcing opportunities for a syndrome in Columbus steel mills and soon to be aluminum mill.
Sentiment has turned the corner and is showing significant improvement.
The team is also making great progress on our aluminum flat rolled strategy, which I will share later on the call.
Operationally, our third quarter was a great quarter, achieving several new benchmarks, including record steel and steel fabrication shipments and record cash flow from operations.
All supporting our cash allocation strategy and commitment to further expansion of shareholder value.
I continue to be incredibly proud of our teams there our foundation and the catalyst of our current and future success is.
The culture of excellence and the strategic positioning executed over the last number of years that allows us to maximize opportunities, resulting in higher lows and higher highs through the cycle.
So a great quarter.
None of this matters without keeping our teams safe.
After the employees are described as companies most important resource.
For us they are more than that their family and the SDI family now has 26000 strong.
We are focused to provide the very best for their health safety and welfare.
We are actively engaged in safety at all times at every level of our organization came on top of mind and enacted conversation thread.
Company.
We will not rest until we consistently achieve our goal of zero incidents.
Before I continue with Teresa would you like to give you some details.
Thanks, Mark Good morning, everyone I add my sincere appreciation and personal congratulations to the team on another strong operational and financial performance.
Our third quarter, 2000, and <unk> net income was $914 million or $5.03 per diluted share.
Inclusive of costs of $111 million or 43 cents per diluted share associated with the continued start up of our sinton, Texas flat rolled steel mill.
Excluding these costs third quarter 2022, adjusted net income was $992 million or $5.46 per diluted share.
Third quarter revenues of $5 $7 billion declined 9% sequentially based on lower flat rolled steel and scrap pricing.
Third quarter 2022, operating income was $1 $2 billion lower than sequential results due to lower pricing and resulting metal spread compression in our flat rolled steel operations.
Our steel operations dairy solid operating income of $658 million in the third quarter with record shipments as Mark mentioned, a 3.2 million tonnes of which sinton contributed 268000 tonnes.
Sequential earnings were significantly lower due to the previously mentioned metal spread compression within our flat rolled steel businesses. In contrast, our long product steel operations experienced metal spread expansion as average scrap cost declined more than product pricing in the quarter in fact, our structural and rail and Roanoke bar divisions each achieved record.
Earnings congratulations to those teams.
Third quarter operating income for our mills recycling operations declined to $10 million as far as pricing declined month over month through the quarter, resulting in significant metal margin compression, but the team continues to effectively leverage the strength of our circular manufacturing operating model that is hitting both our steel and metals recycling operations by providing.
Adding higher quality scrap to our steel mills, which improves furnace efficiency and by reducing company wide working capital requirements. I also give my welcome to the Roka team.
A huge congratulations once again to our steel fabrication team. They achieved record third quarter operating income of $677 million. These earnings were driven by record average pricing record shipments and lower steel input costs steel joist and deck demands remained solid as evidenced by our continued strong order.
Backlog, which extend well through the first half of 2023.
We generated record cash flow from operations of $1 $5 billion in the third quarter. A strong result in release of working capital benefited cash flow year to date 2022, we've generated a record $3 $3 billion.
Our cash generation is consistently strong based on our differentiated circular business model and highly low cost variable cost structure at the end of September we had record liquidity of $3 $2 billion comprised of cash and short term investments of $2 billion and an undrawn unsecured revolver of $1 $2 billion.
Year to date 2022, we funded $565 million in capital investments.
For the fourth quarter of 2022, we estimate capital investments will be close to $400 million of which about 200 million is related to our recently announced aluminum flat rolled investments.
With much of the remaining capital related to our four new flat rolled coding lines that will be located in sinton at heartland.
We named our cash we maintained our cash dividend at 34 cents per common share after increasing at 31% in the first quarter, we also repurchased $482 million of our common stock in the third quarter representing.
Representing over 3% of our outstanding shares.
Year to date, we paid cash dividends of $177 million and repurchased $1 $4 billion or 10% of our outstanding shares representing a 48% net income distribution ratio at the end of the third quarter $245 million remained available under our current share repurchase authorization.
These actions reflect the strength of our capital Foundation and consistently strong cash flow generation capability throughout all market cycles, and the continued optimism and confidence in our future our capital allocation strategy prioritizes strategic growth with shareholder distributions comprised of a base positive dividend profile that's.
We ended with a variable share repurchase program, while remaining dedicated to preserving our investment grade credit designation.
Recently announced aluminum investment is consistent with our unchanged capital allocation philosophy.
We have strategically placed ourselves in a position to have a sustainable capital Foundation that provides the opportunity for strategic growth strong shareholder returns and maintain investment grade metrics. Our cash flow profile has fundamentally changed over the last five years, we will readily fund our flat rolled aluminum and documents with available cash and cash flow.
From operations.
We also plan to continue with strong shareholder distributions as we clearly demonstrated in the third quarter, we're squarely positioned for the continuation of sustainable optimized long term value creation.
Sustainability is also a significant part of our long term value creation strategy and we are dedicated to our people our communities and our environment.
We're committed to operating our business with the highest integrity in that regard we're excited about our newly formed joint venture with alien a leading producer of renewable bio carbon products. We believe our first joint venture facility will decrease our steel scope, one and two greenhouse gas emissions by as much as 25%.
We have an actionable path towards carbon neutrality, you guys more manageable and we believe considerably less expensive than May lie ahead for many of our industry peers.
Our sustainability and carbon reduction strategy is an ongoing journey and we are moving forward with the intention to make a positive difference we plan to continue to address these matters and to play a leadership role moving forward.
In conclusion, I know some of you track the details behind our flat rolled shipments and so for the quarter.
We shipped hot rolled and piano of 951000 tons.
Cold rolled of 139000 tons.
And finally coated flat rolled products of 1 million.
102000, all the time.
For a total of $2 million 192000 tons of flat rolled check mark.
Super Thank you Teresa and certainly incredible results from the steel fabrication platform.
Product, there's obviously a market tailwind, but our strategic positioning over the years.
We had record operating income of $677 million in the quarter with record shipments of 218000 tons.
Nonresidential construction markets remains strong.
This would suggest be suggested by the macro indicators they all remain positive.
Index.
A little over 53.
AI reports are business conditions remain generally strong and Dodge momentum index improved 6% in September .
Nonresidential stops and build rates are forecast to remain good into 2023.
More importantly, our customers tell us demand remained solid in spite of economic uncertainty.
Order activity is better pace. This is the frenetic pace of the recent past and remains higher than historical norms.
Our order backlog as well into the first half of 2023 with strong pricing dynamics.
We expect to see continued strong volume for fabrication in the fourth quarter and for 2023 in general.
Aside from the significant advantage of pull through volume for our sheet Mills.
Millennium provides a perfect hedge to our steel operations.
Although SDI mills, so steady utilization through the third quarter lower domestic steel industry utilization in general reduce the demand for scrap in the quarter.
Ferrous scrap prices have declined month over month, beginning in May through October .
I am dropping from some $735 a ton to more recently earned about $380 per gross ton.
All of these earnings suffered as a result of this progression in market pricing and weaker industry demand.
The only platform is continuing to work with all steel mill teams to expand our shred separation.
The communities to provide even higher volumes with low residual scrap.
The impact of our efforts along with others in the industry is amply demonstrated a view that innovation will solve any perceived views of prime scrap shortage in the years ahead.
With additional producers coming to the market pig iron availability is normalized and pricing has moderated significantly to a little over $500 per ton.
We have sufficient pig iron sourced well into next year.
Supply is not an issue for our flat rolled operations.
And again, we're excited for the addition of Roka to omni source, Mexico portfolio, which naval grow to some two and a half million tons of ferrous and nonferrous annual capability.
It was another historically strong quarter for the steel platform with.
We had record shipments of $3 2 million tonnes and operating income of $658 million.
Our third quarter production utilization rate was around 93% just incrementally lower than the second quarter, there was 95% yet.
<unk> significantly above the industry average of 78.
Our high utilization utilization rates are clearly demonstrated through time.
Value added diversified product offerings differentiated supply chain solutions, all support and the support of until poultry volume all support that utilization high utilization rate compared to our peers and then turn it supports a strong and growing through cycle cash generation capability and best in class five.
Actual metrics.
Looking forward customer order entry is good and backlogs are solid.
And that's supported by our diversified portfolio value portfolio of value added products, which are comprised now of around 70% of steel sales.
We focus on value, creating supply chains to midnight mitigate the impact of price volatility and all this just maintains a higher through cycle utilization rate.
Yeah.
Relative to the markets, we see automotive steady at current rates and we expect that to improve off load 2022 production based on the extremely low dealer inventories and pent up vehicle demand.
The 22 build rate is going to be some 14 5 million units and we would expect 23 to grow to 15 and a half units or so in 2024 to 16 plus units millions units.
Nonresidential construction remains solid as evidenced by fabrication backlog and long product steel volumes.
Our long product steel backlogs are good and several of our divisions.
Columbia City in Roanoke in particular achieved strong volumes and record earnings in the third quarter, demonstrating our market depth.
Infrastructure spending should also provide further meaningful support in the coming years.
New residential construction is softening a little impact in HVAC and appliance and other housing related products.
Fortunately our portfolio was biased to a replacement and we won't get the.
A ton per ton impact.
Oil and gas activity is driving improved orders rose CTG and line pipe.
And solar renewable expansions continues to grow.
Turning to Simpson.
Coating lines are running extremely well.
And ramp up continues on the hot side and the tandem cold mill.
I believe the Hotmail has certainly turned the corner becoming more consistently.
Running it at 60% to 65% month to date with days exceeding well over 80%.
Surface quality is excellent.
Reported coil shape from processing customers is also excellent.
And on the Hot strip Mill design has allowed for thermal mechanical rolling, allowing highest strength grades with lower alloy content and associated costs.
And we've already been approved and ship some API grades which is quite a quite remarkable given the metal has only been up and running for the nine months. So the team has done a phenomenal job.
I think it's certainly affirms our technical and process choices and it is indeed, a next generation mill.
Our exceptional through cycle operating and financial performance continues to support our cash allocation strategies and growth.
The four value add flat rolled steel coating lines are going well and are targeted for the second half of 2023 for startup.
Two for Simpson and two for Holland.
And we're already seeing customer interest for that new volume.
We're the largest domestic non automotive coated flat rolled steel with an annual coating capacity over 6 million tons.
These four new lines will increase that capacity by an additional 1.1 million tonnes.
We have created unique supply chain solutions for our customers, which allow our downstream lines remain almost always full.
With our highest margin products.
Yeah.
Relative to the dynamics the market response from both current and new customers across all market sectors has been absolutely incredible.
And so to recap that a the project.
The 650000 metric ton a year aluminum flat road facility, which will be located in the southeastern U S and we expect to announce that site location in the next few weeks.
Onsite milk.
Last lab capacity.
It was a 450000 metric tons.
And that'll be supported by two satellite recycled aluminum slab casting centers one in the southwest U S and one in the south.
We will have two cash lines coding line and downstream processing and passion packaging lines. So we will be able to furnish all products to the the beverage food packaging arena automotive and industrial.
The male is planned to start up mid 2025, Mexico slabs center in 2024, and the southwest slabs center in the first quarter 'twenty five.
The financial the financial impact will be around $2 $2 billion capex over four years.
It's gonna be funded 100% with available cash and cash flows from operations with no additional debt needed.
We expect to add about $650 to $700 million of through cycle annual EBITDA once it's up and running.
So in closing, we're excited and passion by our future growth opportunities as they will continue the high returning growth momentum we have demonstrated over the last 15 years.
Our teams are all foundation.
Each of them for their passion and their dedication and their desire to excel.
We're committed to the health and safety.
And I remind those listening today that safety for yourselves and each other is our highest priority.
Our culture and business model continues to positively differentiate our performance from others.
We're competitively positioned and continue to focus on providing superior value for our company our customers team members and shareholders and we look forward to creating new opportunities for everyone today and in the years ahead.
So with that said, we would love to answer any questions you might have.
Thank you.
We'd like to ask a question. Please signal by pressing the star key followed by the digital one on your telephone keypad.
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Thank you. Our first question is coming from Emily Chang with Goldman Sachs.
Good morning, Mark and Theresa. Thank you for your time this morning.
My question is just around the fabrication business.
Suddenly seen realized pricing trend higher on a sequential basis, but perhaps could you shed some color on why new contract awards are getting priced and how should we be thinking about the sustainability of your margins in this segment.
In the near time, and perhaps call it on a normalized basis.
So again that business is.
Credibly robust.
Backlogs are so I'll note that from a volume standpoint, and pricing standpoint at historic highs and we see that backlog well into 'twenty three.
Probably about eight months from from there and it's remained solid.
Breads are at very high numbers as you can see from our most recent results.
And we see that volume.
Sustained Q3 volume into Q4.
And our earnings should suddenly parallel that as well.
Relative to the third quarter.
Do believe.
So.
Very very strong as you may recognize that industry over the years as a sort of rationalized and consolidated.
And.
No longer are.
A fragmented as it once was and we see a higher pricing and higher spreads being sustained.
Through the cycle going forward.
Great. Thank you.
Thank you. Our next question is coming from Carlos de Alba with Morgan Stanley .
Yes. Thank you very much good morning.
My question is based on based on the <unk>.
<unk> four.
And market seems that long long products should be doing better than the flat flat end markets on the cladding products.
But in the in the reported volumes, we saw your long steel volumes falling a little bit quarter on quarter, while flat to improved I'm. Just wondering if you can give us a little bit of.
How you see that evolving in the fourth quarter have you seen that this is going to probably reverse.
Based on the end market situation and how those are evolving and also you mentioned in your press release that and Youll see scenario, you'll see lower volumes in the fourth quarter.
However, yes. He said I think in the last couple of years has been quite different that what we saw in say 2015 to 2019 prior to the pandemic. So if you could share some color as to how you see the seasonality playing out this time around will be also great.
Good morning, Carlos Thank you for joining us on the call.
So from the specifics of flat, increasing well I would say worldwide because it was very strong because long products had record shipments in the second quarter. So still very strong, but you have to remember that sinton is starting up in this timeframe. So the addition of certain ramping up helps offset some of the seasonality that you might have.
In our flat rolled shipments even as we head into the fourth quarter.
That being said, we're expecting still does he really resilient volume from this deal base, both and long and flat.
As we head into that what Youre correct as more of a seasonal timeframe, but we have some offsetting.
As we look at both Vincent and frankly, as we look at our coated products, specifically Gobaloon had a really strong third quarter.
Alright, Thank you Teresa.
Thank you. Our next question is coming from Timna Tanners with Wolfe research.
Okay.
Great. Thanks, good morning.
Good morning.
Thanks.
Your utilization continuing to be higher than peers, and it's a pretty big contrast, as you point out you're ramping up.
Meanwhile.
Production.
Your utilization is a is a pretty stark contrast, I'm just.
Nucor has said that they're being disciplined in holding off tons because of weaker demand. So I'm. Just wondering if you can explain what's different about what you're seeing and if you could wait while you do that if you could talk a little bit about the opportunities that you'd mentioned in the past for exports to Mexico and the West coast.
Yeah.
With him and I think as we've talked in the past.
I do believe our business model is definitely differentiated from our peers for sure.
And the high utilization rate.
Is is triggered I think are probably three spots one.
Is we have a much more diversified value added product portfolio mix them than probably any steel producer in the states today.
That allows this optionality across all market sectors in all market products and that suddenly suddenly has a significant impact.
I do believe we have cultivated and developed over time, some pretty unique supply chain.
Sort of partnerships with many of our customers and that gives us resilience through the cycle.
And then thirdly, the the pull through volume of our sort of downstream conversion.
Facilities and new Millennium is quite considerable.
So if you look at this year.
New millennium will.
It will be consuming that are somewhat close to probably 800000 tons of of substrate.
And much of that is.
There's procured through our own mills.
Massive volume sort of pull through there.
And then our Heartland facility, which has a roughly.
800 million tons.
The converter take some material and also the tax which as you know.
850, 900000 tons of our consumption.
So that pull through volume onto itself when when Theres a need we bring a lot more of that in house to maintain that utilization and as you as you point out you know through the cycle we typically.
10, 15% higher utilization than the industry in general.
And I can't Oh.
Over emphasize the impact that that has on our through cycle cash generation capability.
It certainly it certainly supports that.
And in turn supports all the growth and the cash allocation strategies that we.
The balanced cash allocation strategies that we are we.
We continue to execute.
Okay, Great would you mind on that the other part of the question about the opportunities that you'd mentioned.
As part of that our ability to ramp.
At higher levels.
Sorry.
Yeah.
Yes, sorry.
Having a little little tough time.
Hearing timna.
The.
The center mill, obviously ramping up.
Focused on finishing.
Finishing materials through the two coating lines the galvanizing line the paint line.
And just ramping up and the commissioning of all the different product capabilities, we have the.
We believe Mexico.
Will long to them despite the additional hot band.
Capability, that's coming on stream will continue to have a mismatch in the.
The Codell coated arena.
And so it's our intent to be transferring all selling into the Mexican market HVAC appliance and automotive.
And we have yet to develop.
They are meaningful.
So shipping in volume to the West coast.
Confident that will occur over over time as that ramp continues okay.
Okay. Thanks, I'll get back in the queue.
Thank you. Our next question is coming from Cleveland Reichardt with UBS Securities.
Hey, everybody good I'll say good day since it's almost noon here I.
I appreciate taking the question I'll stick to one just to start that market wanted to build on your comment about.
<unk> materials, and and scrap availability I'm just curious as we think.
About it investment opportunities.
You're shifting investment into aluminum and that's kind of the priority right now but.
Yes, there is there any opportunity to invest in some of the raw materials businesses that you already own you know I think on these calls before you've talked about increasing usage of different scrap grades.
Yeah I was just wondering if that's more of an R&D exercise on your part and the steel operations or if there's some infrastructure that youre thinking could add some efficiency there.
Well I think the the given our investment in Mexico for Zimmer and with the Roka.
Well, we don't see a very unique opportunity.
That arena is as prime scrap rich and.
So support Columbus, and and sent them beyond that we're not interested in any sort of large scale.
Recycled sort of acquisition type.
Last month.
The investments will be centered though on streamlining and improving our existing operations lowering our cost structure throughout that organization.
And most specifically investing in sort of segregation separating type technologies.
To optimize the the the screens the waste streams that we have so the zorba twitch and everything to divide that up into more value added 5006 thousand series type raw materials for our aluminum mill.
And also.
Investing in technologies and expanding our current technologies because in all honesty on the the parents separation.
Oh, what we call shred won the improved the shredded material.
We have the technologies available to us, it's just a matter of expanding that across our on the.
Romney base.
And those technologies in all honesty, it's not.
Not a massive amount of capex.
Capex spend.
Yeah.
Can be on the under emphasize though.
That's impacting the <unk>.
The scrap flows.
And it's not just US you know some of our peers are doing the same thing.
Producing a sort of a very low residual shred.
And as I've said in the past.
You look at the shredded call today, if you just take a piece of the the Rusty metal itself.
Likely been produced through a integrated mill is very very low residual.
So by separating out the the the little bits of copper and nickel you can get a prime scrap from that obsolete flow.
And I think we're seeing it you can see it in the marketplace today, where you know.
<unk> is actually.
Andre.
Under the the shred price today.
Yeah.
And it is amplifying the fact that.
Could see concerns as additional capacity comes online over the next few years.
But I think it was.
We've demonstrated clearly the industry has demonstrated a clear clearly what I've always said and that's it.
Innovation will will Trump a challenge each and every day.
That's well understood.
Thank you. Our next question is coming from Alex hacking with Citi.
Yeah.
Yes, Thanks, Mark and Theresa so on Sinton, Mark I think you.
You mentioned that it had turned the corner.
How close are you that to operate at consistent 80% rate you know what are the remaining challenges.
And then what needs to happen to get it up to 19, 95% or whatever you would be targeting longer term.
And is that the kind of rate you would be expecting 19, 95% exit rate.
In 2023, so he stopped below 80% and then you kind of buildup through the year or it would be more of a consistent rate through the year. Thanks.
Yeah.
Okay.
I would describe the the issues that are sending today is just.
Typical.
Startup issues, a little amplified by by the supply chain constraints.
Yeah in the in the old days the other mills, we started up you.
You need a spot split apart and it's like literally on the shelf.
The local city.
We were seeing a little a little.
More time to react to a to certain issues.
That said it.
It is purely just making sure that we are operating each piece of equipment all the way from the from the electric arc furnace through.
True.
The ladle furnaces caster and the hospital just operating each and every minute of each and every day the as I said earlier the equipment is.
Proven to be able to produce everything we.
We intended.
<unk> produced 84 wide, we've gone down to 140.
Three or <unk> 44, and light gauge we produced the one inch pipe.
As I said earlier, we've already been certified on some of the perhaps slightly easier API grades but.
The other grades will come with time, there's no. There's no issue of challenge to get there. It's just a matter of time.
So.
From a capability standpoint, it's definitely there.
We've had a we've.
We've had shifts we've had days close to 80, 586% of production rate, which again given the relatively short time that that team has been ramping up is absolutely incredible I think it took us two to three years and Butler to get to get a 4000 ton shift.
And we've had many of those are already.
So I'm not not concern, it's just a matter of a tie.
<unk>.
I would expect that 'twenty three we should get around 80% of all 3 million tons of shipping capability.
Now, let's shift you are correct, that's where the entirety of the year. So that will there will be a progression of the ramp for that by the time our accident in 2023, and we would expect to be operating at or near that that capacity rate that full capacity rate.
Okay. Thanks, and then just to clarify on the earlier comments.
On Fenton would you be expecting to ship more flat rolled in the <unk> considering.
The ramp up of center or this seasonality will offset that thank you.
Hum.
Alex I think you are asking about.
Full complement of our flat roll operations, and we are expecting to have higher shipments from citizens south, but I'll I'll leave you to determine what seasonality does the rest of the group.
Okay. Thank you.
Youre welcome.
Thank you. Our next question is coming from Curt Woodworth with credit Suisse. Please go ahead.
Yeah, Hi, Mark and Theresa how are you.
Good thanks.
So I just wanted to talk a little bit more about fabrication.
Can you kind of talk to the diversity within your backlog and maybe how bidding activity has progressed.
Yeah, maybe the last 90 days I think there is some concern in the market that you know the data center and warehouse build out has really driven the bulk of this.
Growth rate and that could potentially fall sharply and you know it sounds.
Unclear.
If you have like a lot of big chunky projects that once those burn off then you could be more at risk.
And then within that you know I know you spoke about pricing being fairly favorable and I think you talked about how pricing.
Would be going up progressively I believe ended the second quarter, but can you just confirm that.
Good afternoon, Kurt Thanks for the question.
I'll, let mark address the diversity within the backlog of the fabrication business and it has changed slightly.
It's become more favorable as if things are changing as it relates to the backlog and the pricing.
Mark with exactly that we still have it incredibly favorable pricing heading with the backlog that goes through much of the first half of 2023.
It's not likely to be at that same peak level of about $5000, plus but still very favorable and at the same time, and we're going to and expect to have lower steel input costs as we move through at least the fourth quarter and so as you can imagine that's why.
The power and the business model of having fabrication.
Real natural hedge to lower steel prices is very favorable to us and that's what you're seeing today and we would expect to see in the coming.
Quarters as well Mark do you want to.
The diversity in our order backlog.
Yeah, I think it is transitioning a little bit.
Early on it was very very so with distribution warehouses focused with the cloud computing and things Oh.
Following along.
Cloud computing.
Construction tends to be a continuing.
Continue to be strong and grow our warehouses may be kind of flat to stable.
And we're also seeing sort of a more infrastructure hospitals school type construction.
Activity.
We see it strong.
I mentioned earlier.
It's not at the frenetic pace that it was perhaps six months ago or eight months ago, it's normalized to <unk>.
Still a still very high relative to historic norms.
And if you think about it given the the interest rate sort of environment.
A little economic.
Cloud that we have it's not unexpected that people are wondering about.
Ah projects 789 10.
On site and.
And that's just waiting a little bit.
In general we see that.
Just the nonresidential construction in general remaining very very very robust through certainly the first half of next year into until the latter half.
To address your point on the backlog if there's any.
Risks that we would want to point out there, there's really not a goal.
While diversified backlog theres not individual projects that are out of too large of a size and you know something to just keep in mind as well as one something enters the backlog for the fabrication business. The projects have already been engineered they generally have already been financed theres a lot of certainty in that backlog and if you look on average at the projects that.
We do the cost of steel joist and steel Jack or steal back as a part of the entire project itself is only between 10 and 15 per se. So it is a small piece of that project ended up itself, which also reduces the risk.
Okay very helpful. And then just as a follow up.
I think there had been some maybe incremental concerns on on the aluminum flat rolled market just given some of the announcements by ball.
And others on the beverage can sheet side. So can you just give an update on maybe how you are progressing commercially with that project and you know what initial discussions have been like since you announced the project thanks very much.
Okay.
Well Ross with aluminum, we all are awash with with interest I E.
Incredible interest to be honest, we have been focused of late locating the facilities Glenn and his team have just in the last week or two we completed the purchase of all the all the major oh sort of components.
Suddenly all the long lead time issues.
Equipment packages.
So progress is being made dramatically when theyre starting to focus on the commercial side we've had.
Initial conversations with all but one of the the major.
Beverage.
If it's can makers.
Incredible interest in all honesty that.
And also in automotive are there several.
The folks that have approached us.
To to partner with us going forward.
So from the standpoint of.
Contract didn't volumes pricing those sorts of things that's.
That's too early yet.
Alright, Thank you very much.
Thank you once again, we ask that you. Please limit yourselves to one question to facilitate time for everyone on any additional questions can be addressed upon re entering the queue.
Our next question is coming from Phil Gibbs with Keybanc.
Okay.
Sorry, I was on mute can you hear me now.
Hi, Phil Hey, how are you.
Good.
And specifically you talked about in the script that you were at a 60% to 65% utilization on average for the for the month of October . So far is that what we should expect for the fourth quarter, which would which would get us near.
500000 tons for that asset or do we expect something a little bit more than that as you ramp.
Yeah.
I would not expect 65% for the whole quarter no.
Uh huh.
But I.
Phil.
It's tough to give you a number.
If things continue to proceed as they have.
Our month to date, then youre going to see a very good number for the quarter, but I can't I can't foretell the future.
All I can say is.
The operation has reached a much more stable consistent a level of operation.
The you know the.
The big shifts or the big days the them all of them.
But more importantly, we're not seeing the the zero shifts as we once were in the summer and as you see in any any start up so.
So the consistency of operation.
Is is very very are much improved.
Cause me a lot of confidence going forward.
Should we should we expect.
Given the higher.
Volume incrementally and in some of that stabilization and just the overall operations.
That you will get to EBITDA positive in the fourth quarter and in sort of out of the startup phase that you've been on.
Yeah.
So good afternoon.
We you know we talked about it on the second quarter conference call that our expectations were sitting at that point in time was that we would reach.
EBITDA positive sometime in the fourth quarter and most likely pushed out sometime in the first quarter, rather than the fourth quarter, but definitely as Marc mentioned, we're seeing a lot of positive changes and there's been some key successes that the team had just recently in October that we would expect to result in some really good.
Changes, having forward, but I would I would say, Josh it's probably closer to in the first quarter versus the fourth.
Okay, and then as just a follow up.
If you could take.
Take a shot and in talking about.
'twenty 'twenty three Capex, if you have a general idea and then just also our thoughts on that working capital in Q4. Thank you.
Youre welcome.
So we're in the middle of our detailed planning phase related to capital I'll give you some.
Directionality, but we would have more clear and defined.
Expectations for you as we.
Meet in January for the fourth quarter conference call that right now.
Aluminum investment still look like we'll be spending about $750 million in 2023 as it relates to both recycled top centers and the rolling mill itself.
We also have the completion of the <unk> line, which is likely to be around $200 million in 2023.
We have the bio carbon facility. So I would say just those growth projects alone will probably get us to around $1 billion for capital spending in 2023, and then as we think about the additional projects that we're evaluating right now I would suggest that it shouldnt be any greater than one two to $1 3 billion.
But we'll have more clarity.
As we talk to you in January .
Oh, I'm, sorry, thanks, David and as it relates to the working capital.
As we've had.
And we expect to see some seasonality.
Liam for customers to reorient their inventories by the end of the year and as we've seen pricing declines in both scrap and steel.
Steel I would expect to see another pretty significant.
Funding from working capital contribution from working capital in the fourth quarter.
Thank you.
Our next question is coming from Tristan Gresser with Bnb paradox.
Yes, hi, Thank you for taking my questions.
The first one is on the cost of ferrous scrap.
This game much higher than what we forecasted and I guess this is due to the purchase of.
More expensive metallics in each one.
Some of your peers also flag.
Are you able to quantify this extra negative impact yet in the quarter.
And do you believe this will remain a headwind in Q4.
Okay.
And so.
So mark a question related to ferrous scrap pricing and our average price was higher than expected from.
Their models and I would tell you there's a significant piece of that that has to do with higher pig iron prices. So during the first quarter with the Russia and Ukraine.
Circumstance.
Did others went out and purchased more pig iron to have uncertainty around supply. It was at a higher price than we're currently seeing today, which I think mark mentioned was around $500 per.
Her time, and so the flat roll steel mill, specifically set in Columbus, and Butler are still working through that higher cost pig iron at this time, Mark do you wish to add any more commentary.
The the pig iron and we also ended the quarter with subscribe inventory.
That obviously flows through into a higher priced scrap in inventory that flu.
Float into the and into the third quarter to those inventories are well in control Myer and went back to kind of a four four week.
Maybe five week inventory level.
So going forward I think that will will normalize, but the pig iron price in all honesty is going to continue into the fourth quarter for sure.
Okay.
Very helpful and maybe just a quick follow up.
On the buy clean initiatives that has been put in motion, but the U S government.
What kind of impact are you expecting from that policy.
It is a potential boost to demand at all you've seen already.
I mean, Pat on that initiative. Thank you.
Okay.
And from a buy America policy I'm, sorry, it was hard to hear you at the very end as it related to the biomarker policy.
It is still so early on.
We're not seeing a considerable amount of traction from it at this point.
Conversation's with customers on the commercial side, though.
We believe that it won't just be buy America, but if you look at again, our steel operations, specifically as it relates to even our current low carbon footprint for our carbon steels and our long products deals. We believe will be the beneficiary continuing going forward of that I'm going to call. It green steel for lack of a more sim.
Paul terminology at this point in time, and we believe that the biomedical ought to have a positive influence as well as the jobs Act and the infrastructure program, which just you can really start seeing traction from in the next nine to 12 months and that should support steel consumption in the U S. Specifically in our estimation Mark do you have anything to add no.
Alright, Thanks, a lot.
Thank you. Our next question is coming from John Tumazos, with John Tumazos Independent research.
Thank you.
We expect a significant drop in scrap flows.
With scrap steel prices.
Yeah.
Okay.
John .
They've eased.
A little.
I would say that the that the reduction in flow is probably going to sort of mitigate any any further a substantial decline in scrap pricing.
Thank you.
Just recall.
And 83 at Darlington when you were working with Castor for Nucor.
Fresh student.
I remember.
Competitors have 30, this 50 year old twin Bill Casters.
Intimately understand often unionized and maybe you're a little bit too humble.
Modest and don't want to say that you think you can build a new plant within SMS design.
More efficient.
And people don't understand the opportunity.
And.
Gratulation so it looks great.
Thank you John .
Thanks for the memory, but I do believe to your point the the new aluminum mill.
And in all honesty I don't look at it as an aluminum mill it I'd say its a new horizon, it's really aluminum business for us.
And it's not unlike.
27 years ago, when we put STI together and we penetrated.
And <unk> been somewhat successful growing within the steel industry. The same the same.
So the drivers exist today in aluminum as it did back in steel you you've got a aged ins.
Industry.
It's very very high legacy costs.
For sure.
<unk>.
There hasn't been a new mill built for some 45 years and as you know Glenn is and his team is incredibly.
Smart and talented are getting the right technology and building it effectively.
And efficiently.
It's it's exciting and it's exciting.
Exciting for the young team that we have to see that being the foundation of our growth for the next 25 years.
Congratulations.
Thanks, Matt.
Thank you. Our next question is coming from Timna Tanners with Wolfe research.
Hey, guys. Thanks for the follow up I guess I had another big question Big Picture question. If you could indulge me theres. So many new galvanizing lines being added just.
Despite you guys buy nucor for sure definitely some planned ones around the corner or potentially from yes.
I'm just wondering is there a structurally better outlook for galvanized or some incremental demand story. There were some supply piece I'm missing that's going to continue to support that level, you know increased level of supply.
Well I think the the utilization of golf product.
It's just generally expanding.
I don't know, whether you have a crawl around cause but it over my my 2020 or 30 years.
It went from just a one on one or two parts with a call to galvanize them almost almost the whole car is becoming galvanized.
So I think there's just a general expansion of.
Over time.
People talk about the the light weighting in the autumn motive arena more lightweight and comes from stronger products, but also comes through sooner.
Thinner gauge material so.
So if you look at the the length.
Of <unk>.
Coated material today versus.
The past just within our means.
Less throughput and needs more more lines to get the same same volume.
So I don't see there being a a.
Our galvanized.
Flood or issue.
That you might see.
Okay, great. Thanks again appreciate it.
Ladies and gentlemen that concludes our question and answer session I would like to turn the call back over to Mr. Millett for any closing remarks.
Well.
Thank you everyone for your time today.
Certainly for those that have enabled our success.
Customers are service providers and most importantly, our teams are absolutely phenomenal phenomenal group of people and we appreciate your loyalty because we've been doing business together for use in use and our new years.
And to those in the in the investment community that support us. Thank you.
We will endeavor to continue to treat our money, our stis money like our own like your money.
Going to utilize it.
Very very effectively.
Think if you look at a R.
Use of the of all of those proceeds were very diligent very disciplined.
And in this interesting environment spending money again effectively with with high returns then perhaps.
The industry in general.
Thank you. Thank you for your support and to every every are individually the SDI family. That's on the line. Thank you for what you do be safe each and every day I look after each other cheers bye.
Once again, ladies and gentlemen that concludes today's call. Thank you for your participation and have a grace and safe day.