Steel Dynamics Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 26, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Steel Dynamics 4th Quarter and Full Year 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. Please be advised this call is being recorded today, January 26, 2023, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect.

Operator

At this time, I would like to turn the conference over to David Lipschitz, Director, Investor Relations. Please go ahead.

Speaker 1

Thank you, Jenny. Good morning, and welcome to Steel Dynamics' 4th quarter and full year 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 Deal Dynamics and Teresa Wagner, Executive Vice President and Chief Financial Officer. The other members of our senior leadership team are joining us on the call individually.

Speaker 1

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 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 or starting up new assets, the aluminum industry, the use of estimates, assumptions in connection with anticipated project returns And our Steel, Metal 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 annual filed SEC Form 10 ks under the headings Forward Looking Statements and Risk Factors found on the Internet at www.sec.gov and if applicable in any later SEC Form 10 Q. You'll also find any reference non GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics reports 4th quarter and full year 2022 results. And now I'm pleased to turn the call over to Mark.

Speaker 2

Thank you, David. Good morning, everybody. Thank you for being with us for our Q4 and full year 2022 earnings call. Nancy, I think you saw operationally our teams had a very, very, very solid Q4. Our new Millennium Building Systems platform generated record steel Our Cinton is showing significant operating improvement with a clear path to profitability in the Q2 of 2023.

Speaker 2

Our new aluminum group is making great progress on our aluminum flat rolled investments, and I'll share more details later in the call. Relative to full year 2022, the entire Steel Dynamics delivered an exceptional performance with record sales, earnings and cash flow generation. I think it was a tremendous achievement and I'm incredibly proud of our team. They are the foundation of our company and they are the ones that have truly driven our success over the years. It's their 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 all market cycles.

Speaker 2

However, none of this matters without keeping our team safe. Often employees are described as companies' most important resource, but for Steel Dynamics, they're more than that, they are family. And now we number over 12,000 strong. We are continually focused to provide the very best for the health, safety and welfare. We're actively engaged in safety at all times at every level, keeping a top of mind in an active conversation at all levels through the organization.

Speaker 2

With that focus, the team's safety performance improved significantly in 2022, but there's certainly more to do as we will not rest until we consistently achieve our goal 0 injuries. But before I add any more detail, Teresa, would you like to give us some detailed financial results?

Speaker 3

Thank you, Mark. Good morning, everyone. I add my sincere appreciation and congratulations to the entire team. $3,000,000,000 derived from strong product pricing and volumes across all of our operating platforms. Record operating income of $5,100,000,000 and net income of $3,900,000,000 or $20.92 per diluted share And record cash flow from operations of $4,500,000,000 with EBITDA of $5,500,000,000 As Mark mentioned, it's truly an exceptional performance.

Speaker 3

Regarding our Q4 2022 results, net income was $635,000,000 or $3.61 per diluted share, which includes additional performance based special compensation of $24,000,000 or $0.09 per diluted share that was awarded to all non executive eligible team members in recognition of their extraordinary performance and costs of approximately $168,000,000 or $0.67 per diluted share associated with our Staunton Texas flat rolled steel mill ramp. Our Q4 2022 operating income Declined 35 percent sequentially to $575,000,000 due to lower realized selling And seasonally lower shipments within our steel operations, which individually generated operating income of $178,000,000 with shipments of 3,000,000 tons in the 4th quarter. The flat rolled steel mills were negatively impacted during the quarter with high cost pig iron that was purchased earlier in 2022 during the early stages of Russia's invasion of Ukraine. Based on current pig iron prices of $500 per ton Versus our average costs incurred in the 4th quarter, earnings were negatively impacted by about $80,000,000 We expect to see that continue into the Q1 and the negative impact is likely to be around $60,000,000 as we work through all of the For the full year 2022, operating income from our steel operations was $3,100,000,000 representing the 2nd strongest year in our history with record annual shipments of 12,200,000 tons.

Speaker 3

4th quarter operating income from our metals recycling operations improved to $14,000,000 based on increased volume and metal spread expansion despite lower average selling values. For the full year 2022, operating income from our mills recycling operations was $130,000,000 Due to lower volume and average selling values, as spare scrap prices fell 9 out of 12 months during the year, it was sequentially lower than the record results in 2021. Our Mexican recycling operations have proven to be a strategic key For both sourcing scrap for our Southern Steel Mills and driving profitability, I want to say a sincere thank you to the Zimmer and Roca team. We continue to effectively lever the strength of our circular manufacturing model, benefiting both our steel and metals recycling operations by providing higher quality scrap to our steel mills, which improves furnace efficiency, lowers costs and reduces company wide working capital needs. Once again, our steel fabrication operations achieved record quarterly operating income of $682,000,000 As metal spreads continue to expand based on steady product pricing and lower steel input costs, which more than offset the impact of seasonally lower shipments.

Speaker 3

Steel joist and duct demand remains solid as evidenced by our continued strong order backlog, which extends through the first half of twenty twenty three. Our Steel Fabrication platform also achieved another record year in 2022 with operating income of $2,400,000,000 Eclipse seen last year's record of $365,000,000 Congratulations to the entire team. Well done. This demonstrates the power of our circular manufacturing model and the natural hedge our steel fabrication business provides to Steel price shifts. During the Q4 of 2022, we generated strong cash flow from operations of $1,100,000,000 due to strong results and release of working capital.

Speaker 3

For the full year, we generated a record $4,500,000,000 Our cash generation is consistently strong based on our differentiated circular business model and highly variable low cost structure. At the end of the year, we had liquidity of $3,400,000,000 comprised of cash and short term investments of $2,200,000,000 and our fully available unsecured revolver of $1,200,000,000 During 2022, we invested $909,000,000 in capital investments, of which over half related to ongoing construction of our 4 new flat rolled coating lines and our aluminum flat rolled mill investments. For 2023, we believe capital investments will be in the range of $1,500,000,000 the majority of which relates to our aluminum flat rolled investments and the completion of our flat rolled coating lines. Since our last Call, we also announced the location for our aluminum rolling mill at Columbus, Mississippi. Mark will share the strategy of the location later in the call.

Speaker 3

We're also incredibly pleased to have received near term state incentives for the project of $250,000,000 with meaningful additional tax benefits to occur over the next 15 years. During the Q4, we maintained our cash dividend of $0.34 For a common share after increasing at 31% in the Q1 of 2022. We also repurchased $413,000,000 of our common stock in the Q4. For the full year, we paid cash dividends of 2 Just $1,800,000,000 or 12 percent of our outstanding shares, representing a 53% net income shareholder distribution rate. At the end of the year, dollars 1,300,000,000 remains available under our current share authorization program.

Speaker 3

Since 2017, we've increased our cash dividend per share by 119%, and we've repurchased $4,200,000,000 of our common stock, representing 31% of our outstanding shares. These actions reflect the strength of our capital foundation and consistently strong cash flow generation capability and the continued optimism and confidence in our future. Our capital allocation strategy prioritizes high return strategic growth with shareholder distributions comprised of a base positive dividend profile that is complemented with a variable share repurchase program, while we remain dedicated to preserving our investment grade credit Designation. We've strategically placed ourselves in a position of strength to have a sustainable capital foundation that provides the opportunity for meaningful strategic And strong shareholder returns, while maintaining investment grade metrics. Our free cash flow profile has fundamentally changed over the last 5 years From an annual average of $580,000,000 between 20112015 to $2,600,000,000 today between 2018 and 2022.

Speaker 3

Our recently announced aluminum investment is consistent with our unchanged capital allocation strategy. We will readily fund our flat rolled aluminum investments With available cash and cash flow from operations, we also plan to continue strong and responsible shareholder distributions as we've clearly demonstrated. We are 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 Aimmune, a leading producer of renewable bio Carbon Products.

Speaker 3

We believe our 1st joint facility could decrease our SteelScope 1 greenhouse gas emissions by as much as 35%. We have an actionable path toward carbon neutrality that is more manageable and we believe considerably less expensive that may lay ahead for many of our industry peers. Our sustainability and carbon reduction strategy is an ongoing journey, And we are moving toward with intention to make a positive difference. We plan to continue to address these matters and to play a leadership role moving forward. As I conclude my remarks, I know there are some of you that follow more detail of our flat rolled shipments.

Speaker 3

So for the Q4, our hot rolled shipments were 959,000 tonnes, our cold rolled shipments We're 109,000 tons and our coated shipments were 1,100,000 tons.

Speaker 2

Mark? Thank you, Teresa. As was mentioned, Steel Fabrication saw phenomenal results And the platform and the year. And again, thank you to the Phenom team. I think their effectiveness and their efficiency And their output per employee exceeds anyone in the industry.

Speaker 2

So congratulations to you all and thank you for all you do there. It was another record quarterly performance and record annual operating income of $2,400,000,000 for the year with record shipments of 856,000 tons. Although the macro industries remain a little mixed, we believe non residential construction markets are and will continue to remain strong throughout the year. Despite lower ABI indications, I believe overall architectural firms remain optimistic for 2023. Our Dodge Momentum Index improved around about 6% in December.

Speaker 2

Non residential starts and build rates are also forecast to remain solid through the year. I think the continued on shoring of manufacturing businesses and the infrastructure spending programs will start kicking in. That will continue to provide momentum for construction spending. More relevant, I think our customers certainly tell us demand remains solid In spite of the economic uncertainty, and it's certainly confirmed by current order rates, not only in the joist and deck business, but also our structural Our Steel Fabrication order backlog extends through the first half of twenty twenty three with strong pricing dynamics. With continued solid order intake rates, we expect to see continued strong volume and performance from those operations throughout 2023.

Speaker 2

The fabrication platform is not only a significant contributor itself, but it provides significant pull through volume for our steel mills, allowing higher Through cycle utilization rates and it also provides a meaningful natural hedge to lower steel pricing. O'Mel's recycling platform had a solid year, especially in light of the challenging pricing environment. During 2022, ferrous scrap prices declined 9 out of 12 months and volumes were marginally lower. The team managed to achieve metal margins There were only $2 per gross ton lower than record 2021 results. After 7 consecutive months of declining price during 2022, 1st scrap prices improved in December January, and it's our expectation that pricing will continue a moderate seasonal increase during the Q1.

Speaker 2

Metal's recycling and geographic footprint provides a strategic competitive advantage for our EF Steel Mills and our scrap generating customers. In particular, our growing Mexican volumes will enhance our Columbus and Sinton positions and the Zimmer and Roca acquisitions are performing very well and integration It's outstanding. The metals recycling team continues to partner with our steel teams to expand shredded scrap separation To provide more high quality low residual scrap to our steel mills. The impact of these efforts along with others in the industry has demonstrated that innovation We'll provide ample scrap supply in the years ahead. Similarly, we're also exploring technologies for more effective aluminum separation in anticipation of sourcing material for our upcoming aluminum flat rolled operations to maximize recycled content.

Speaker 2

Steel operations achieved record shipments and their 2nd best annual earnings in 2022. Again, outstanding performance by an Standing team. So thank you for each and every one of you there. Record shipments of 12,200,000 tons, operating income of $3,100,000,000 Our 'twenty two steel production utilization rate was 92%, excluding Simpson, compared to a domestic industry rate of 78%. And again, our higher utilization rates are clearly demonstrated throughout all market cycles.

Speaker 2

Our value added diversified product offerings, Differentiated supply chain solutions provide stickiness and the support of our internal pull through manufacturing volume It's clearly demonstrated time and time again that we can maintain higher utilization than our peers in the industry. It's a higher it was a key differentiator. It supports our strong and growing through cycle cash generation capability and best in class financial metrics. Looking forward, customer order entry is good and backlogs are solid. In actuality, December was historically high order intake month, followed by another historic Hi, order intake year to date.

Speaker 2

So we see a very, very, very solid market developing for the rest of the year. Auto production is expected to increase in 2023 from the lower 2022 rates. Dealer inventories have improved, But still remaining meaningfully below historic norms. The build rate in 2022 was roughly 14,300,000 units It's expected to grow a little to about 15%, 15.1% for 2023 and higher thereafter. On residential construction remains solid as evidenced by fabrication backlog and as I said, the long product steel volumes.

Speaker 2

Residential construction has certainly softened. It's impacting HVAC, appliance and other housing related products. But fortunately, much of our portfolio is biased toward replacement. Oil and gas activity is driving improved orders for DG and Lime Pipe and Solar continues to grow. I think generally this market strength It's clearly supporting market price appreciation.

Speaker 2

And in particular, the challenges with OMSA in Mexico has Certainly changed the regional sort of markets and the Mexico tons are staying in Mexico and the U. S. Market is certainly Benefiting from that. In Cintam, the downstream coating lines are running well. They are running below full capacity though as the rest of the mill continues to work through start up items.

Speaker 2

The hot mill and that's the Good news. The hot mill has turned the corner, running more consistency, approaching 65% capability month to date. We've been experiencing very, very long sequence lengths on Macassa recently up to 22 hours at a time. We're We're achieving days in excess of 85 percent capacity, and we should be around about 150,000 tons for the month of January And improving thereafter. Our current utilization is certainly being impacted by certain supply chain issues related to bearings and rolls.

Speaker 2

This is specific to the caster roles in the segments, but we expect to have this resolved before the end of the Q1, which will allow for a much stronger production for the rest of the year. Additionally, high priced pig iron inventory is being drawn through All drawn down through the quarter and raw material input costs will normalize for Q2 through the rest of the year. While financial performance will likely be flat there in the Q1, as we consume that high priced big Significant advance in both productivity and earnings in Q2. All production dimensional capabilities have been proven there. The hot strip mill design is certainly allowed for thermal mechanical rolling, allowing production of higher strength grades with lower alloy content And associated alloy cost.

Speaker 2

And we've already been approved and shipped some API grades. I think experience to date certainly affirms our technical and process choices, and there's no doubt that this is the next generation electric arc We continue to grow. Our exceptional through cycle operating and financial performance continues to support our cash generation and growth investment strategies. We have the 4 value add flat rolled steel coating lines under construction. These projects have gone well and they targeted for start up in the second half of twenty twenty three.

Speaker 2

We have a galvanizing line and paint line going in at Sinton and similarly into Heartland. And we're seeing very good Customer interest for that new volume. Currently, we're the largest domestic non automotive coater of Flat Rolled Steel with an annual coating capacity of over 6,000,000 tons. These four new lines will increase that capacity by an additional 1,100,000 tons. We've created unique supply chain solutions for our customers, which allow our downstream lines to remain always fully utilized with our highest margin products.

Speaker 2

Switching to aluminum, market response from both current and new customers across all market This has truly been incredible. To recap the project itself, it's a 650 metric ton per year, aluminum flat rolled facility. The main mill facility will be located in Columbus, Mississippi. It's close to the Southeastern markets and well positioned to serve Mexico. From the KCS rail line, which connect That connects us again to Mexico to bring slab up and material back down to Mexico.

Speaker 2

And it also connects To Canada to bring primary aluminum down from the sources of the U. S. We intentionally located it on the TVA Power grid, supply of green energy, and we have water access by the Tom Bigby Waterway. So the infrastructure the transportation structure is good for us. We attained a very attractive incentive package And having our current our Columbus Steel Mill close by, it allows us to draw on that facility for talent, for Professional services and there'll be a transition or transfer of many of our folks there, which will allow an immediate infusion of our culture To that aluminum facility.

Speaker 2

So we're excited about that. The mill itself will have on-site Melt cast slab capacity of roughly 600,000 metric tons will be supported by 2 satellite recycled aluminum slab casting centers. 1 will be located in the Southwest U. S. And 1 in SLP Mexico.

Speaker 2

Both sites, we have Letters of intent in place and we're under due diligence, but I believe they will serve us very, very, very well. Obviously, the strategic thought there was to place the slab centers in areas of surplus scrap And the California Western market and Mexico have an abundance of UPC material. Mill itself again is going to be equipped with 2 cash lines, a coating line, downstream processing and packaging lines. We've actually expanded the project scope there to include additional scrap processing and treatment to maximize recycled content. It's a state of the art facility and we'll be serving the sustainable beverage and packaging markets, both body And then in time, the automotive sector and industrial sectors.

Speaker 2

Breakdown would be 300,000 tons of can sheet, 200,000 tons of auto and about 150,000 tons of industrial. All the principal equipment is on order, allowing for a Pretty firm start up of the mill mid-twenty 25. We believe the Mexican Slab Center will start up in the second half 24 in the Southwest U. S. Slab Center early 2025.

Speaker 2

The total project cost, including the recycled slab centers, has grown a little from our initial $2,200,000,000 estimate. The increase is somewhat associated with now that we've truly defined the equipment costs, but we've also Added scope, as I said, we put in scrap processing and treatment and segregation at both the slab centers, which has increased And today, we estimate a firm budget of about $2,500,000,000 It will be 100% funded with available cash and cash flow from operations. So there's no additional debt or financing needed to push this thing forward. And we clearly expect to see about $650,000,000 to $700,000,000 of through cycle annual EBITDA With an additional $40,000,000 to $50,000,000 arising from our recycled omni source efforts. From an investment premise, and we've talked about it before, but we see the aluminum market Not unlike that in the steel industry when we started SDI some 30 years ago.

Speaker 2

It's an industry That has essentially older assets. There's been little reinvestment over the years, heavy legacy cost. There's inefficiency and sort of high cost operations. And the advantage compared to any other steel market that we've entered is there's actually a supply side deficit. Every other market in steel has always been oversupplied, And we've had to use our culture and low cost strategies to penetrate those markets.

Speaker 2

With aluminum, there's a clear, clear supply deficit We'll certainly aid the ramp up and a very, very quick profitability of that project. It's certainly business alignment. We believe it's a sort of an adjacent industry, so to speak. It's going to allow us to leverage our core competencies of constructing, designing, constructing, ramping up very, very large Sure. Capital assets, it allow us to leverage our recycling footprint.

Speaker 2

OmniSource is the largest North American Recycling of non ferrous products, including aluminum. We recycle over £1,200,000,000 Half of that is aluminum today. I believe we will certainly be able to infuse the project with our culture, and that will power A very low cost, very high efficiency operations. So we are very, very excited and we're certainly excited From the reception we're getting from those aluminum customers. Looking forward, We were certainly excited and passionate by our future growth opportunities as they will continue the high returning growth momentum we have consistently demonstrated over the years.

Speaker 2

We were recently added to the S and P 500 Index. I feel that's a true testament to our people And to the financial strength and maturity of our company, we're arguably one of the top 5 steel producers in the world as measured by market cap Today and the 3rd largest in North America by capacity. We certainly have the best financial metrics of any of our peers. All these achievements have been achieved in a relatively short timeframe. That could not be accomplished without the phenomenal commitment of our extraordinary people.

Speaker 2

Everyone has had an impact and everyone contributes each and every day. We were celebrating our 30th year in business later this year, and there are only better things to come. Teams And the culture they create are our foundation, and I thank each of them for their passion and their dedication. And in turn, we are committed to their welfare, their health and Safety. I remind those listening today that safety for yourselves and each other is our highest priority each and every day.

Speaker 2

Our success is also driven by the loyal support of our customers who have become partners and friends over the years. Together, we have created many innovative supply chain solutions, Creating value for all. We look forward to providing similar value and optionality to all our new customers As we continue to expand our product offerings in the steel arena, but also in the new aluminum market that we're entering. Finally, thank you to all that have invested in us. There is a growing number that are recognizing the power of our culture, The resilience of our business model and the potential outsized depreciation that are significant yet disciplined growth will return.

Speaker 2

Certainly look forward to creating new opportunities for all of us today and in the years ahead. So with that said, we'd love to open the floor up or the call up Questions?

Operator

Thank Thank you. Your first question is coming from Emily Chang of Goldman Sachs. Emily, your line is live.

Speaker 4

Good morning, Mark and Theresa, and thank you for taking my question. I'd like to start with the aluminum rolling mill and what progress you've made there. Maybe curious as to how many sort of contract Negotiations or discussions you've started to have with different customers, maybe what end markets you've been targeting so far? And you think about how Steel Dynamics may ultimately disrupt this industry, are there any indications that the pricing construct that we've historically seen of this

Speaker 2

Thank you. Good morning and thanks for your question. I do believe that when one says disrupt an industry that can be taken both positively and negatively. I think from our perspective, we look at it from a very positive nature, creating optionality for the customer base. Many of our existing steel customers also buy and consume aluminum.

Speaker 2

And so it's great to be able to create Further value for them. I do believe that our advantage and we've seen that Over the last 30 years in steel, in that the power of our culture Allowing us to leverage state of the art equipment tends to drive very, very effective, highly efficient, low cost operations. And in any commodity market, the low cost producer will survive and thrive And allow superior financial metrics through the cycle. And so the mill itself, The combination again of our culture, as stated on the equipment, just simply the plant layout, The high recycled content that we will enjoy, the improved yield impact through the process, The low overhead cost all will combine to provide a very low cost solution And allow us to, I think, penetrate those markets quite effectively. Will that change the pricing environment?

Speaker 2

I don't So we will be just a partial participant initially anyway in that marketplace.

Speaker 3

From a progress perspective, Emily, I think that Mark mentioned earlier that we do have locations That we have in mind and we're negotiating right now for both of the recycled slab facilities, plus we now have the location and so there's a lot of excitement happening in Columbus, Mississippi. Last year, we spent about 100 and just a little over $120,000,000 on the investments. Going forward, just to kind of recalibrate since we do have an increased amount of $2,500,000,000 In 2023, we're likely to spend somewhere between $900,000,000 $950,000,000 in capital In 2024, dollars 1,200,000,000 with the remaining $200,000,000 to $300,000,000 during the start up year of 2025. So the teams are pushing Forward very quickly.

Speaker 5

All right.

Speaker 4

Thank you for the color.

Operator

Thank you. Your Question is coming from Carlos de Alba of Morgan Stanley. Carlos, your line is live.

Speaker 6

Thank you very much, Mark and Theresa. So on capacity, I would like to discuss capacity utilization both for the industry, the company as well as the expected ramp up of the 4th value added coated lines. So you guys have been running, as you described in earlier comments, at a higher capacity This is the industry, but now the industry in the U. S. Is running around just slightly above 70%, 75%.

Speaker 6

How long can this persist, do you think, Given that prices are increasing, supply discipline has been there so far, but there are some folks out there that are not doing as well as you Clearly by the numbers that you have posted. So how do you see the situation evolving, Marc, perhaps on this? And then either Marc or DaVisa, how do you see The ramp up the expected ramp up of the capacity utilization of the Ford value added lines. You mentioned that you see 80% in 2023 for But any color on the 4th quarter lines will be great.

Speaker 2

Thanks, Austin. You were like a machine gun there. So I'm not so sure I got all your questions. I think from a ramp up, I will work backwards, but from the ramp up of the coating lines, Those will be, I think, very, very strong. Obviously, we have many, many galvanizing lines, prepaint lines Throughout the company and we will harness all our technical resources there to get those lines up Quickly.

Speaker 2

We certainly have the substrate available to fully load those lines. So I think the ramp up, Again, those lines will start up at the second half, perhaps Q4, and we'll ramp up quite quickly Through the rest of the year into the following year.

Speaker 3

As it relates to the first part of your question, Carlos, around utilization for the industry, I would point out that even if you go back to more challenging times like 2015, etcetera, Our utilization still remained very high and that's because of the power of our pull through volume, which we would anticipate as well. But we are really optimistic for 2023 With the additional on shoring of manufacturing businesses, which you are seeing in reality, as well as with the infrastructure program and other investment opportunities, We think that steel demand in the U. S. Will continue to stay steady to potentially increasing as well as The trade benefits of melting and casting in the U. S.

Speaker 3

For the U. S. Producer. So yes, flat roll price Specifically, have improved recently, which we think that they should have. We don't think that that's going to have an impact of A negative impact.

Speaker 3

We think that will be a positive impact. And we think both industry utilization rates and ours specifically should remain steady to improving in 2023.

Speaker 6

All right, great. Thank you very much, Marc and Lisa. I'm sorry, Marc. I'll slow down next time.

Operator

Thank you very much. Your next question is coming from Timna Tanners of Wolfe Research. Timna, your line is live.

Speaker 7

Yes. Hey, good morning, guys. I wanted to ask about the Downstream, the Fabricated segment, please. Just a little clarity, if you could, on the guidance. As I understand it, you talked about some Slippage from very high levels, but still above historical levels.

Speaker 7

But, historical EBITDA per tonne prior to 2022 is $190 a tonne and 2022 is $2,850,000 I'm just wondering if you could provide a little more color on where we should fall between those two extremes. And maybe if you could, it would be helpful. I know Nucor mentioned a year over year comparison or if there's anything that you can provide a little more clarity on that, that'd be great.

Speaker 2

I think one has to recognize that the industry has gone through Quite a consolidation comparing it to some years ago. And that has allowed Market strength or strong market pricing compared to history and that will continue. The Year as it's unfolding, we're entering the year with an absolute solid backlog through the middle of the year for sure. The order input rate is indeed off the kind of the frenetic crazy pace that it was 12 months ago, But it's very, very solid and we believe that it's going to be a very, very good year for us at year end. I believe the and there's some concern maybe, as I said earlier, the macro indices may not look as rosy as some would think.

Speaker 2

And some believe that there's economic uncertainty out there. As I hopefully articulated, we don't see The gloom and doom that everyone else is seeing out there. Our order input rates across all our sectors with the One exception, a little off on residential is solid. And December bookings, record level On a historic basis, similarly year to date. We just see strength through the year, Through all ends, through our order book.

Speaker 7

Okay. Mark, is that strength on volumes, strength on prices, Strength on margins, I mean, do you expect year over year to be up? And just like I'm saying, it's a big gap. I get that it'll be higher than it's been historically, but Any color on if we should expect some continuation of what we saw in 2022?

Speaker 2

I think the steel space will I'm saying that the steel space will appreciate from the lows, obviously, we're seeing the hot band pricing off the market pricing is 650 and it's up way over 700 In fabrication, the spreads will likely come off a little. They certainly haven't to any large extent at this point. You're certainly seeing people say, well, Our projects are getting delayed. We're not seeing any cancellations at all. We're seeing projects delayed some, but in my mind, that's it's not an unhealthy thing in all honesty because it's just protracting or extending The cycle, the business cycle in that arena.

Speaker 7

Okay. Thanks, Mike.

Operator

Thank you very much. Your next question is coming from Curt Woodworth of Credit Suisse. Curt, your line is live.

Speaker 8

Yes, thanks. Good morning, Mark and Teresa. How are you doing?

Speaker 6

Good.

Speaker 8

Good. I just want to follow-up on the fabrication Comments. So in the past, you've talked about you've had backlog basically priced through the middle part of this year. And I think you had discussed, I believe pricing in the $5,000 or higher level. So I just wondered if you could confirm that is kind of the price level your backlog is at.

Speaker 8

And then if you're Sold through the 1st part of this year, I assume you're bidding projects now for 3Q. Can you comment on price levels you see there? And then with respect to some of the delays or project push outs, from what we've seen, the data center and some of those areas are still very strong, but obviously, the Amazon type warehouse spend a lot of those have been canceled. So if you just kind of help us maybe understand a little bit of the DNA of the backlog would be helpful. Thanks.

Speaker 3

Good morning, Kurt. So from the perspective of pricing, obviously, we're not going to give specific pricing, But you would have seen that the pricing held in very, very steadily in the Q4 from an average perspective, and we've seen very A steady pricing in the backlog as well. So I would on the higher side, if you think about what's in the backlog. And that's why we have great Confidence in the earnings resiliency of the fabrication business through at least the first half of this year. And the order backlog, it's an interesting question because Broadened out, wherein as it was very concentrated in warehouses, it's broadened out now into more, I would say, infrastructure type Hospitals, schools, churches, etcetera.

Speaker 3

So that's a good thing. I mean, that's what we think we'll see more of. We expect to see Very strong volumes for fabrication in 2023 from what we're seeing so far. And Mark mentioned the order entry activity is very good too from a historical So then you can contemplate what you think steel prices will do to make an estimation of You think we'll continue to see expanding spreads in fabrication or not. That's what we saw in the Q4 definitively.

Speaker 3

Mark, do you want to add anything?

Speaker 2

And just the one comment though on I think it was mentioned that the distribution warehouses are again canceled. We actually are only seeing that in one customer. Well, actually not a customer of ours, The one company, the distribution warehouse business in our backlog is solid and not getting canceled out. So that's not a comprehensive issue. And just to reemphasize what Teresa said on earlier on the reshoring.

Speaker 2

Restoring is real. It truly is. That's going to be supportive of that business. And if you look at the Just the size of some of these factories, the battery manufacturing facilities, These are huge, massive, massive facilities that will require a lot of joist and deck. So again, It's off the frenetic pace that we saw, but it's very, very, very solid sector for us for the rest of the year.

Speaker 8

Okay. I appreciate that. And then just a follow-up on Sinton. What were the volumes shipped this Quarter and we look at start up costs for the year, it's roughly $430,000,000 So that's a pretty material drag on your profitability. Can you comment Maybe when you would expect to maybe break even with respect to start up costs?

Speaker 8

And do you have any guidance for what start up impact would look like in the Q1? Thank you.

Speaker 3

Yes. So from a volume perspective, Curt, Chittenden had shipments in the Q3 of around just under 270,000 tons and it increased to just Under 340,000 tons for shipments in the Q4, and we expect to see that improve in the Q1 and then Have a significant improvement in the Q2 of 2023 from a impact, we still expect to see losses As they work through the higher priced PEGLIER, which is obviously matching against lower steel prices than they were at this time last year. And so it's like It'll be it should improve over the 4th quarter losses pretty significantly, but still be higher than we'd like to see maybe around the one

Operator

Thank you. Your next question is coming from Tristan Gresser of BNP Paribas. Tristan, your line is live.

Speaker 9

Yes. Hi. Thank you for taking my questions. Maybe just a quick follow-up on Cintin. Are you able to share any EBITDA annual Contribution you're expecting for next year or maybe kind of a sense of how this compares versus the normalized EBITDA target you mentioned given Maybe a slower start up and then some ramp up of the quoting lines as well in Q4 that's going to help.

Speaker 9

So any kind of a sense You can give us that, that would be great.

Speaker 3

So, I think Mark mentioned the ramp up for The 2 additional value add lines that will be in certain in the Q3 of 2023, those should ramp, we expect fairly quickly to start benefiting Their product mix, we're not going to give full year guidance for Sinton as far as EBITDA, but I would tell you that I think Kurt mentioned earlier on the call that the losses in 2022 were over $400,000,000 and it's going to swing to a significant Positive for 2023. So just that differential alone will have a significant momentum benefit To our earnings in 2023, but it was just too early for us to give an estimate. But it won't hit through cycle EBITDA in the year where we're still ramping up production.

Speaker 9

Okay. No, that's really helpful. And my second question is more on the demand You talk about steel demand increasing in 2023. Can you give us a sense of what kind of Number you're seeing and maybe diving into your key end markets also there, if you're able to share some Quantitative number, that'd be great. Thank you.

Speaker 5

I guess

Speaker 2

from our perspective, the Higher demand translates to in large part to price support And then spread support. Our operations are already running at quite a high utilization rate. Further demand obviously is certainly going to help our Centum facility and given the market sectors energy is very, very Strong in that area in Texas. That's helping us. And the challenges that We're seeing in Mexico and the imports of sheet coming up from Mexico Into the Southwest markets, but also even up into the Midwest have essentially Mitigated, they're staying in Mexico now.

Speaker 2

So that's going to create good demand and great Dynamics. So from a market perspective, we will certainly be able to support All the capability that the ramp up will allow.

Speaker 9

Okay. Thanks for the color.

Operator

Thank you. Your next question is coming from Andreas Bokkenhuser from UBS. Andreas, your line is live.

Speaker 5

Thank you very much. Just one question from me. Just switching gears a little bit over to the Long Steel segment. What are you seeing there in terms of potential new orders coming in from the infrastructure bill, the IRA? Are you seeing anything yet There we've obviously seen rebar prices kind of coming down for the last 6, 7 months.

Speaker 5

So it doesn't feel like the infrastructure bill is kind of biting yet, but what are you seeing on your side To kind of stop the rebar price decline?

Speaker 2

Well, as we've suggested in the past, we're not big in the rebar markets in all honesty. But nonetheless, Structural Loan Products perspective, the infrastructure bill spending is not necessarily kicked in It typically takes 6 to 9 months for that to materialize. And obviously, it's too soon. But come the summer of this year, I think you'll start to see some benefit there.

Speaker 5

Got it. That's very clear. Thank you, Mark.

Operator

Thank you. Your next question is coming from Lawson Winder of BOA Securities. Lawson, your line is live.

Speaker 5

Hi, good morning, Mark. Good morning, Teresa. Thank you for today's call. Maybe could I ask about the dividend outlook and just kind of get your thoughts on return of capital? So last year, you bumped the dividend quite substantially.

Speaker 5

And this year, you've expressed some confidence in Simpson and Simpson wasn't contributing, in fact, was a drag in 2022. So maybe just kind of your thoughts around 2023? Thank you.

Speaker 3

Good morning. I'm smiling because Mark tosses things my way and it's funny how he does it. But so from a dividend perspective, We do like to grow the dividend in a way that is consistent so that we're constantly having increases Across the spectrum and I think as I mentioned since 2017, we actually increased the dividend by almost 120%. And we like to do that lockstep with Free cash flow increases that are through cycle like Sinton. I would expect that we should have a pretty significant Increase coming forward as well.

Speaker 3

We like to do those traditionally in the Q1 timeframe. We have additional projects that are a little bit Smaller, but that are coming online in 2023 that will add to through cycle earnings. And given our stock price, which has been fantastic, Driving up recently, you should expect to see strong shareholder distributions continue and that would include a strong increase in the dividend coming forward.

Speaker 5

Okay, fantastic. Thank you. Congratulations.

Operator

Our next question is coming from John Tumazos of John Tumazos Very Independent Research. John, your line is live.

Speaker 10

Thank you. I try to keep a little spread on non scrap Cost of goods sold per ton, just taking your total corporate revenues per ton Pre tax per ton and subtracting scrap profits and it peaked a year ago at 6.73 There's only 4.56 Contributors to that, the much lower price of purchased steel for your Calvinizing and painting, etcetera divisions. 1st, lower profit sharing, Improvement in the Sinton mill as it ramps up and hopefully will be the lowest cost when it's Please explain, by the way Nucor's non scrap cost of goods sales went up and We're the highest in the last 2 years current quarter. So theirs is the opposite direction, but that's a separate problem to figure out.

Speaker 2

John, great to have you on the call as always and thanks for the question. I think the biggest parameter is substrate cost. As we've Over the years, we've ramped up the tech substrate, Harlan substrate. And even at Cinthon, We actually prepurchased about 150,000 tons, maybe a little more to load The downstream coating lines in preparation for when the hot mill started up. So you're certainly seeing That influenced our costs for sure.

Speaker 3

And the other thing that you hit, John, it was spot on as well. It has to do with mix. So if you think about the increase in the impact from our fabrication business, That would have had some change in that as well. So I think it's both mix and what Mark talked about is the steel substrate.

Speaker 10

In your steel mills, with the normal Unscrapped cost of goods sold was sort of 200 a ton or 250 or 300?

Speaker 2

We've always tried to not share that information, John. So I prefer to stay that way. I would tell you though that, 1, our conversion cost is probably as good as anyone in the world. And number 2, The people don't necessarily recognize the offsetting sort of efficiency or effectiveness of volume. So on our process lines, galvanizing lines, prepaint lines, even though some of the input costs have appreciated, The fact that our teams continually just improve productivity, put more volume through, Offsetting the sort of the overhead and the fixed costs, our actual processing costs on those lines I've been sort of almost stagnant for the last, I don't know how many years.

Speaker 10

Thank you.

Operator

Thank you very much. There appear to be no further questions in the queue. I will now turn the call back over to Mr. Millett for any closing remarks.

Speaker 2

Thank you, and thank you for everyone on the call for your time today. Certainly, thanks to our team. I want to remind each and every one of you that you do contribute you do have an impact On our success and stay safe and keep each other safe. Customers, we can't do it without you. I'd just like to reemphasize those that have invested in us.

Speaker 2

There's a growing cadre Folks that are building positions that they really are recognizing the power of our culture. It is different. We are And we drive absolutely different results. Our business model allows us Perform and maintain higher through cycle cash generation than our peers. I think hopefully, People are starting to recognize that our capital allocation, our growth is incredibly disciplined, Particularly on the acquisition side.

Speaker 2

And I think that speaks to just Our underlying results is interesting. One measures the earnings power Of our company, on an employee basis, we are substantially higher than anyone else out there in our peer group. And again, it speaks to our overall efficiency and effectiveness of the culture, the strategic decisions that the team has made over the years. And it's it will continue to drop to the bottom line. So investors that support us, Again, many, many thanks to you as well.

Speaker 2

And with that said, have a great day.

Operator

Again, ladies and gentlemen, that concludes today's call. Thank you for your participation and have a great

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Key Takeaways

  • Steel Dynamics delivered an exceptional full-year 2022 performance with record sales of $30 billion, operating income of $5.1 billion, net income of $3.9 billion, and cash flow from operations of $4.5 billion.
  • Q4 net income of $635 million, or $3.61 per diluted share, was weighed down by $24 million in special compensation awards and approximately $168 million in start-up costs at the Staunton flat-rolled mill.
  • The new Staunton, Texas, flat-rolled facility is ramping up; management expects it to reach break-even and profitable operations by Q2 2023 as high-cost pig iron inventory is consumed.
  • SDI is advancing major growth projects including four new flat-rolled coating lines and a $2.5 billion aluminum rolling mill in Columbus, Mississippi, funded entirely by cash flow, with the mill targeted to begin production in mid-2025 and generate $650–700 million of annual EBITDA.
  • The company’s capital allocation remains robust, ending 2022 with $3.4 billion of liquidity, repurchasing $413 million of stock in Q4, increasing dividends by 119% since 2017, and maintaining an investment-grade credit profile.
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Earnings Conference Call
Steel Dynamics Q4 2022
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