Steel Dynamics Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 12 speakers on the call.

Operator

Welcome to the Steel Dynamics First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's remarks, we'll be conducting a question and answer session and instructions will follow at that time. Please be advised At this time, I'd like to turn the conference over to David Lipschitz, Director, Investor Relations. Please go ahead.

Speaker 1

Thank you, Matthew. Good morning, and welcome to Steel Dynamics' Q1 2023 Earnings Conference Call. Chief Executive Officer of Steel Dynamics Teresa Wagner, Executive Vice President and Chief Financial Officer and Barry Schneider, President and Chief Operating 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, except, anticipate are words of similar meaning.

Speaker 1

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 and assumptions in connection with project returns and our steel, metals recycling and fabrication businesses as well as to general business and economic conditions. Example 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 4 10 Q. Now I'm pleased to turn the call over to Mark.

Speaker 2

Thank you, David. Good morning, everybody, and we certainly appreciate you all joining us Our first quarter earnings call today. As you read, once again, our teams achieved a solid financial and operational quarter As highlighted by, most importantly, a consecutive quarter of significant safety improvement, 82% of our facilities were And most importantly, our piece of focus appears to be minimizing severity rate. We had record steel shipments of 3,300,000 tons And adjusted EBITDA generation of a strong $950,000,000 With a clear path to profitability in the Q2 of 2023, given the expectation of increased volumes, We are also making great progress on our aluminum flat rolled investment. There's great excitement within the prospective customer base for a new and innovative supply chain solution.

Speaker 2

As always, I'm incredibly proud of our teams. They are the foundation of our company and they drive our success. It's their culture of excellence and the intentional diversification of our product portfolio that allows us to maintain higher utilization rates and maximize opportunities, Resulting in higher lows and higher highs through all market cycles and producing superior financial metrics. For safety, great financial performance is of no import without having our team safe. Often employees are described as the company's most important resource.

Speaker 2

But for us, for Steel Dynamics, they're more than that. They're family, A number over 12,000 strong. We're focused to provide the very best for their health, safety and welfare. We're actively engaged in safety at all times, keeping it top of mind and an active conversation at every level of the organization. With that focus, as I mentioned, the team's safety performance further improved in the Q1 of 'twenty three, but there's more to do, We will not rest until we consistently achieve our goal of 0 injuries throughout our organization.

Speaker 2

So with that said, and before I Pursue the quarter. Teresa?

Speaker 3

Good morning, everyone. It's great to join you. I had my sincere appreciation and congratulations to the entire team for another strong operational and financial performance this quarter. Our Q1 2023 net income was $637,000,000 or $3.70 per diluted share, Excluding those costs, Q1 2023 adjusted net income was $691,000,000 or $4.01 per diluted share. 1st quarter 2023 revenues of $4,900,000,000 were slightly higher than sequential 4th quarter results, Driven by record steel volume and increased metals recycling prices.

Speaker 3

Our first quarter operating income of 835,000,000 was 10% higher than 4th quarter results driven by record steel volume. As we discussed our business this morning, We see positive industry fundamentals for 2023 and beyond, and we're focused toward a continued transformational growth initiative. Our steel operations generated strong operating income of $345,000,000 in the Q1, as record shipments of 3 rail division as they had another record earnings quarter supported by a strong construction market. Our flat rolled steel mills were negatively impacted during the quarter with High cost pig iron that was purchased in early 2022 during the early stages of Russia's invasion of Ukraine. Based on current pig iron prices, earnings were impacted by approximately $50,000,000 in the Q1, but we have worked through the higher priced inventory now.

Speaker 3

Operating income from Marmell's recycling operations was $43,000,000 over 3 fold 4th quarter results Due to increased demand driving higher prices and volume. Our Mexican recycling operations have proven to be a strategic key for both Sourcing scrap for our Southern Steel Mills and driving profitability. Thanks to the Zimmer and Roca teams. We appreciate you. The team continues to effectively lever the strength of our circular manufacturing operating model, benefiting both our steel and metals recycling operations By providing higher quality scrap, which improves furnace efficiency and by reducing company wide working capital requirements.

Speaker 3

Our Steel Fabrication operations achieved strong operating income in the quarter of $551,000,000 The lower than record 4th quarter results due primarily to seasonally lower shipments. Steel Joystendectomy As evidenced by continued robust order activity, specifically our March order activity was extraordinarily strong. This is resulting in a strong order backlog extending into October November of 2023. Based on our backlog, customer sentiment And manufacturing momentum, we expect steel fabrication earnings to remain strong throughout the year, including the second half. Our cash generation continues to be strong based on our differentiated circular business model and highly variable cost structure.

Speaker 3

At March 31, we had record liquidity of $3,500,000,000 comprised of cash and short term investments of $2,300,000,000 And are fully available and secured revolver of $1,200,000,000 During the Q1 of 2023, We generated cash from operations of $734,000,000 We spent approximately $226,000,000 on capital expenditures. We believe for the full year of 2023, capital investments will be in the range of $1,500,000,000 The majority of which relates to our aluminum flat roll mill investments. In February, we increased our cash dividend 25% To $0.425 per common share based on our ability to consistently generate strong cash flow and aligned with our growth strategy. We also purchased $354,000,000 of our common stock, representing approximately 2% of our outstanding shares. At March 31, dollars 980,000,000 remained authorized for repurchase under our new plan.

Speaker 3

Since 2017, we've increased our cash dividend per share by 174% and we've repurchased $4,500,000,000 of our common stock, representing over 30% of our outstanding shares. These actions reflect the strength of our capital foundation and strong cash flow generation capability. We continue to be optimistic and confident in our future. Our capital allocation strategy prioritizes High return strategic growth with shareholder distributions comprised of a base positive dividend profile that's 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 Sustainable capital foundation that provides the opportunity for meaningful strategic growth and strong shareholder returns, while maintaining investment grade metrics.

Speaker 3

Our free cash flow profile has fundamentally changed over the last 5 years from an annual average of $580,000,000 to today's Average of $2,600,000,000 Our aluminum growth strategy is consistent with our unchanged capital allocation philosophy. We will readily fund our flat rolled aluminum investments with available cash and cash flow from operations. We also plan to continue Sustainable optimized long term value creation. Sustainability is also a significant part of our long term value creation strategy In that regard, we remain excited about our joint venture with Amium, a leading producer of renewable biocarbon products. We believe our first joint facility could decrease our SteelScope 1 greenhouse gas emissions by as much as 35%.

Speaker 3

And I want to specifically thank the Biocarbon Solutions team in Columbus, Mississippi. They're doing a fantastic job and we still hope to start operating this facility In early 2024, we have an actionable path toward carbon neutrality that is more manageable and we believe considerably less expensive Then what may lay ahead for many of our industry peers. Our sustainability and carbon reduction strategy is an ongoing journey, We're 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. Before I hand the call back to Mark, for those of you that keep specific track of our flat rolled shipments, In the Q1, we had hot rolled and P and O shipments of $1,006,000 We had cold rolled shipments of 130 2,000 encoded shipments of 1,192,000 tons.

Speaker 3

Mark?

Speaker 2

Thank you, Theresa. Although there was some seasonality in shipping volume For fabrication, we saw yet another strong quarter, driven by the sustained market strength and an absolutely extraordinary execution by our team. Productivity of our operations is incredible. So thank you for all the for the great job you all are doing up there. We continue to have high expectations for the fabrication business.

Speaker 2

We believe non residential construction markets will continue to be robust in the coming years. Non residential starts and build rates are forecast to remain strong throughout 'twenty three and related spending has been significantly higher so far in 'twenty 3 compared to last year at this time. The continued on shoring of manufacturing businesses and infrastructure More real time, our customers tell us demand remains solid as confirmed by strong order entry rates, Especially the most recent March order activity. Steel fabrication order backlog, as Teresa suggested, extends 7 to 8 months And October, November with strong pricing dynamics. Not only a significant contributor onto itself, Our fabrication platform provides meaningful pull through volume for our steel mills, particularly important in softer markets, allowing for higher through cycle utilization rates.

Speaker 2

It also provides an effective natural hedge to lower steel prices. Our metals recycling platform achieved a strong first quarter. Congratulations to them. They are on a path to higher volumes and increased metal margin. After 7 consecutive months of declining Pricing in 2022, ferrous scrap prices improved in December and throughout the Q1, increasing well over $100 per gross ton.

Speaker 2

We expect scrap pricing to remain fairly steady at these higher levels based on increased seasonal North American steel mill demand in Q2 and Q3. Our metals recycling and geographic footprint provides a strategic competitive advantage for our steel mills and our scrap generating customers. In particular, our growing Mexican volumes enhance our Columbus and Sinton raw material positions. They will also strategically support aluminum scrap procurement for our future flat rolled aluminum investments. Hamel's recycling team is working closely with both our steel and aluminum teams to expand scrap separation capabilities through process and technology solutions.

Speaker 2

Our low residual SHRED-one is just one example of that. The impact of these efforts along with others in the industry It's demonstrated that innovation will provide ample ferrous and non ferrous scrap supply in the years ahead. Our steel operations achieved record quarterly shipments of 3,300,000 tons and solid financial results in the Q1. Steel production utilization rate, excluding Cinan, was 94% compared to a domestic industry rate of 75%. Our higher utilization rates are clearly demonstrated throughout all market cycles.

Speaker 2

Value added diversified product offerings Provide broad optionality across all market segments. Enhanced Supply Chain Solutions is driving customer preference And we're supported by the internal pull through manufacturing volume. Our higher through cycle utilization rate is a key differentiator Looking forward, customer order entry is good and backlogs are solid. March in particular was a very strong booking month for the steel platform. Auto is solid.

Speaker 2

Auto production is expected to increase in 'twenty three over 'twenty two rates and dealer Inventories have improved, but still remain below historical norms. Build rate in 'twenty two was some 14,300,000 units, And we expect 23 to show 15.1 and a little higher in 24. Non residential construction remains strong As evidenced by strong fabrication backlog and long product steel volumes. Long products are seasonally solid From a backlog perspective and onshore and infrastructure spending should provide further meaningful support in the coming years. Residential construction has softened to some degree, but that erosion appears to be easing a little, but that segment Tends to be a small part of our overall portfolio.

Speaker 2

Oil and gas activity is very strong, driving improved orders for OCTG and Line Pipe, and Solar continues to grow appreciably. At Centon, we produced 420,000 tons of hot band in the quarter, which 56% of the eventual capacity. 5th and daily records were achieved in March, clearly demonstrating the mill's ability to reach the 3,000,000 tons. As we discussed in our Q1 call, production through the quarter was impacted by certain supply chain issues related to bearings and rolls Needed for the caster. This issue is now being resolved, and we expect a significant advance in productivity and earnings in Q2, And we should see the mill being EBITDA positive in Q2 for sure.

Speaker 2

We believe full Capacity utilization could be in the range of 80% of rated capacity. The team has demonstrated Clearly demonstrated the key competitive advantages of the Texas Steel Mill. Full product dimensional capability has been proven. We have gone down to 50 ish and all the way up to 1 inch and all the way out to 84 inches width. The customers are reporting that the surface quality is absolutely exceptional.

Speaker 2

The hot strip mill design is allowed for thermal mechanical rolling, Which allows the production of higher strength grades with lower alloy content with a significant reduction in production cost. Grade 80, grade 100 has been achieved, and we've already been approved and shipped some API grades. In my mind, this affirms our technical and process choices, and there's no doubt that this is the next generation electric arc furnace flat rolled steel technology of choice. We certainly have gained strong market acceptance. Commercially, we can sell everything we make and then some.

Speaker 2

With the cast of segment issue resolved, we're able now to fully lever our heavy gauge wide capability. Our on-site customers are busy continues to support our cash generation and growth investment strategies. Relative to our expansion into aluminum, The market response from both current and new customers across our targeted market segments has been incredible. So to recap, the project that's a 650,000 metric ton aluminum flat rolled facility that will be located in Columbus, Mississippi, State of the art facility serving the sustainable beverage and packaging, automotive and industrial sectors We have produced roughly 300,000 metric tons of can sheet, 200,000 metric tons of auto and 150,000 metric tons of industrial alloy. On-site milk cast slab capacity will be 600,000 metric tons and that will be supported by 2 satellite recycled aluminum slab One in Central Mexico, we've already purchased the property there, and we're pursuing a Southwest U.

Speaker 2

S. Site As we speak, technology will include 2 cash lines, coating lines and downstream processing and packaging. We've expanded the project scope to include additional scrap processing and treatment to maximize aluminum recycle content. All the principal equipment is already on order, and we expect the roller mill to start up mid-twenty 25, The Mexico Slab Center, second half of twenty twenty four and the Southwest Slab Center, probably the Q1 of twenty twenty five. Total project cost, including the recycled slab centers, is expected to be $2,500,000,000 100% to be funded with available cash and cash flow from operations.

Speaker 2

As we've said in the past, the expectation is that Somewhere between $650,000,000 to $700,000,000 of through cycle annual EBITDA for the aluminum project, plus likely $40,000,000 to $50,000,000 for Omni. I think it's a very, very compelling investment premise. Excuse me. We see a market environment Not unlike that in the steel industry when we started SDI 30 years ago. It's predominantly old assets, little reinvestment, Heavy legacy cost is inefficient with high cost operations.

Speaker 2

A significant aluminum flat roll supply deficit exists North America and is expected to grow in the coming years. There is business alignment. We can leverage our core competencies of our construction strength and operational know how and also lever Omni's recycling footprint, as Omni is the largest North American aluminum scrap recycler today. SDI culture will drive high efficiency and low cost. And Throughout the industry, there's a very steep cost curve, which is going to support margin.

Speaker 2

A very, very cost effective high return growth initiative. We're excited and impassioned by our future growth Opportunities as they will continue the high returning growth momentum we have consistently demonstrated over the years. We were added to the S and P five hundred index in 2022. We are arguably one of the top 5 steel producers in the world as measured by market cap and the 3rd largest in North America relative to capacity. All these achievements in a relatively short time frame.

Speaker 2

We celebrate our 30th year end of business in 'twenty 3, and there are only better things to come. Our teams are our foundation, and I thank each of them for their passion and their dedication. And we are committed to them. And I remind those listening today that safety for yourselves, your families and each other is our highest priority. Our culture and business model continue to positively differentiate our performance, leading to best in class financial metrics.

Speaker 2

We're no longer a pure steel company, but an integrated mills business providing enhanced supply chain solutions to the industry. In turn, mitigating volatility and cash flow generation through all market cycles. We're competitively positioned and continue to focus on providing superior value for our company, customers, team members and shareholders alike. And we look forward to creating new opportunities for all of us Today and in the many years ahead. So with that all said, I'd like to open the floor up for questions.

Operator

Your first question is coming from Emily Chang from Goldman Sachs. Your line is live.

Speaker 4

Good morning, Mark and Theresa. Thank you for taking my questions this morning. I wanted to ask A bit about the fabrication volume expectation there. I'm just trying to take a look at the 1Q number. It certainly was a You mentioned that there was some seasonality and some customer supply chain constraints there.

Speaker 4

Can you provide some color as to what they were and how we move past this and anything you'd highlight as we look forward to the rest of the year as to what that volume trajectory could look like?

Speaker 3

Thanks, Emily. It's a great question. And there was seasonality in the Q1, but there was also Some movement because some of the customers are experiencing supply chain constraints as it relates to construction labor As it relates to materials, and so it's just simply pushing out orders, it's not changing the entirety of the volume itself. So the order backlog Some of these projects has actually pushed out, even further than into that October, November timeframe. So it's a shifting of volume.

Speaker 3

I guess it's how I would phrase it. As Mark mentioned and I mentioned in my notes as well, March was an extraordinary order entry for our seal and joist Stack business and that really is a, I think, a testament to the strength of that market today. And if you think about, the benefits That are kind of outside of just normal construction arena. If you think about manufacturing that has momentum behind it because of the Inflation Reduction because the infrastructure program, manufacturing on shoring, etcetera. We really expect our fabrication business to experience Very strong volumes this year as it's supported by those extraneous additional tailwinds, if you will.

Speaker 4

Great. Thank you.

Operator

Thank you. Your next question is coming from Curt Woodworth from Credit Suisse. Your line is live.

Speaker 5

Thank you. Good morning, Mark and Teresa. A follow-up question on fabrication as well for me. In the past, you've talked about Backlog pricing in the $5,000 per ton level, we've been hearing that prices definitely come in a lot from kind of peak levels last year. I just wanted to get a sense for if you could comment on pricing you're seeing in the market.

Speaker 5

And then you talked about The March order entry being very good. Can you give us a sense of what the makeup of that backlog or that order entry is? And then if you give any comments on EBITDA per tonne expectations.

Speaker 3

Kurt, you're trying to be tricky. You know we won't give EBITDA per ton, but I appreciate you trying. As it relates to the order activity, to give you a sense of it, it was well more than double, the order activity that we've seen kind of In the more recent, timeframe, January, February, December timeframe, so it was incredibly robust. And most of that activity came from what I'm gonna All industrial and manufacturing related business. So I think one needs to keep in mind when people talk about non residential construction, think they like to hone in on office space and there's many other categories as it relates to what would impact steel joists and deck demand And that's where we're seeing a lot of momentum.

Speaker 3

So that order activity for us is very much focused on those larger projects. And I think that's where the funding from those projects, A lot of the times are actually already funded. They're not bank funded, but they're project oriented Funding from large corporations themselves or now there's public funding support as it relates to decarbonization efforts and The Department of Energy and the excess funds that will be coming in those arenas as well. So there's a lot of, extra things I think that will support The volume going forward, but for us, it's primarily in that industrial manufacturing base at this point in time. As it relates to pricing, The commercial teams would be very upset with me.

Speaker 3

Barry is laughing if I were to try to give any commercial guidance at this point. I would tell you that as we've said in the past, the average price and the entirety of the order backlog is still very high from a historic perspective. It's not at The peak pricing that we saw, but it's very much aligned with what we have seen for the entirety of last year as an average.

Speaker 5

Okay. That's helpful.

Speaker 2

And just for clarity, when we say the backlog is in peak pricing, The sustained backlog that's kind of extending out is at very, very, very good Past pricing, the new pricing coming in, as you mentioned, is off a little from that for sure. But Relative to a historic basis, it is way, way higher than historic norm.

Speaker 5

Okay. And then just a quick follow-up on Sinton. As we think about that asset running 50 6% utilization, but having a net loss of $70,000,000 Can you we would think that Given where metal spreads are today, if that asset could be 70% utilized in the Q2, it Theoretically, you should make a lot of money, right? But it seems like there's still some kind of lingering startup issues, and you talked about some of the supply chain constraints. So can you help us understand a little bit about maybe the earnings power of that asset later this year or any frame of reference in terms of 2Q in terms of what you think Utilization rates could look alike.

Speaker 5

Thank you.

Speaker 2

Great question. And if you I'd say, if you look at the Q1 and certainly the 4th Quarter. You've had, you might say, a couple of extraneous impacts From a cost perspective, we obviously have higher priced pig iron coming through Given our order early last well, not early last year, Q2 last year with the Russia and Ukraine sort of crisis, So that is peeling out now through the Q1 and a little bit in April. In anticipation of early start up of the downstream lines, we bought And again, that was at higher pricing and that had to come through the system and that is essentially sort of out of the system today. So you we were carrying that sort of burden in the Q4 and in the Q1 and Some of it will come into the second, but it's substantially reduced.

Speaker 2

Obviously, the main principal driver It's volume, volume, volume, volume drives the successful performance of any major capital asset and certainly A startup asset such as this, we were at 56%. And the our confidence in the technology, I think, at least For me, it's driven by windows of absolute amazing performance where we've had shifts, we've had weeks, we're At 75%, 80% of capability already. If you look at sequence lengths, Which we and I and our industry for sure is an indication of the effectiveness of the teams and the equipment. We're averaging, I think, a little over 13 heats a sequence. We've been as high as 22 heats, 23 heats, and each heat is Whatever, 200, 210 tons per heat.

Speaker 2

That, in my mind, amplifies the capability of the asset. We just have to get the reliability of all the equipment. And again, it's a as you know, Kurt, it's in line. So The melt shop, the ladle furnace, the castor, the rough and mill, the finishing mill, everything has to be running in unison. And we're getting there.

Speaker 2

With the segment bearing roll issue behind us, not hindering us, I think we're looking for a sort of function improvement here in the next month or 2.

Speaker 3

Kurt, just as a reminder, on a through cycle basis, we still believe very strongly that Sinton, when it has For the value added lines operating, we'll have a through cycle EBITDA in the range of $450,000,000 to $500,000,000 per year. So that Outlook hasn't changed. So it is a significant benefit long term. It's just a matter of this year.

Speaker 5

Okay. Thanks. Best of luck.

Operator

Thank you. Your next Questions coming from Carlos De Alba from Morgan Stanley. Your line is live.

Speaker 6

Great. Thank you. I'm just going to try it in a different way. Without maybe discussing the absolute levels, it is clear that the EBITDA per ton and the profitability of the fabrication business is Extraordinary relative to history. It actually started based on what I've seen before the pandemic, but it exploded Throughout the pandemic and it has remained at those levels.

Speaker 6

How do you see the normalization Relative to say 2019 or 2017 to 2019 average, do you expect To be able to sustain a significantly higher profitability relative to that 2017 to 2019 average, Even if it is lower than what we're experiencing today. I mean, you probably understand that we're trying to figure it out What is a much more normal potential run rate of profitability in that business just given how extraordinary the results have been? Thank you.

Speaker 3

Carlos, thanks. I know everyone's trying to figure that out. And what I would say to that is Yes, we do believe that going forward, you're going to have there has been a structural shift and change And how the commercial aspect of, the steel joist and deck business has materialized in the last 2 years, if I would say it that way. And the change is that, there's first of all, there's considerable volume We believe that demand is going to stay in place for a considerable amount of time. There's limited supply.

Speaker 3

So in today's environment and I think in the future environment, It's not so much as looking at, just a product itself, but this is a highly engineered product. So it's looking at a product as well as a service, and that service is requiring time on the mill or time in the facility itself, and that has a value. And that's what now has come to the Or is that the customers understand there's a time element and a service element as well as a fairly highly engineered product set. So we believe those are structural changes and I think that came to bear and was proven in the second half of twenty twenty two When steel prices actually were being reduced pretty significantly, and we think an over correction, and yet we had increasing pricing Within our steel joist and deck facilities themselves. So we do believe there's a structural change.

Speaker 3

I can't help you more than that. I would tell you that we expect very strong volumes this year to be comparable to last year. And I think that we've told you we've got an order backlog that goes out into October, November, And it has a significantly higher price and that price is not too far off of what the average pricing would have been for 2022. I think we've given you a lot of data points, to hopefully help you with your estimates.

Speaker 6

That's great Caller, Teresa, thank you very much. And if I may squeeze one more. Maybe, Mark, could you comment as to how do you see Right now, obviously, that could change. But right now, how do you see the ramp up profile in terms of capacity utilization of the Flat Rolled Ali project?

Speaker 2

No, I think the again, as I said earlier, I'm expecting a step function improvement in the second. I'm sorry. I'm sorry. I'm sorry.

Speaker 6

Yes, the Allee, the aluminum project. Yes. I think that you mentioned. Yes.

Speaker 2

I would suggest that it's And that's a great question in all honesty, because we're wrestling with that ourselves right now, to be honest, and trying to understand fully The sort of the approval certification process of can sheet as opposed to auto sheet, The fact that we're creating slab ahead of time will aid that. And the fact that we have On the automotive side, some very, very, very good relationships with 2 or 3 key auto producers That are seeking our aluminum, and I think that will accelerate that certification process. So from the standpoint of actual ramp, I would imagine it wouldn't be too much different Then, you would expect, for any facility sort of 50% for the 1st 12 months, 80% for the 2nd 12 months and then ramping up thereafter. That would be probably as Good estimation is I would suggest to you.

Speaker 6

Great. Thank you very much, Mark.

Operator

Your next question is coming from Timna Panners from Wolfe Research. Your line is live.

Speaker 7

Hey, good morning, everyone. I wanted to start out and ask a little bit more color on garage doors. I know you have a great position in garage Stores and also, on the warehousing side, if you could provide some more color on those end markets?

Speaker 2

Certainly, the garage door is off a little, Timna, for sure, as in concert As you see typically, as you see the housing market come off, you see the replacement Business go up. So it's not one for 1, but it is off a little bit. The warehouse Market, I think when you're talking about warehouse market, I'm assuming you're looking at the sort of distribution warehouse Type facilities.

Speaker 3

Right.

Speaker 2

Obviously, there's been a lot of focus on the fact that Amazon overbuilt. Amazon wasn't a principal customer of ours. The other warehouse distribution organizations Are not off to that same degree. That said, cloud computing, pharma It's very, very, very strong. And as Teresa mentioned, you're starting to see true sort of reshoring sort of industrial manufacturing Growth, the Teslas of the world, the battery facilities, that sort of thing.

Speaker 7

Okay. That's helpful. Thanks. I want to follow-up on Sittin a little bit to think about the cadence of when we're going to see some of these mix shifts or improvement in the mix with the value add. So Just I know you talked about the Galvines coming on, and I also wanted to think about when we might see some more inroads into auto given your ability to make the thicker slabs and perhaps penetrate that market earlier than other mini mills.

Speaker 7

Can you talk a little bit more about when we should start to see first the galvanized Capacity ramp up within Sinton and also the potential for penetrating exposed auto in the next several years.

Speaker 8

We're really excited with the ramp up of the galvanizing down at Sinton. We do have to feed our paint lines right now. So We are working automotive discussions and trials into our production plants, but we're also anxious on making sure the whole plant is operational. All these units starting together, we want to feed the paint line, we want to feed our broader range of customers in the galvanized. We're really excited about the capabilities that we've seen in the Galvaline itself, paired with Our technology on the hot side.

Speaker 8

So we are excited about the surface quality especially. That was one of the big decision makers And to this point, we're really excited. We have not begun actually putting material into automotive plants, Well, we're engaging with customers that have entrusted our future with them and they're excited. They come through the shop And they see a path. So our technical teams are very much in discussions there and very much complemented with our Columbus operations that Are doing the workhorse of the automotive today.

Speaker 8

So we're excited to see it. And I think it has to happen at a pace that Tactical people are comfortable with, so that we can once we earn that business, we can entrust it with them that we're going to be shipping a

Speaker 2

good product into them. And obviously, Tim, the oh, my watch has gone off. Sorry. My ears are such that I don't hear high pitched voices. So, well, definitely voices, but any sound.

Speaker 2

So If you heard my watch alarm, I apologize. But Timna, I think the auto penetration is going as planned though. And if you look at the strength of our business model, the strength of Cintron itself, It's a very, very, very diversified product portfolio and we can leverage different market segments and give us greater optionality. So currently, the energy is incredibly strong. OCTG markets line pipe is strong and That will continue, I think, for the rest of this year going into the next year, particularly with the infrastructure build out.

Speaker 2

And we're seeing actually and it's surprising us a little bit perhaps, but The energy markets for heavy plate or heavier plate, heavier products anyway that we produce at any of our other mills, That is something that we're starting to leverage, particularly now we've got the caster issue behind us and can go up to full 1 inch thick. So we can sort of dance and work through or work around the different market segments. And to be honest, that's the strength of Sinton, that's the strength of all of our flat rolled facilities.

Speaker 7

If I could sneak one in on Sinton, I forgot to ask about the Mexican exports. I've been hearing actually that's been a big advantage for Sitting in another mills in the south, do you think that's more sticky than the taking share from AMSA being closed or how much do you expect that could stick, assuming AMSA restarts?

Speaker 2

I think the answer situation certainly is aided both Not just the Mexican market, but the U. S. Market because Mexican output and capability has been sort of Focused or redirected squarely within the Mexican market itself. So that's helped us. I think the customer base at AMSA is when you go through a shockwave like this, you So, while you reflect on your future, and I think they see a need for optionality.

Speaker 2

So even when, AMSA comes back, I think you're we're confident in all honesty of maintaining a lot of that business. So it's been very, very fortuitous for us.

Speaker 7

Makes sense. Okay. Thanks for the detail.

Speaker 5

You're welcome.

Operator

Thank you. Your next question is coming from Tristan Gressler from BNP Paribas Exane. Your line is live.

Speaker 9

Yes. Hi, good morning. Thank you for taking my question. The first one, I apologize, it's again about the fabrication outlook. You fact that you're targeting volumes of last year, so strong volumes, Is that fair then to assume a strong pickup then in volumes into Q2?

Speaker 9

And also, the second part to that question is Maybe on the moving pieces there for the outlook, it's also on the cost side. Can you discuss a little bit the cost side there, Especially in Q2, I mean, we've seen flat steel prices double over the past months. The backlog is kind of locked. So Yes. Anything you can say there in terms of potential cost pressure into Q2 that would be helpful.

Speaker 3

Thanks, Tristan, for the question. Yes, as it relates to volume, I mean, traditionally, you're always going to have your strongest Construction months and project months and quarters in the second and third quarter. So we absolutely would expect to see stronger volumes in that timeframe For our fabrication business as well. As it relates to cost, we generally sometimes it changes, but we generally keep around 8 weeks or so Of steel on the ground for our fabrication business, uniquely, we use primarily flat rolled steels and a little bit of merchant steels in the process. So if you can kind of file that bouncy ball with how you feel the pricing will look going forward and what's done in the recent past and should give you some inclination of how the metal margin will move pushing forward into the 2nd quarter.

Speaker 9

All right. That's helpful. So the price increase we've seen has not been Reflected.

Speaker 3

Yes, it lags about 8 to 10 weeks.

Speaker 9

All right. I want

Speaker 2

to emphasize the obvious here, because We all tend to sometimes focus near term, but the new Millennium Fabrication Business as a whole It's incredibly important, a, for pull through volume, particularly in softer markets, as we said earlier, allowing the higher utilization Right through our steel mill. But it's also yes, in this environment, maybe you get a Steel pricing comes up, you get a little bit of squeeze and vice versa on the other opposite side. But there's a very strong natural hedge to Our business here and we've been very intentional with our growth into sort of value add, sort of diversification of of our portfolio and the businesses that we grow to try and mitigate that volatility of 3 cycle cash generation And not be as cyclical as we once were, maintaining higher highs and higher lows for sure.

Speaker 9

Okay. No, that makes sense. And maybe a quick follow-up on working capital. We've seen quite a good Release in Q1, how would you see that evolve moving forward?

Speaker 3

Yes. So as we talked about it, there was a lot there was a significant amount of working capital build in 2022. Much of that was not structural. It had to do with us layering on some additional raw materials with paint iron, some additional substrate that Mark mentioned. So We have been able to work through most, if not all of that.

Speaker 3

We still expect to have some working capital give back as we head into the second quarter, As we kind of still right size some of our inventory levels, etcetera. So, it may not be a significant of a benefit as you've seen in the last two quarters, but we We think working capital will be a funding source heading into the 2nd quarter.

Speaker 9

Okay, perfect. Thanks a lot.

Operator

Your next question is coming from Andreas Bokkenheiser from UBS. Your line is

Speaker 10

live. Yes. Thank you very much. Good morning, everyone. Two quick questions from me, one on steel and one on Ali.

Speaker 10

On steel, you're very obviously growing your volumes both quarter on quarter and year on year. And it certainly looks to be faster than the market. So you guys seem to be capturing market share. Can you assuming you agree with that, can you give us a little bit of color on where specifically you're capturing market share from peers? Is it non res?

Speaker 10

Is it auto? Is it energy? Possibly all of the above, but is anything kind of standing out and maybe also why you're able to capture that market share obviously? And then secondly on the Ali question, obviously you're targeting automotive among other sub industries. Where specifically will the Ali go in automotive?

Speaker 10

Is this going into auto body sheet that historically has been dominated by steel and especially steel Supplied by the blast furnaces, is that where you envision the aluminum to go? Those are my two questions. Thank you very much.

Speaker 2

Okay. Well, for the standpoint of our increase in volumes, I would say, yes, we are picking up market share. The Geographic location of the Sinton, Texas plant is pivotal. Obviously, that was an underserved market. We have access into Mexico now, much, much, much cheaper than any other U.

Speaker 2

S. Mill to the tune of well, We can get it down there for $40 $30 yes, dollars 30 sorry. Whereas, if you're bringing it down from Northern Indiana, it's probably 100 plus. So there's massive geographic sort of advantage for that mill and we're picking up, as I said, Mexican market, We're picking up energy again because of that location, OCTG and Line Pipe. So that is one sort of driver.

Speaker 2

The second driver, I think, and I got to applaud The automotive team, they've done a phenomenal job over the last 2 or 3 years. The traction there is amazing, Particularly with the European auto producers, and we're favored because of our carbon footprint Our sustainability sort of profile, our mills will be the they report, Not us, but they report that our Columbus facility, for instance, and our Butler facility are probably some of the lowest Facilities carbon producing facilities in the world. We're gaining a lot of market share from that. I think that those are the probably the principal gains there. And then on the aluminum, Firstly, there is a substantial supply deficit that industry in Kanshi and aluminum is reliant on a very, very large portion of imports today.

Speaker 2

So we would intend or believe that our Low cost position, our efficiency and our commercial approach We'll be very, very well received and we'll offset A, some of those imports and B, pick up The share of growth in that industry. You mentioned the kind of the steel aspect. Having aluminum in our portfolio gives us the advantage. I guess if there is A steel decline in any one area with a pickup in aluminum, we can penetrate that or take advantage of that.

Speaker 10

That is clear. Thank you very much.

Speaker 2

Oh, sorry, sorry, sorry. And where is it going? Well, again, the facility is not, in this case, Unlike, our start and steel, we're not revolutionizing the technology necessarily. It's absolute state of the art technology for sure, but it will have the same capability Of any, high class new, aluminum facility in the world. So both the unexposed and the exposed.

Operator

Your next question is coming from John Tumazos from Tumazos Independent Research. Your line is live.

Speaker 10

Thank you.

Speaker 11

Congratulations on all the progress. I'm looking at your almost $1,000,000,000 of cash flow Four uses in the quarter, and it's just so large and formidable without sitting at a positive EBITDA And sheet prices were a little low. The numbers are just so big. My first question is what will you do with all the money? Would you perhaps invest more in Scrap ferrous, scrap non ferrous iron ore, lots of opportunities in raw materials or resources.

Speaker 11

And second, you had a $418,000,000 Deduction from cash flow for accrued expenses, I was just curious what was such a big accrual?

Speaker 3

John, I'll take the last one. That's a simple one. We have a company wide profit Sharing plan, that's how we provide for retirement for all of our 12,000 people, and it's simply 8% of pretax earnings. And since we had a record 2022, We were able to give all of the employees $422,000,000 in total, and that payment went out in March. So that's the reason for the significant change.

Speaker 11

So it should really be almost amortized uniformly over the quarters from the Point of forecasting cash flow.

Speaker 3

Yes. Well, I mean, you could do it that way. But in actuality, it comes out in March. But yes, you could look at it that way.

Speaker 11

The Q1 had that big deduction from it and it was still a lot of money.

Speaker 3

That's correct.

Speaker 2

Actually, John, if you're within about 100 miles of any of our facilities on March 15th, you would have heard the shout and Screaming and the crying as to the amazing thing that is, and it's massive, massive, massive boost to our employees. And as I tell each and every one of them, it ain't a gift. Each and every one of them has earned that profit Sorry, that's proper sharing. Relative to investing Wealth, so to speak, scrap, iron sort of backwardly integrating is not a primary target. Certainly, iron ore is iron is certainly not a target at this moment in time.

Speaker 2

We will and we are looking at The options for during a strategic supply of our own pig iron, a green supply. So that's ongoing, but not a massive capital expenditure once we move forward with that. On the scrap side, we are spending money on segregation, different ways Of cleaning up all the different scrap flows to maximize, a, recycled content in the aluminum business And also to reduce the residual level of the obsolete flow again to supplant some of the prime scrap. That's working incredibly well, particularly when there's a good spread between obsolete and prime. Not only are you Securing a flow of prime scrap, but the cost impact is very, very, very significant Reduction in cost or savings.

Speaker 2

But again, we are smaller, smaller investments in Segregation there, you'll see us spend a few dollars expanding our scrap footprint in the We're not talking about anything that's going to impact the balance sheet. In all honesty, we expect that cash flow generation to continue. And we will continue, I think, just the same cash allocation strategy that we've had in the past, With a strong balance sheet, huge liquidity, it allows us to have a balanced perspective. We'll continue To have a positive dividend profile, you saw us increase, was it 25% here earlier this year. We'll continue to repurchase our shares.

Speaker 2

We think it's still at an incredible value today. Sure. We're continuing with the organic growth. We got the 4 coating lines going in, start up Later this year, we got the aluminum project, and the team for 30 years I've continually found good cost effective high returning organic growth projects And there's a bunch in the pipeline there. And obviously, we continue to review the sort of M and A activity As it comes across our desk.

Speaker 2

So we're very, very blessed for sure.

Speaker 11

Thank you and congratulations.

Speaker 2

Thank you,

Operator

John. Thank you. That concludes our question and answer session. I'd like to turn the call back over to Mr. Millett for any closing remarks.

Speaker 2

Super. Thank you. Well, again, for those that are still on the call, Sony, appreciate your time today. We appreciate your support For our customers, thank you, thank you, thank you. We can't do it without you.

Speaker 2

And to our Sure. Our team, each and every one of you, you do an absolutely phenomenal job each and every day. And just do one thing for us Me personally, be safe. Look after each other. Have a good day.

Speaker 2

Bye bye.

Operator

Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation and have a great and safe day.

Powered by Quartr

Key Takeaways

  • Consecutive quarter of safety improvement with 82% of facilities free of recordable injuries and a company-wide goal of zero injuries.
  • Record Q1 performance: 3.3 million tons of steel shipments and $950 million in adjusted EBITDA, positioning the company for Q2 2023 profitability as volumes rise.
  • Strong cash generation in Q1—$734 million from operations—and record liquidity of $3.5 billion, enabling a 25% dividend increase and $354 million in share repurchases.
  • $2.5 billion aluminum flat-rolled investment underway: a 650,000 MT annual capacity mill in Mississippi plus two recycled-slab centers, fully cash-funded and targeting $650–700 million of through-cycle EBITDA.
  • Circular manufacturing and sustainability initiatives—including Mexican recycling operations and an Amium biocarbon JV—are enhancing scrap supply and could cut Scope 1 emissions by up to 35%.
AI Generated. May Contain Errors.
Earnings Conference Call
Steel Dynamics Q1 2023
00:00 / 00:00