Steel Dynamics Inc (STLD) 2020 Q1 法說會逐字稿

Good day, and welcome to the Steel Dynamics First Quarter 2020 Earnings Conference Call.

(Operator Instructions)

Please be advised this call is being recorded today, April 21, 2020, and your participation implies consent to our recording this call.

If you do not agree to these terms, please disconnect.

At this time, I would like to turn the conference over to Tricia Meyers, Investor Relations Manager.

Please go ahead.

Thank you, Michelle.

Good morning, and welcome to Steel Dynamics First Quarter 2020 Earnings Conference Call.

As a reminder, today's call is being recorded and will be available on your website for a replay later today -- sorry, on our website for a replay later today.

Leading today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and Theresa Wagler, Executive Vice President and Chief Financial Officer.

The other members of our senior leadership team are joining us on the call individually as we are following appropriate social distancing guidelines.

Among today's statements, which speak only as of this date, may be forward-looking and predictive, typically preceded by believe, expect, anticipate or words of similar meaning.

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 our steel, metals recycling and fabrication businesses as well as the general business and economic conditions.

Examples of these are described in the related press release as well as in our annually filed SEC Form 10-K under the headings Forward-looking Statements and Risk Factors found on the internet at www.sec.gov, and if applicable, in any later SEC Form 10-Q.

You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports First Quarter 2020 Results.

And now I'm pleased to turn the call over to Mark.

Thank you, Tricia.

Good morning, everybody.

Welcome to our first quarter 2020 earnings call.

We certainly appreciate and value your time in these unprecedented circumstances.

Steelmaking is designated a critical infrastructure industry by the U.S. Department of Homeland Security.

We are deemed essential to the nation's defense infrastructure, transportation and overall economy.

And as such, all our operations have been operating.

Protecting the health and well-being of our teams is our most critical priority.

We are closely monitoring the COVID-19 situation and have implemented numerous additional practices throughout the company to protect each of us.

I want to thank our more than 8,400 team members for remaining steadfast and passionate.

We continue to operate safely with a spirit of excellence, and I'm incredibly proud to work alongside each of them doing this unparalleled time.

We are committed to the health and safety of our people, the families and our communities, all while supporting our suppliers and meeting the needs of our customers.

But before I continue, Theresa, will you please provide insights regarding the team's recent incredible performance during the first quarter that should not go understated despite these present environmental issues, along with our strong financial foundation?

Thank you.

Good morning, everyone.

Our first quarter 2020 net income was $187 million or $0.88 per diluted share, above our guidance of $0.83 to $0.87 due to stronger-than-anticipated March flat-rolled steel shipments.

First quarter 2020 revenues were $2.6 billion, somewhat lower than prior year first quarter sales but 10% higher than fourth quarter sequential results, driven by improved steel pricing and shipments.

Our first quarter 2020 operating income was $274 million, $18 million lower than prior year first quarter, but notably, 50% higher than sequential fourth quarter results due to record steel shipments driven by solid first quarter underlying demand.

From a platform perspective, our steel operations' first quarter shipments increased 7% sequentially to a record 2.8 million tons with increased volumes experienced across the platform.

Our average quarterly realized sales price increased $10 per ton to $774 in the first quarter and average scrap cost increased $24 per ton, causing steel metal margin compression.

The result was first quarter steel operating income of $293 million, 45% higher than the sequential fourth quarter results.

For our metals recycling platform, first quarter operating income was $8 million compared to a loss of $5 million sequentially, a result of higher ferrous and nonferrous selling values and shipments, with prime scrap indices rising at almost $30 per gross ton during the first quarter.

About 65% of our metals recycling ferrous shipments serve our own steel mills, increasing our scrap quality, our melting efficiency and reducing our company-wide working capital requirements.

Our vertically connected operating model benefits both platforms.

For our steel fabrication business, first quarter 2020 operating income remained strong at $29 million compared to near-record sequential results of $33 million primarily due to seasonally lower first quarter shipments.

We experienced record order inquiry and bookings in the first quarter, ending March with a record backlog.

We're still experiencing strong order inquiry and are entering the traditional construction season on a good footing.

Our cash generation continues to be strong.

During the first quarter of 2020, we generated $211 million of cash flow from operations, offset by operational working capital growth related to higher steel selling values and the $74 million distribution of our annual company-wide profit sharing to our teams.

We spent $218 million in fixed asset investments during the first quarter, of which $130 million related to our new Sinton, Texas, flat-rolled steel mill investment.

To date, we have funded $335 million of the $1.9 billion project.

Regarding shareholder distributions, we increased our cash dividends 4% in the first quarter of this year to $0.25 per common share.

This follows increases of over 20% in both 2018 and 2019.

The Board also authorized an additional $500 million for stock repurchases in February of this year.

We repurchased $170 million of our common stock during the first quarter, and $444 million remains available under the new authorization.

Since 2016, we've invested $1.3 billion in our common stock, representing over 50% -- 15% of our outstanding shares.

These actions reflect the strength of our capital foundation, consistent cash flow capability and strong liquidity profile, demonstrating our confidence in our sustainable through-cycle strong cash generation.

Part of that confidence is based on the high variability of our cost structure within our operating platforms.

During market weakness, working capital becomes a funding source.

2015 is a great example.

Working capital provided over $500 million to cash flow that year.

For the coming months, we expect working capital to also be a source of cash flow for us.

For the remainder of the year, we currently are planning for capital investments to be roughly $1.2 billion, of which the new Sinton, Texas, steel mill represents $1 billion.

This spending for Sinton is heavily weighted to the second half of 2020.

Over $700 million of that $1 billion spend is actually meant to be in the second half of this year.

As we gain more visibility into the extent of the disruption in 2020 related to the coronavirus, we could shift some of the 2020 investment into 2021 if we believed it was necessary.

Based on current time lines, we estimate capital investments for 2021 to be in the range of $700 million to $750 million, of which Sinton represents $600 million.

We entered the coronavirus crisis in a position of strength with a strong cash position and liquidity profile.

Entering 2020, we had over $1.6 billion of cash and short-term investments.

At the end of the first quarter, we had almost $1.5 billion.

Combined with our $1.2 billion undrawn, unsecured revolving credit facility, we have available liquidity of over $2.6 billion.

One can't look historically at our financial performance to determine either a trough or a peak future performance.

We've grown significantly, transformed our Columbus Flat Roll Division, further diversified our steel product offering and incorporated even more levers to increase our through-cycle financial performance.

Since 2015, we've increased our total shipping capacity from 11 million tons to over 13 million tons, while increasing our value-added revenues from just over 55% in 2015 to almost 70% last year.

Since 2015, we've transformed Columbus' through-cycle earnings capability by reducing their operating costs, dramatically increasing their value-added product capabilities and diversifying their customer base and end market sectors.

We've expanded our Structural and Rail and Roanoke Bar Steel Divisions to include Reinforcing Bar production capabilities, further diversifying the location's product offerings in order to sustain higher through-cycle utilization.

We've also added new manufacturing businesses to our portfolio that use steel as a raw material, providing additional opportunities to sustain our own steel mills utilization throughout market cycles.

Since 2015, we've increased the possible internal volume by over 1.5 million tons through acquisitions and growing our steel fabrication platform.

This is an incredibly powerful tool during weak demand environments.

In addition, collectively, our primary recent and planned strategic growth investments provide an estimated incremental annual future EBITDA of over $425 million on a through-cycle historical spread basis.

This estimate includes our Sinton steel mill and third Columbus galvanizing mine as well as our 2 operational Reinforcing Bar Expansions.

We're simply even more agile today than ever before.

We're also dedicated to preserving our investment-grade credit rating.

Our capital allocation strategy prioritizes responsible strategic growth with appropriate shareholder distributions comprised of a base positive dividend profile that is complemented with a variable share repurchase program during periods of excess cash generation.

We are squarely positioned for the continuation of sustainable, optimized, long-term value creation.

And on a personal note, I want to take just a moment.

I want to wish my dad a very happy birthday.

He's not listened to one of these calls in 25 years, and he's listening this morning.

And I also want to thank our teams, truly, for their passion and generosity and the care that they're showing for each other's health and safety.

God bless.

Mark?

Well, thank you, Theresa.

As I stated, safety is and always will be our #1 value and priority.

Nothing is more important.

During the first quarter of this year, our safety performance improved from the previous quarter's outcomes with meaningful improvement in the severity of incidents.

Our safety performance continues to be significantly better than industry averages, but as I've said many times before, it's not enough.

It will never be enough until we reach our goal of 0. We all need to be continuously aware of our surroundings and our fellow team members.

I challenge all of us to be focused, both as we think traditionally of safety, but even more so now as it relates to keeping each other in good health.

The steel fabrication platform delivered a strong first quarter performance.

Construction is also deemed in an essential business, and as such, almost all the states allowed construction projects to remain open.

We've had some jobs delayed or postponed, but at this time, it has not been widespread or meaningful.

This should perhaps be expected as in previous market downturns, construction has lagged the rest of the market by 4 to 6 months due to prefunded ongoing projects.

We experienced the record number of inquiries in bookings in the first quarter.

Our fabrication order backlog remains very strong with 15% higher than at this time last year.

Our metals recycling team performed well in the quarter, returning to profitability.

During the first quarter, prime scrap appreciated about $25 or $30 per gross ton.

However, with lower domestic steel production, April prime scrap prices retracted about $30 and shredded $45 per gross ton.

Lower industrial prime scrap flow related to the temporary idling of the automotive sector in April was offset by reduced demand due to lower steel mill utilization, maintaining sufficient prime scrap availability.

As the announced staggered automotive plant restarts begin in later April and throughout May, we expect to see prime scrap flow return to good levels prior to a ramp up in steel mill utilization, and thus, in turn, stable the scrap prices.

In general, the steel teams had a phenomenal performance in the quarter, hitting record volumes in a tough environment.

We saw underlying steel demand strength and increased steel selling values in both flat roll and long steel products through substantially all the first quarter before the Russia/Saudi Arabia oil price war and the state COVID-19 stay-at-home directives.

Since mid-March, the landscape has shifted rapidly.

A severe decline in energy prices related to oversupply has significantly reduced steel demand from the pipe and tube manufacturers.

And the temporary closure of automotive production and the related supply chain closures will meaningfully impact flat-rolled steel demand for this upcoming second quarter.

Since mid-March, hot-rolled coil index pricing has declined over $100 to about $485 per ton according to Platts.

As a result of reduced flat-rolled demand and reduced pricing, a considerable number of higher cost flat-rolled steel operations have been indefinitely idled.

Since the end of 2019, we believe it represents a reduction of between 12 million to 14 million tons of annual flat-rolled sheet steel capacity, approaching some 20% -- 30% of total domestic capability.

In contrast, the construction sector continues to be steady, which, as mentioned, is a critical steel consuming, representing 40% to 45% of total domestic consumption in normal markets.

The order activity from our construction-related customers, in addition to current strength in our steel fabrication order backlog, supports this sentiment.

We believe that coming months will be difficult.

Yet in these environments, the strength of our people and our differentiated business model becomes even more evident and more impactful.

As demonstrated historically during times of market inflection, we will likely gain market share based on our uninterrupted low-cost operations providing the greatest customer optionality, product end market diversification with value-added market niches and the additional internal steel sourcing from our captive manufacturing businesses.

To put that in perspective, our steel fabrication platform, The Techs, Heartland and Vulcan, purchased 2.3 million tons of steel in 2019 and only sourced about half of that from SDI-owned steel mills.

This provides additional opportunity for internal purchasing to keep our steel mills running at higher utilization rates even in a weaker demand environment.

U.S. administration's recent guidance for states to begin a staged reopening is positive.

As they begin this critical process, improved steel demand will follow from pent-up demand and already low steel inventories.

We've provided a summary of our recent growth investments on a slide in our investor deck posted on the website.

In the last 12 to 18 months, we've executed several strategic investments that will benefit our through-cycle earnings and cash flow position.

We expanded 2 steel mills by the combined addition of 440,000 tons of steel rebar production capability, providing product diversification and a differentiated supply chain for the customer.

Our model provides meaningful customer optionality and flexibility with significant logistics, yield and working capital benefits.

This end market diversification provides for a higher through-cycle utilization for our Structural and Roanoke Steel Divisions.

Heartland Steel, an 800,000 ton value-add flat-rolled steel processor that sells primarily cold-rolled and galvanized products, has been ramping up nicely, providing additional order support and operational flexibility for our Butler Flat Roll Division.

This increased the through-cycle utilization of our steel assets and broadened our value-added product mix.

The acquisition of 75% of United Steel Supply has been another excellent investment.

As a flat-roll Galvalume prepayment steel distribution company, it has provided a meaningful distribution channel to new customers.

As a consumer of our internal steel products, they also increase the power of our through-cycle steel utilization.

Since our acquisition of Columbus Flat Roll Division, the transformation of its product portfolio through the expansion of its value-added steel capabilities, diversification of its customer base and the addition of paint line has meaningfully increased its through-cycle earnings capability, which will be clearly demonstrated during this downturn.

We're now close to completing $140 million 400,000 ton value-added third galvanizing line, which we expect to begin operating in mid-2020.

The value-added product increase will decrease Columbus' hot-rolled coil exposure and provide a ready and waiting hot band customer base in the south for our new Texas steel mill.

At Sinton, we continue to be excited by the material growth the construction of our new next-generation flat roll steel mill will deliver.

As Theresa explained, our financial strategy is focused on entering 2020 providing for the required investment associated with this transformational project.

Our team has an incredible depth of experience in the construction, start-up and operation of large steel manufacturing assets.

Collectively, we believe they have more experience than any company in the industry, and they're performance and momentum has been remarkable.

In January, we received the required environmental permitting to allow for full construction efforts, and we currently anticipate a mid-2021 start-up.

That said, as Theresa mentioned, we will be reassessing our time line throughout the second quarter as we gain more visibility into the impact of COVID-19.

Additionally, even though we intentionally did not purchase equipment from China, some of our equipment has been manufactured in other countries where the coronavirus is also active.

We're having weekly conversations with these manufacturers, and we currently do not believe our planned schedule has been meaningfully impacted.

The new state-of-the-art 3 million ton steel mill will include a value-added coating line comprised of 550,000 galvanizing line and a 250,000 ton paint line with Galvalume capability.

It will follow the same stringent sustainability model as our other steelmaking facilities with state-of-the-art environmental processes.

Our existing steel mills have a fraction of the greenhouse gas emission intensity, actually about 12% of average world steelmaking technology.

With an 84-inch coil width, 1-inch thick, 100-KSI product capability, the Texas mill will have capabilities beyond existing electric-arc-furnace flat roll steel producers, competing even more effectively with the integrated steel model with foreign competition.

As you know, the steel mill is strategically located in Sinton, Texas, near Corpus Christi.

We have targeted 3 regional sales markets for the mill, representing over 27 million tons of relevant flat-rolled steel consumption in the Southern and West Coast United States and Mexico.

We also plan to effectively compete with heavy imports in Houston and the West Coast.

Our customers are excited to have a regional flat roll steel supplier.

We have several customers in discussions, with 1 already committed to locate on site with us and a second close behind.

These 2 customers alone will represent over 800,000 tons of local steel processing and consumption capability.

The Sinton location provides a significant freight benefit to most of our intended customers relative to their current supply chain options.

We believe the potential customer savings related to freight alone are a minimum of $20 to $30 per ton, and for some, much higher.

This freight advantage, along with the much shorter lead times, provides a differentiated supply chain solution, allowing us to not only be the preferred domestic steel supplier in the Southern and Western U.S. but also to effectively compete with imports, which inherently have long lead times and speculative pricing risk.

From a raw material perspective, our metals recycling operations already control significant and growing scrap volume in Mexico through scrap management agreements, much of which is prime.

As announced in March, we are also planning to acquire a Mexican scrap company as part of our raw material strategy for Sinton.

Their primary operations are strategically located near high-volume industrial scrap sources throughout Central and Northern Mexico.

The company currently ships approximately 500,000 gross tons of scrap annually but has an estimated annual processing capability of about 2 million tons.

After closing, we plan to ramp up volume fairly quickly.

We are currently waiting for Mexican regulatory approval as well as other closing requirements to expect to close in the coming months.

We believe our unique operating culture, coupled with our considerable experience in successfully constructing and operating cost-effective and highly profitable EAF steel mills, positions us incredibly well to successfully execute the Sinton project.

As I've said before, we're not simply adding flat roll production capability.

We have a differentiated product offering with significant geographic freight and lead time advantage and an import alternative to a region in need of options.

Our unique culture and the execution of our long-term strategy continues to strengthen our financial position through consistent, strong cash flow generation and long-term value creation, differentiating us from our competition and demonstrating our sustainability.

Again, our commitment is the health and safety of our people, our families and our communities, all while supporting our vendors, serving our customers and sustaining our value-creation journey.

Our team is simply incredible.

I'd like to thank each of them for their patience, resilience and commitment during these tough times.

They have an indomitable spirit that drives us to excellence.

And also, a very special thank you to the health care providers and their families within Steel Dynamics and those serving individuals across the globe.

Thank you.

Be safe.

Be well.

So Michelle, please open the call for questions.

(Operator Instructions) Our first question comes from the line of Chris Terry with Deutsche Bank.

Just interested in the outlook, sort of, what you've seen so far in April.

Obviously, the chart you provided in your presentation had utilizations in the 80% mark.

You're above the average.

That's fallen to the mid-50s in the last couple of weeks.

Just wondering if you could comment on how steel deals are going so far in April.

And maybe based on your order book, what you might expect that to be during 2Q?

I know it's a difficult question, but just wondering if you can provide some color on the ground.

Well, certainly.

I think, as you said, it's an incredibly difficult question.

Not so sure our crystal ball is clearer than others.

But I will say that it's positive looking through the lens of our order book and our order input rate.

And I read this morning an American metal miner individual saying, "Well, nobody is buying out there." I guess, perhaps, they're not buying from other people, but they are buying from us.

I believe that, obviously, energy is going to be very stagnant for the rest of this year into next year.

Automotive is going to come back.

Again, one doesn't necessarily know exactly when, but the expectation is, yes, later this month and through May.

But the bright spot, certainly, is construction.

And as I mentioned earlier, construction tends to lag market downturn.

We saw it in 2015, we saw it in 2008, 2009.

It tends to lag the downturn in the market by about 4 to 6 months because operations or projects tend to be prefunded.

And we're seeing that in our New Millennium Building fabrication business in our structural mill.

As I said, New Millennium, extremely strong backlog despite some project pushbacks, but there's nothing real meaningful change yet.

And we are very, very strong, have a large market share in the distribution warehouse market.

That, obviously, given people staying at home and the expansion of Amazons and the like, that is -- remains a growth area in all honesty.

Structural and Rail Division, backlog is currently solid, certainly through May.

It did see a $25 price decrease here just recently, but I do believe that people will recognize that we're troughing out at the bottom of the market.

The scrap is going to be somewhat stable here in the next month or 2. So those that have been hanging on the sidelines, not buying, will likely come to market.

In that arena, in the beam arena, heavy structurals, distribution has certainly slowed as they whittle down their inventories.

They're now pretty damn tight, and we're starting to see them come back and buy as they need.

The fabricators, that business still is strong as they supply the ongoing construction projects.

Rail is actually very, very strong for us at the Structural and Rail Division, and rebar is an addition for us.

Compared to past downturns, the product portfolio of Structural and Rail Division is much more diverse today, and we won't see the depth of lower utilization rate.

And if you remember, back in 2009, 2010, that business went to 30%, 35% utilization, still remaining somewhat profitable.

But that's not going to happen this time because of a much more diversified product mix and market mix.

And so that should weather the storm very, very well.

Engineered Bar, that is seeing a little softness right now.

Obviously, automotive is down.

Energy, seamless tube is down there.

So that is one arena that is probably as soft as anything in our product portfolio.

Flat roll remains relatively robust is probably too strong a word.

But we're targeting those operations to run at around about 80% utilization.

That, for us, seems to be a good balance between fixed-cost absorption and pricing.

And it appears that we should be able to sustain that targeted output certainly for April, certainly for May, and we're confident that we can do that in June as well.

So generally, I think it's, obviously, quarter-over-quarter, it's going to be a tough couple of months for us, but we are positive.

Our next question comes from the line of David Gagliano with BMO Capital Markets.

Congrats on a solid start to, obviously, a challenging year.

I just want to follow up on the prior question.

If we look at Slide 11, 94% utilization rates in the first quarter.

What's that number today?

Dave, I think that's what Mark just really tried to address.

So we've not -- there's a couple of things that I think differentiates us.

One is that we continue to operate 24/7.

And so with that, we get the orders and we gain market share during environments like this, especially as other higher-cost production is being shut down.

Right now, we're still operating at a very good utilization rate across the platform.

The most challenged division, frankly, is our Engineered Bar Division, and that's because of -- they're tied to both the energy market and to just general industrial.

Once automotive comes back, and more specifically for Engineered Bar, then Caterpillar, John Deere, et cetera, start operating again.

And I think that schedule, the last charts that I've seen, was towards the mid- to the end of May you should start to see that correct.

But that being said, it is a very difficult environment.

It's just we're able to gain market share.

And we're very nimble in the order entry and working with the customers.

And that tend to make is so that in very difficult environments, our utilization stays higher.

The other point is the internal volume, that is not to be overlooked.

So fabrication is still incredibly strong with the record backlog.

They need steel.

They'll be buying that steel from our own steel mills.

The same thing with -- regarding to our internal processing division.

So Heartland, United Steel supply, et cetera, they need steel.

They'll be buying that from our internal steel mills.

So that helps our utilization profile, and not most of our, if any of our, competitors have that same lever to pull.

So we can't give you an exact percentage number today.

Frankly, I don't know what the exact percentage would be overall, but I know that we feel good about where we are and that the teams are doing a great job.

Okay.

Thanks for the additional color.

The commentary was targeting 80% on the flat side.

How about maybe -- is there a target for the remainder of the product mix?

Well, I think structural should remain in that sort of 75% to 80% range.

Again, the merchant shapes, probably less than that.

Again, merchant shapes around about tends not to be a massive part of our earnings profile anyway.

But our -- 3 out of 4 of our principal mills, Butler, Columbus and the Structural and Rail Division, are targeting that 75% to 80% utilization rate.

As Theresa said, Engineered Bar right now looks to be softer than that.

So Dave, just as an example, if you go back to 2015, which I would suggest is the last weak steel environment that we've seen overall generally, our operations even at that time were operating at over 70%.

On the flat roll side, they were actually operating closer to 90%.

It's always more challenging on the long product side because there's just extra capacity out in the system as it relates to long products and because they're all electric-arc-furnace based.

But today, we would suggest that we just have more internal levers to pull.

And so we wouldn't think that necessarily, overall, when you include both flat and long, has as much impact as it might have at one point in time.

Our next question comes from the line of Seth Rosenfeld with Exane BNP Paribas.

With regards to the cost performance that we've seen in the business, as you've continued to grow your processing volumes, utilizing some internal and some third-party substrate, can you just give us a sense of how that's impacting your overall fixed-cost base for the business?

Again, if we think about how you're positioned in 2020 compared to past downturns, should we consider that growth in processing is essentially more variablizing your cost base versus history?

Or should we think about this in a different way, perhaps?

And then secondly, just one more follow-up with regards to Sinton.

I was wondering if you can please give a little bit of color with regards to the decision to continue with the same 3 million ton target.

Given the weakness in oil and gas you yourself have of that being weak through 2021 and plans for 1 million tons going into energy, how do we think about that 3 million ton target in the current market environment for Steel Dynamics?

Okay.

Seth, I think -- good morning.

I think I have all the questions written down.

So from -- the first question is about the adding of the manufacturing businesses or the processing businesses, there's 2 points that you should keep in mind.

One is you're correct.

It is increasing the variability of our cost structures.

But again, as a reminder, each of our operating platforms is already over 85% variable cost, but this helps that as well.

The other component to recognize is that because they're buying steel and using steel as a substrate, that is impacting our cost of goods sold by having steel run through cost of goods sold, which is just higher priced.

And so just anecdotally, in the first quarter, we had about 15% of our cost of goods sold was associated with those steel purchases from the converting companies.

From a Sinton perspective, Mark, I'll let you handle the energy question.

Yes.

For sure.

I think that the mill is structured or designed for 3 million tons.

It's not like a conventional thin-slab based EAF where you have 2 casters.

This has 1 caster with a 3 million ton capability, and as such, it's not a matter of building half the plant or anything like that.

Nor do we will be defenseless by doing so.

Obviously, the output would be adjusted somewhat to demand.

But again, yes, the energy markets are pretty tough right this second.

But as one -- for those that have been in the industry for a significant amount of time, things do cycle, that market will come back.

But the advantage of the Sinton facility is its geographic location.

We're not dependent on 1 single market or product.

We've got around about 27 million tons of market capability when you look at the Southwest, you look at the West Coast and you look at Mexico.

And we can shift that product between energy and automotive and construction.

And we feel that the investment premise remains totally, totally intact.

And just as a quick point on that.

From an energy perspective, last year, I think the other shipments, about 7%, was related to energy, but that was primarily at our Engineered Bar division and at Columbus.

But within that number, we also shipped quite a bit of volume from our Steel of West Virginia facility into solar.

So our energy number also includes solar, and solar is still something that's actually increasing in demand during this time as well.

Our next question comes from the line of Timna Tanners with Bank of America Merrill Lynch.

Wanted to just drill down a little bit into your cash flow philosophy.

So I heard you -- maybe, Theresa, I misheard, can you clarify?

You said for the remainder of the year, CapEx is $1.2 billion, which sounds like your CapEx forecast is intact at $1.4 billion.

Or did I hear that wrong?

If -- and you also went on to say that you could adjust it if needed, but you're not adjusting it.

And you also said that you could -- you just authorized further buybacks and just completed, what is it, $170 million buybacks in the quarter.

So I kind of get the impression that, for now, Steel Dynamics is operating as if the impact of reduced demand and COVID-19 impact is a shorter-term phenomenon and kind of getting back to normal later in the year.

That's what I'm piecing together from your comments on the CapEx and the buybacks.

But I just wanted a little bit more thought on how you're thinking philosophically about the rest of the year and the CapEx and buyback spend.

Great.

So let me clarify.

You're right concerning the capital expenditures currently for 2020.

We started the year saying we expected to spend about $1.4 billion, we spend $200 -- a little over $200 million in the first quarter.

So for the remainder of the year, there's $1.2 billion left.

Of that $1.2 billion, over $700 million of that is actually late in the second half of the year and it's related to Sinton.

As we progress, Timna, through the second quarter, we believe we're going to gain a lot of visibility as a state, for lack of a better word, reopens on what that means for steel consumption and on our own operations for the remainder of 2020.

As we progress through the second quarter, should we think that we want to potentially take some of that capital and push it into 2021, we can make that decision to do that at that time.

But right now, from what we're seeing, as Mark mentioned, how the mills are operating and the market share and the activity that we're seeing, we don't believe that, that decision is something that we're making today.

As it relates to our share repurchases, we repurchased $107 million in the first quarter.

Most of that was purchased within January and February time frame.

What you should expect to see from us in the second quarter is that we will be watching the markets, watching the impact of the coronavirus, and you won't see us heavily into this year buy back market at that point in time.

And then we'll reassess for the second half of the year.

The reason the Board authorized an additional $500 million in February of this year is simply because we think share repurchases during periods of excess cash flow is an important tool to have, and so we wanted to have that tool because we actually only had, I think, about $40 million to $50 million left on the previous program.

Does that help clarify how we're thinking about things?

Yes.

Absolutely.

Because I was having a difficult time squaring some of those comments with the market environment.

Okay.

So I guess, just as a follow-up, if I could, can you just talk a little bit about when you think you'll have more visibility on construction?

So like you said, construction is late cycle.

You wouldn't see cancellations yet on that.

But it sounds like that could start to flow through later in the year.

And I just wanted to get a little bit more thought on when you would start to see any impact on your backlog or any commentary from what you're seeing on the ground level because we're hearing that private sector activity is kind of drying up.

So I'm just wondering if that's in line with what you're hearing as well.

Well, Timna, I've seen the same commentary out there, and it seems to be a little disconnected to our actual order book and what we've seen.

And as I've said quite consistently, our real lens for SDI is through that order book and through the inquiry rate, and all that remains quite strong.

As an analogy, if you look at the 2008, 2009 downturn, which was pretty significant onto itself, we saw the Structural and Rail Division operating pretty consistently into the summer of 2009.

There was a good 4, 5, 6 months of strong sort of continuation from prefunded projects.

And we're seeing -- as I said, a large part of our business is in the distribution warehouse arena, and that is, I would say, is expanding more than contracting.

So I think we see things optimistically.

We are also very, very realistic.

And I just want to go back to what you were saying about is there a the dichotomy between the markets and what we're seeing relative to our strategy, but I -- and I am going to ramble a little bit I think, but I'm probably -- some of the members of the SDI team have been in the business probably longer than anyone on the call and probably most leadership in any of the steel companies.

And we've seen the [80 81].

We lived through and managed through 2001, 2002 when 45% of the industry was in solvency.

We lived through 2008, 2009.

We lived through 2015.

So we are very realistic and recognize the impact and the market change and manage to that.

And I think we've demonstrated through our 25-, 26-year history that we're very intentional, we're very disciplined, and we're actually conservative.

At that same time, in periods like this, leaders.

And you've got one of the best leadership teams in the world here, they need to lead.

They shouldn't be seeking cover.

We need to be seeking opportunity.

And that's where we think Sinton is a very, very good investment, a very good opportunity, and we'll continue to go down that path.

That being said, just to reemphasize what Theresa said, we'll continually reassess our order books, the market, cash flow generation, and we'll adjust as we see fit.

But I think it's very, very important to recognize that, again, a lot of the CapEx for Sinton is sort of back-ended towards the end of the year here, and it's a huge lever that we can pull, if necessary.

Okay.

And by lever you mean to delay, right?

I don't envision you're talking about like pulling it per se, right?

No.

We're just talking about delaying it, Timna.

And just one other point.

And I didn't want to belabor it, but you really can't forget the strength of the working capital for us and the funding source it can be, if necessary.

Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

Mark, can you talk a little bit about the on-site customers that you're going to have on Sinton?

I think it was part of your script on Sinton, but I just wanted to be sure because I think you'd said over 800,000 tons of local or on-site processing.

And obviously, that's a big chunk of the 3 million tons that you're looking to get.

So one, I just want to make sure I heard that correctly, and two, where do you think that, that can go as this project evolves?

Well, I think we've got one signed and a second very, very, very close to signing.

There's a preference on their part not to commit names at this moment in time.

But you are right, the 2 of them would amount to about 800,000 tons of consumption and processing capability.

We probably have another -- not probably, we do have 4 other interested customers that have been given full packages, lease packages and those sorts of things.

They just slowed a little bit because of the situation we're in, but we're confident that we're going to get those folks, too.

But it is a very, I think, important part of the overall strategy of that mill.

Collectively, it's likely to be somewhere over 1 million tons of on-site capability.

Okay.

Well, that's helpful.

So talking basically 1/3 kind of built-in on-site there.

I think that there are tax benefits or deferrals on accelerated depreciation on years where new assets go into service and it's -- let's just say 2021 is intact for Sinton, at least as it is today.

What should we be thinking about the size of just the accelerated depreciation benefits in terms of tax avoidance in the years it goes into service because, obviously, with $2 billion of spending, it could be pretty meaningful?

Yes.

So we don't have exact numbers, but I would estimate that of the $1.9 billion, you're likely to have accelerated depreciation on at least 80% to 85% of that number.

Okay.

Would you take that all in year 1, given, I guess, all the assets go into service and -- in 2021?

Yes.

That would all be recorded in 2021 as the year of service.

Our next question comes from the line of Andreas Bokkenheuser with UBS.

Just 2 quick questions for me.

First of all, on oil, obviously, this week's oil volatility, how do you guys think about that?

Just aside from what it could do to investment in the energy sector and tubular steel and so on and so forth, when you kind of saw what happened yesterday to prices, what kind of went through your mind in terms of are there any opportunities for Steel Dynamics that we should be thinking about?

And what are the sort of less obvious challenges as well?

So maybe just give a little bit of framework, if you will, around how you're kind of thinking about the oil price move yesterday.

And, I guess, the second question is more on construction.

Can you give a little bit more granularity there?

When we look at the residential and nonresidential construction numbers, there seems to be as much weakness as there is strength and has been for the last year or so.

You guys seems to be exposed to the strength of it.

So could you give a little bit more granularity as where are you seeing that strength in any particular areas?

Is it res or with nonres?

Geographically, is it more south than north and so on?

That would be very helpful.

Well, certainly, the -- well, regarding the energy markets, I think yesterday was quite incredible.

And I'm not so sure we've had time to digest.

But in general, obviously, the immediate impact is on the energy markets, pipe and tube, and that was -- that's not just been a COVID thing.

That obviously is Russia and Saudi Arabia doing that thing.

And the low energy prices will just extend the downturn there.

That is 8% to 10%, I guess, of the steel market in normal times.

So that -- we look at that as a pretty stagnant market rest of this year going into this year and next year, first half of next year anyway.

The -- I guess, the positives.

Well, one is scrap tends to move down with oil.

I'm not so sure that the physical market would allow that to occur in May.

We're looking.

Scrap shouldn't move down in May, but we think given the physical market, it's probably a sideways market movement forward.

But that may change here in the next week or 2. What I do think it that the pressure on the energy market is going to, in turn, put pressure on the integrated mills.

And I think you've seen a pretty dramatic idling of integrated capacity, blast furnace capacity here over the last 4, 5, 6 weeks.

And if you look back over a longer period, the last couple of years, there's been a much more frequent turn on, turn off of some of that capacity as they suffer a pretty strong economic pressure.

And I think a sustained downturn in the energy markets will make a ton of those assets -- it's going to be a tough decision to ever bring them back.

So I think it may -- as a positive, it may help rationalize the industry to some small degree.

Sorry.

And then you had the second question on construction granularity.

Again, there certainly has been weakness in the northeast, but that's tended to be more projects or construction locations actually being shut down by the states.

We certainly see strength in the south.

We certainly, as I said, see strength in that distribution warehouse arena.

Our next question comes from the line of Gordon Johnson with GLJ Research.

This question may have been asked, but I was wondering if I could get a little bit more color on your shipments expected across some of the different lines.

I know you said your utilization is going to drop to 75% to 80%, but can we get maybe a little more color on kind of what you're seeing in Q2 and maybe some of the green shoots you see in the second half?

Yes.

We're not going to get too specific for 2 different reasons.

One is that we generally don't give that type of guidance, and the second reason is, especially going into the environment that we're in right now, there's not a lot of visibility.

And so we want to make sure that we're being appropriate.

But I think what Mark was suggesting is that you -- we intend to see utilization, or at least we're planning for utilization at our flat-roll operations, somewhere in that 75% to 80% range.

And traditionally, even in 2015, we were actually operating at about 90%.

So we generally gain market share in flat roll during periods of weakness, and we're seeing that today as well.

And we've not -- we don't see a driver for that to change throughout the quarter.

The long product side is more difficult.

So in the Structural and Rail arena, we do expect to maintain higher utilization in that 75% to 80% range because of the order backlog as it sits today and because construction is continuing for us in that arena.

And with the addition of rail and rebar, that product diversification helps that facility.

Across the other long product mills, it's more difficult.

So you're going to see the most weakness in our mind in the special bar quality, or the SBQ, arena, and then that's distributed throughout.

So that's probably about as much clarity or granularity as we can provide on volumes at this point.

Okay.

That's helpful.

And then one last one.

In the checks we've done, it seems like you guys are doing quite well in the construction space, particularly against the integrated mills.

Is there any, I guess, approach you guys have or color you can provide on, I guess, incremental attempts to take share in that space?

And is that accurate that you guys are doing quite well in the construction space against your integrated peers?

Yes.

No, that's absolutely correct, and especially -- it wasn't just in periods like this.

In the first quarter, our Structural and Rail team did a fantastic job on the construction side in pulling in volume.

And if you were speaking more specifically about our fabrication business, we have been gaining market share in that arena as well and the team is doing incredibly well.

And Mark pointed out more specifically in that warehouse arena, but we have been taking market share, and we would expect to continue to do that.

Our next question comes from the line of Sean Wondrack with Deutsche Bank.

Just if you look at the auto market, I think you had mentioned that some of the auto manufacturers are looking to come back online within the next few weeks.

Can you talk about like are you starting to hear from them more, like more order inquiry?

And also sort of for the industry, I realize you guys are a great operator and you're going to have the ability to potentially take share this year.

What is sort of your baseline, if you have one yet, baseline forecast for auto production?

Do you assume it's down 10% this year?

Curious about that.

I didn't hear that question.

The question related to automotive, and it relates to the perspective of as they start to roll on and we've been taking market share specifically in -- with the European automakers, et cetera, would we expect to continue to take that market share?

And what are we thinking about from a volume perspective?

So how much will steel consumption volumes or auto builds from another perspective, how much will that be down?

I think it's $1 million to $1.5 million units is what I'm seeing.

And then the perspective just around what do we feel about continuing to take that market share related to automotive?

Got it.

Okay.

I would suggest that, as I said earlier, my crystal ball is probably no better than anyone else's on the call.

And the whole recovery is subject to when folks get back into the marketplace and at what speed.

Do they ramp up?

From present information, it appears that the automotive start rolling back starting in the end of -- mid- to end of next week and all the way through May, depending on which company.

It's -- they've got a -- there's a backlog of vehicles right this second.

So how quick the recovery is difficult to gauge.

If you look at the past troughs, it tends to replenish -- they've been in a position to replenish inventory and pent-up demand.

I'm not sure you -- we will see that this time around.

To quantify our gain in market share is -- relative to tons, it's a tough thing.

All I can say is the -- our facilities are sort of armed and ready to go.

And it's our flexibility across all markets, it's not just the auto but all markets, that allows us to take up options to gain.

It's going to be a while before the integrated mills just start turning on all their idle capacity.

One would imagine that they need to see some visibility and transparency for a market that is on the -- has got positive momentum, and that pricing also has positive momentum, and that's not going to happen just because the automotive and a few other 1 or tier 2 stampers got up.

So there's that time period, it's a matter of months, maybe longer this time around, who knows.

But it's a matter of months where the flexibility of electric-arc-furnace operations can take advantage of the marketplace.

Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

How much of Butler and Columbus mill tonnage used to be scalp for welded-tube for energy exploration and in the plan for Sinton?

And should we just assume that those volumes become construction steels given the short-term crude oil outlook?

Well, for, John, I would say, Butler, the energy scalp is not a massive part of that portfolio.

And so we tend to see hot-rolled coil dependence from that facility is not really dependent to oil and gas.

And given the value-add diversification there, we don't really have a massive amount of hot band to sell, to be honest.

Columbus certainly has greater exposure.

And if you remember, when we purchased the mill in 2014, that was dominantly an energy pipe supplier.

And I think back then, it was, Theresa, 30%, maybe 40% of its output.

It was over 40% with energy.

Since then, the team -- and really sort of catalyzed by the downturn on energy '15, the team has done a phenomenal job diversifying that asset, adding greater coating capabilities, adding a paint line, adding a variety of high-strength type grade of steels there, getting into automotive, getting into Mexico.

So the -- both the product and the market diversification there has totally transformed the entity.

And so its through-cycle earnings today is nothing like '15.

It's much higher.

That being said, it's probably 10%, maybe 15% energy related.

John, just overall, to put a point on it, last year, our shipments, we only had 7% that were related -- across the company, that were related to energy.

And some of that included solar, some of that was high premium-grade OCTG, that sort of thing.

So it's not that much of our business either last year or today at this point.

And then as it relates to Sinton, we will also be competing, we think, very effectively with imports.

And I think that's something that people should recognize as well.

Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

Theresa, did you provide the mix of sheet products, as typical?

I apologize, Phil.

I didn't.

I have it here, though.

So for our flat roll shipments, and I know a lot of you use it for your models, our hot-rolled coil and our pickled and oil shipments were 891,000 tons, our cold-rolled shipments were 151,000 tons, and our coated shipments were 948,000 tons for a total of 1,990,000 tons.

Apologies.

Our next question comes from the line of Charles Bradford with Bradford Research.

The question goes down to a little bit something maybe out of your bailiwick, but apparently, U.S. Steel has dropped out of membership of the AISI.

That may impact the quality of the industry data that we get.

Have you seen any change in the quality?

I'm thinking especially of the usually pretty bad operating rate figure.

Chuck, I would say we've not seen any change, but nor have we analyzed it, to be honest.

Our next question comes from the line of Tyler Kenyon with Cowen.

Theresa, just a quick one for me.

Do you anticipate any relief in 2020 from the recently passed CARES Act, payroll tax deferrals, enhanced deductibility of interest expense, et cetera?

And any way to bracket what kind of cash relief that could provide in 2020?

Yes.

Given the analysis that we've done, I really can't put a great bracket around it.

But at this point in time, Tyler, it's not something that we're viewing as will be significant for us.

There's definitely -- the payroll tax relief would have an impact.

But apart from that, given our expectations on operating in the different areas where they're helping either smaller companies or companies that are not doing as well as we are, I don't think it's going to be something that's meaningful at this point.

If that changes, we'll be sure to let you know.

That concludes our questions-and-answer session.

I would like to turn the call back over to Mr. Millett for any closing remarks.

Thank you, Michelle, and thank you, everyone, on the call.

I just would like to emphasize, I'm a pretty optimistic guy.

And if you were surrounded by the team we have at SDI, you would have that same optimism, and it's really based on SDI's position.

And I would suggest, even in these tough times, the SDI team shines in moments that challenge.

And we are in a position of strength.

Our business model is built for -- to be resilient in trough markets, in tough markets.

We have a high variable cost structure.

85% of our cost structure is variable.

We've got a broad value-added product portfolio, and we have strong pull-through volume, as we've suggested, from our internal downstream operations.

All that builds a high utilization rate, and we've demonstrated in every trough higher utilization rates than our competition.

And when you have capital-intense steel assets, volume is absolutely critical, and that translates into better financial metrics through the cycle.

So we're still confident in our cash-generation capability.

We are still confident in our financial foundation.

And we are battling each and every day, but our orders continue to flow in.

So we do remain positive.

That being said, we're incredibly intentional, and we recognize that we need to be assessing and our position almost each and every day.

We've demonstrated that in the past, and we will demonstrate that going forward.

So for all of you, thank you for being on the call.

Customers and employees, seriously, thank you.

You make SDI who we are today.

And everyone, be healthy, and be safe.

Bye-bye.

Thank you.

Once again, ladies and gentlemen, this concludes today's call.

Thank you for your participation, and have a great and safe day.