Steel Dynamics Inc (STLD) 2015 Q2 法說會逐字稿

Good day and welcome to the Steel Dynamics second-quarter 2015 earnings conference call.

(Operator Instructions)

Please be advised this call is being recorded today, July 21, 2015, 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 Marlene Owen, Director Investor Relations.

Please go ahead.

Thank you Brenda.

Good morning everyone, and welcome to Steel Dynamics' second-quarter 2015 financial results conference call.

As a reminder, today's call is being recorded and will be available on the Company's website for 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.

We also have our leaders for the Company's operating platforms including Dick Teets, President and Chief Operating Officer for our steel operations, and Russ Rinn, President and Chief Operating Officer for our metals recycling operations.

Please be advised that certain comments made today may involve forward-looking statements that by their nature are predictive.

These are intended to be covered by the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995.

Such statements, however, speak only as of this date today, July 21, 2015, and involve risks and uncertainties related to our metals business or to general business and economic conditions which may cause actual results to turn out differently.

More detailed information about such risks and uncertainties may be found at the Investor Center Advisory Information tab on our Steel Dynamics website and our form 10-K annual report under the caption Forward-looking Statements and Risk Factors or as applicable in subsequently filed forms 10-Q filed with the Securities and Exchange Commission.

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

Thank you Marlene, good morning everyone.

Thank you for joining us.

The first half of 2015 continued to be an interesting start of the year.

Significant industry shifts are taking place that are fundamental to the domestic steel community in raw material and product pricing as well as recent [permarine] trade case advancement.

But before exploring our thoughts regarding the domestic steel landscape and how Steel Dynamics is uniquely positioned for growth, I ask Theresa to come in on the second-quarter financial results.

Thank you Mark.

Good morning everyone.

Our second-quarter 2015 adjusted net income was $53 million or $0.22 per diluted share, which was within our adjusted guidance of between $0.20 and $0.24.

The adjustment excludes two items: the first, approximately $29 million or $0.07 per diluted share of expenses associated with idling our Minnesota iron operations.

And of that excluded amount, approximately $21 million represents non-cash inventory valuation adjustments.

The second item represents approximately $9 million or $0.02 per diluted share of reduced earnings related to the planned furnace maintenance outage at Iron Dynamics.

The last time this significant maintenance was required was in 2008, over seven years ago.

Including the adjustments, second-quarter 2015 reported GAAP net income was $32 million or $0.13 per diluted share.

Regarding Minnesota, the operations are in their expected idle state with the corresponding reduction in our employee base completed.

We expect the ongoing financial impact from the operations to Steel Dynamics' financial results to be minimal at less than $1 million a month from both an earnings and EBITDA perspective, and as such, we don't expect to specifically identify them separately in the near future.

Second-quarter 2015 consolidated revenues were $2 billion, 2% lower than the sequential quarter based on average product pricing reduction, not volume, as both steel and metals recycling shipments increased sequentially.

Adjusted operating income was $120 million compared to first-quarter results of $100 million, a 20% improvement based on record fabrication performance and significantly improved metals recycling results.

For the second quarter 2015, steel shipments increased 15% to over 2.2 million tons compared to the first quarter.

However, profitability remained relatively flat as metal spread contraction offset the improved volume.

As steel imports remained high, steel prices were pressured and our average second-quarter sales price declined down $101 per ton while our average scrap cost declined only $57 per ton.

For our recycling platform, ferrous shipments increased 10% in the second quarter stemming from domestic steel mill utilization improvement.

Ferrous metal spikes stand at 9% as scrap cost relativity subsided.

From a non-ferrous perspective, shipments also increased 6%; however, metal spread stayed fairly flat.

As a result, our metals recycling operations' second-quarter operating income increased meaningfully over the sequential quarter to $12.3 million.

A continuing terrific story for our fabrication operations.

The positive momentum in underlying nonresidential construction demand combined with our national presence and stellar customer service resulted in record performance metrics for the quarter and for the year so far.

Second-quarter 2015 record operating income from our fabrication platform was $28 million or 27% higher than their previous record.

Record operating income per ton was $252, over 30% higher than first-quarter performance.

We continue to see improvements in underlying nonresidential construction demand, which is good news for all of our businesses as the construction sector is also the largest domestic steel consumer.

During the second quarter, we generated significant cash flow from operations of $309 million with operational working capital providing $193 million.

The working capital reduction was a result of more normalized scrap volume at our steel mills, as second-quarter production utilization improved and also due to reduced overall scrap values.

Second-quarter capital investments totaled $23 million.

We estimate annual 2015 capital expenditures to be in the range of $150 million.

This includes some payments for the recently announced $100 million paint line expansion at Columbus.

However, most of the costs for that project will be incurred in 2016.

We maintained our quarterly cash dividend to shareholders which increased by 20% in the first quarter of 2015.

Our history of increased quarterly dividends continues to demonstrate evidence of the competence our Board of Directors has in the strength of our cash generation capability, financial position and optimism concerning our future.

As demonstrated during the first half of 2015 throughout market cycles, our business model generates strong cash flow based on the low, highly variable cost structure of our operations.

Even after deleveraging our balance sheet and increasing cash dividends, we have record liquidity of more than $1.6 billion at June 30, 2015.

Total debt remains consistent at $2.7 billion while net debt of $2.2 billion decreased another $258 million in the quarter or 10% due to free cash flow performance.

I'd like to point out that the adjusted EBITDA in the press release schedule denotes the number we use for financial covenant purposes.

However, if we were to fully adjust for the Minnesota and Iron Dynamics items that occurred in the second quarter, adjusted EBITDA was $197 million and pro forma trailing 12 month adjusted EBITDA $973 million.

This gets us to a net leverage of 2.4 times.

Our credit profile remains in line with our preferred through-cycle net leverage of less than 3 times, which is a testament to our disciplined approach to growth, creating shareholder value through sound capital allocation and an efficient balance sheet.

Additionally, our debt maturity outlook is incredibly flexible.

We don't have any near-term meaningful maturities, and those in the longer term are well laddered and in the interim years have call provision flexibility.

Looking forward, we believe that our capital structure and credit profile have the flexibility to not only sustain current operations, but to support additional strategic growth investments.

Mark?

Thanks Theresa.

I think it's never redundant to state that there's nothing more important to us than creating and maintaining a safe work environment.

Safety is the forefront, integral to everything we do.

Though our safety performance is better than our industry average, our goal remains a zero safety incident work environment, and the team did a great job in that respect in the second quarter.

They reduced company-wide recordable injuries by over 25%.

We continue implementing new initiatives and reinforcing others to drive toward our ultimate goal for no injuries and no incidents.

Operationally, the teams performed well in a continued challenging environment.

The ongoing flood of steel imports continue to pressure steel product pricing to a greater degree than the benefit from lower scrap costs.

As a result, Steel Dynamics along with the industry in general experienced margin compression in the second quarter.

Our average selling price fell $101 per ton while our average scrap cost per ton only decreased by $57.

However, due to continued solid domestic demand, our steel shipments improved 15%, offsetting the margin compression in the quarter.

After operating at a trough utilization rate in March, our steel operations have been achieving monthly sequential volume improvements.

Driven by stronger flat row production, our second-quarter steel utilization rate recovered significantly to 87%, which is meaningfully higher than our first-quarter performance as well as the average domestic metal utilization.

While our company-wide exposure to the energy sector approximates only 8%, it is higher at our recent Columbus flat row steel mill, which is particularly impacted by both imports and reduced energy sector steel consumption.

As you may recall, our first order of business after buying Columbus was to significantly expand market and product diversification, moving toward a greater number of customer relationships and a broader mix of value-added products serving more industries.

The teams are making tremendous progress in automotive and construction-related products.

We're also making good progress in potential Mexican export opportunities.

Market shifts take time, but our planned paint line and Galvalume addition on the Columbus campus will be a significant catalyst.

The $100 million investment will provide roughly 250,000 tons of annual coating capability and further diversification into higher-margin products for Columbus.

We already have two paint lines and Galvalume capability in Indiana, but this project allows for a higher product quality, double-wide steel and access to the southern markets including Mexico.

We plan to sell service-critical appliance-grade steel as well as construction related products.

Operations are expected to begin during the first quarter 2017.

In the interim, we continue to improve Columbus' operating costs and product breadth and quality capabilities.

Columbus sold 34% more value-added galvanized steel in the second quarter and achieved record production results on those lines.

We continue to see the benefit of collaboration between our Columbus and Butler flat roll teams.

Along with production and process successes, since the acquisition, Columbus is implementing great cost-reduction initiatives with many more in the works.

Additionally, our steel platform continues to benefit from our more significant organic growth investments, the addition of premium rail capability and expanded engineer special bar quality capacity.

In rail, all domestic class 1 railroads have qualified premium head-hardened rail.

Year to date rail shipments have increased over 45% from last year, and premium rail has been the driver.

Railroad investment forecasts suggest domestic rail consumption will continue to be strong during the next three to five years despite the energy decline.

We're committed to the rail market and are targeting shipments of up to 350,000 tons per year.

The capability to weld 320-foot length rail versus the conventional 80-foot sticks is a strong competitive advantage, improving rail safety and reducing our customers' maintenance costs and installation time.

Regarding SBQ, the product and capacity expansion within our engineered special bar quality operations also continues to ramp up.

With the energy market weakness, the larger diameter SBQ market has not been as strong in 2015, and our addition of the smaller diameter bars has provided product diversification and aided mill utilization.

Metals recycling as we suggested less volatility in scrap prices and higher domestic steel mill utilization, the profitability from our metal recycling operations meaningfully improved in the second quarter.

Compared to a slight loss in the first quarter, we recorded a $12 million operating profit in the second based on increased ferrous shipments and metal spread.

Additionally, the symbiotic relationship between our recycling operations and steel mills facilitates lower average input costs as compared to our peers.

The recycling environment remains challenging, and there appears to be a shift in the supply and demand balance.

The continued significant overcapacity of shredders, particularly in the southeastern US, continues to constrain margin as processes are all competing for the same material.

However, scrap export levels have fallen the past two consecutive years to volumes significantly lower than recent historical norms.

With the expectation of a continued strong US dollar and reducing scrap exports and the resulting ample scrap supply, we don't see any likely drivers with significant increases in ferrous scrap prices in the near term.

Based on this difficult operating environment, we believe there will be consolidation or rationalization of smaller scrap companies in the near future.

As communicated in our May 26 press release, we elected to idle our Minnesota pig iron operations for an initial 24 month period given the significant and sustained decline in pig iron pricing.

In this market condition, the cost to produce iron nuggets is meaningfully higher than product selling values.

The gain in strength of the US dollar and raw iron ore supply and demand factors support the thesis to sustain lower pig iron prices.

Since our investment in iron making capacity was intended as a hedge against high-priced pig iron and scrap, the indefinite idle was a prudent and necessary response to the prevailing marketing environment.

While the lower raw material cost environment advantages our steel platform, it has resulted in our own economic situation in Minnesota.

That being said, I want to sincerely thank the whole Minnesota team for their commitment and persistence in pioneering and succeeding in bringing a new pig iron production technology to life.

Unfortunately in the end, it was not a matter of technology or management because the process works.

It was purely the result of market economics.

I commend the dedication, hard work, and strong commitment of the employees in the area communities.

I am pleased to report, though, that we were able to offer positions to approximately 90% of those employees who wished to have employment within the SDI family at other locations.

The fabrication platform continues to achieve record operational and financial performance.

Second-quarter operating results of $28 million surpassed the previous record by 27%, which was achieved in the fourth quarter of last year.

The fabrication group achieved record operating income at four of our six plants -- the team did a phenomenal job.

Going to the field joist institute, year-over-year domestic joist shipments increased about 2% year to date.

We have gained the market share as our shipments increased 11% over that time frame.

The team continues to perform exceedingly well both in market share advancement and leveraging our national footprint.

It is a credit to the foresight and positioning work the team did over the past several years.

Based on sustainable increased demand and market share gains, we've added production shifts at several of our plants, creating more jobs in our local communities.

The strength of this business provides insight into the continued growth of non-residential construction activity.

Overall, while external challenges create a turbulent environment for us, all our employees performed well in the second quarter, driving operational and financial metrics that are gained with the top of our peer group.

Now to the macro environment, we believe the US has solid demand dynamics in place.

Consumer confidence and spending remains intact.

Billable goods and construction investment continue to grow -- both key measures of US steel consumption.

Forecasts for the two largest domestic steel consuming sectors, automotive and construction, remain good.

Automotive is continued -- or is forecasted to grow to almost 18 million units over the next few years, and overall construction spending and domestic manufacturing continue to trend favorably.

However, excess steel import volume combined with higher than typical inventory levels has limited US steel mill productivity.

We believe the tide is turning.

Inventory levels should continue to decline in the coming months.

Underlying market demand should give further support to steel product pricing which we believe has stabilized.

On the raw material side, strap flow remains good, and the strength of the US dollar should continue to impede the scrap export market.

Consequently, there doesn't appear to be strong drivers for ferrous scrap price appreciation, which led raw material pricing to remain relatively stable at current levels and perhaps trend lower if the low iron ore pricing environment persists.

We believe the fundamentals are supportive of stronger economic growth in the US during the second half of the year.

However, the current unimpressive global growth expectation combined with severe worldwide steel production overcapacity will continue to be an industry headwind to steel pricing.

But we believe domestic pricing overcorrected based on the recent spread to foreign prices, and we think there is room for price appreciation later this year.

As raw material prices remain at lower levels and utilization improves, there's margin expansion opportunity in the second half.

Additionally, in order to insulate ourselves from imports, part of our strategy is not to only develop strong customer relationships, but to also manufacture products that are more difficult to compete with on a global basis, such as our painted flat roll steel, highly engineered SBQ steel and longer length rail.

As such, we're able to mitigate some of the import impact and with our broad portfolio of value-added products, maintain higher steel mill utilization rates when compared to our peers.

On the trade front, we're pleased that the ITC has confirmed that the flood of unfairly traded imports of corrosion-resistant sheet steel has materially reduced our shipments, pricing and profitability.

I believe in fair trade, but the US has become a dumping ground for world excess steel capacity.

We are confident that such actions will create a more positive pricing environment for us going into the second half.

So driven to maintain a sustainable differentiated business, we are focusing on opportunities to maximize our financial performance.

We believe our superior operating and financial performance clearly demonstrate the sustainability of our business model throughout the market cycle.

We're focused on providing exceptional value to our customers, committing to the highest levels of quality and timeliness, partnering with them to create value and develop what they need today and anticipating what they will need tomorrow.

As we look ahead, we continue to be optimistic regarding our future.

Columbus is one aspect of the story and our organic growth products another.

Strong cash flow generation through the cycle has built a solid financial foundation from which we can take advantage of the new opportunities that lay ahead.

The strong character and determination of our employees are absolutely unmatched.

The dedication to customers and passion for excellence compel us all to the highest standards of performance.

I thank each and every one of them and remind them safety is always the top priority each and every day, each and every hour.

Thank you for your time today, and Brenda, we will open the call for questions.

Thank you.

Certainly.

(Operator Instructions)

Our first question comes from the line of Luke Folta with Jefferies.

Please go ahead with your question.

Hi, good morning.

Good morning, Luke.

Great quarter.

Thank you.

Tough environment, good execution, well done.

We got a good team.

That's clear.

First question on SBQ, can you just give us some sense of what the order book looks like?

Is the second quarter you think representative of what trough should look like near term, and any color in terms of just the end market dynamics there, I'm sure energy's weak.

Any color on the other markets and how much you are shipping from the small diameter mill would be very helpful.

Thanks.

Luke, on the actual volumes on the SBQ side, Dick probably could give a little clearer picture.

I think of all our markets, the SBQ arena is a little more noisy, and a little flat I would say.

Things have maybe picked up just a hair the last couple of weeks, but I think mainly the customer base is just patching holes at the present time.

Dick, any thoughts on the bars, heavy bars?

We really haven't been the same numbers and so forth since we're still in the startup, and it's a very small market.

We do report in through the SMA and into the SBQ family, but we don't report individual.

We are improving.

We've gotten our precision mill working and are delivering a great product out there.

And as you pointed out in your original statement, thank goodness for the expansion into that because of the bigger bars and the weakest of our -- of the products there, so it's really going to play very well.

I think it's emblematic or testament to the strategy we've had since the very beginning to diversify our product mix across as many products and market sectors as we possibly can.

And I think we're seeing the benefit of that right now, and obviously when the market returns, we will be able to leverage that to greater profitability.

Luke, I think you also mentioned that the general market, and I think the markets remain somewhat mixed, but in aggregate, incremental demand growth remains intact.

As we stated, automotive continues to dominate, truck trailer material handling are actually having a peak year.

Energy is obviously stagnant, but we see manufacturing is solid.

Residential is recovering, and non-residential construction continues to rebound.

I think it's a testament to our New Millennium systems platform, which had a record second quarter.

Their quarter activity continues to be very strong.

Their COGS are suggesting another very strong year for us, and so in general, as the construction markets come back, I think we have considerable leverage to that.

We've got about a million and a half tons of latent unused volume that is high correlated to that nonresidential construction.

I think customers are affirming active demand, but right now still reluctant to take inventory positions until they see more market transparency.

They just don't want to take an entry position.

As I think you just saw, inventories destock is slow.

We saw I think it was the fifth month in a row of slight destocking.

They were around about 2.6 months on hand today, higher for sure than last year, but slowly, slowly trending down, and that destocking I think is obviously positive for us.

One other observation, Mark, is that some of our forging customers have basically given us a double-sized order, but they haven't given us multiple months' worth of orders, so we're still trying to interpret that.

We do believe there's some strengthening, but they still have a reluctance to take a long view of it yet.

I guess on a similar note, the bounceback in shipments from the Columbus mill was pretty robust, and I know that energy tubulars is a pretty decent sized end market for them.

You talked about some initiatives to expand the product offering at that facility.

It seems a little early to be having that big of an impact from some of those initiatives, so if you can talk about what drove the big bounceback in Columbus shipments sequentially.

I don't know that it was really the tonnage that was a big bounceback.

We're very proud of the percentage of bounce back of the value-added I think is what Mark said.

We've had a real focus on additional customers, additional products, value added in particular.

But they did -- your point was they did have over 100,000 ton increase in shipment, and that was, again, just to the marketing perspective that Dick's talking about.

It was quite a bit on the volume side as well.

Yes, I think -- yes.

We continue to say for a long time now that demand truly is incrementally growing, and that underlying demand was there just because we had a slug of imports come in in front of the January, February, March time frame.

And that just suffocated the market for Columbus in particular because they were obviously exposed to the Houston arena.

I think we're incredibly excited that the Columbus team is doing incredibly well.

I think the collaboration between Butler and Columbus teams is incredible, and it really is growing fruit.

As Dick, said our value-added shipments have grown quite significantly.

We made great strides in quality there and are regaining a lot of the customers that we once had.

We're also leveraging our existing customer base.

We have some partners that we've had a great working relationship over the years, and their volumes have picked up dramatically, and New Millennium billing products also has been sourcing more steel from the Columbus.

Great color, thank you.

Our next question comes from the line of Brian Yu with Citi.

Please go ahead with your questions.

Thanks.

Good morning, and congrats on a good quarter, especially on the free cash flow side.

Thank you.

The first one is you guys have impressive shipments in the second quarter.

Mark, you said you're expecting improved financial results in the back half of the year.

Does that -- embedded in there, is that, you will maintain these strong shipments in the back half?

And I think you mentioned earlier that you think prices will probably recover, and those are the two combination of factors, continued high volumes and some improvement in underlying markets going to drive the better results?

Yes, there's nothing that we see that should change the volume profile.

In fact, I would consider that volume profile appreciating, and I think the -- generally with good volume, I think in turn with margin expansion is a positive.

I think imports -- even though imports June, July are incredibly [stable] I would say, domestic pricing through the first quarter and into May declined dramatically and eroded the spread, and when we saw a slight decline in the import number.

That has increased unfortunately, China's dropped its price dramatically and dropped it by 18% in May, and the import number is probably, I don't know, $390.

But I think because the global spread is mitigated somewhat, I think that the trade case success will certainly bring things to a greater, a more level playing field, and the continued inventory destock and alignment is going to help the supply demand balance to our favor.

Automotive will be strong.

Construction is growing.

Manufacturing is good.

You never know, maybe the politicians will come through finally and do some infrastructure build which will be very, very positive too.

So I think there's a climate for a short, stabilized, slightly appreciating pricing, and at the same time, raw material costs, scrap in particular I think is selling on a trend more than likely down.

You've got an iron horse supply, today I think is around about $50-ish and will remain low.

That's going to draw scrap down.

Strong dollar is going to continue to impede exports.

The bullet pricing is very, very low, and therefore held that also.

You've got solid scrap flows and our obsolete flow has come back pretty well, prompt flow, due to strong automotive production is incredible I would suggest.

And Nucor is back in the market with DRI supplying some of their mills.

So I think the environment whereby raw material pricing is at minimum flat most likely, and you have some appreciation drivers for pricing.

So I think from a perspective, we're still optimistic.

Great.

And second question is just on working capital, there's been a significant improvement year to date.

If we look at some of the relative metrics like days outstanding or turn rates, are these at your targets or is there further room for improvement?

What you're seeing in the quarter, Brian, is, again, the realignment on the scrap volume at the steel mills, based on the improved utilization in the second quarter and the decreased scrap values.

But going forward, there's still room for improvement.

One example is that we still don't necessarily have the finished goods volumes at Columbus where we'd like to see those, and there's different areas where we still think we can elicit some additional cash from working capital.

So we feel pretty good about where we are.

I wouldn't expect huge things in the second half.

Okay.

Would you be able -- say at today's prices, would you be able to quantify how much more working capital you could extract from Columbus?

I don't think it's -- I think it's not unreasonable to say probably in the $50 million range.

Okay.

Helpful.

Thank you.

Our next question comes from the line of Matthew Korn with Barclays.

Please go ahead with your question.

Good morning everybody.

Thanks for taking my call.

You're welcome.

Mark, as you pointed out, raw materials are low.

Steel shipments for the overall industry still seem weighted down by the energy market.

You've got domestic capacity still in the low or mid-[70s].

A couple months back, there's a smattering of these price hike amounts, but the indexes really only moved gradually.

Do you think we can get above $500 for hot rolled in this environment, and how much do you think we need to be worried that the China Midwest spread is starting to blow out a little bit again as prices in Asia crumble?

I think the domestic pricing overcorrected to some degree, and I was pretty -- back in April, May, pretty confident that you could see some price increase.

With them coming down even further, that's obviously going to be a headwind and put pressure on pricing, but the -- to see a $500 or $480 number domestically, I think that is more than reasonable, particularly when you have the potential trade case kicking in here in the next month or two.

During the second quarter it's going to have more and more of an effect.

Second half.

Second half.

Yes.

Okay.

All right.

Then let me ask this a little bit specifically.

I remember the last time we all spoke, I recall how you said the lead times that extended at Butler and Columbus but from, I think the quote was horrific levels.

Your orders moving at the best rate since the fall.

Where are we now comparably?

It'd be helpful.

Maybe you can do a run down of the major product groups, give a little bit of visibility on where lead times have shifted from last quarter.

I'm not so sure we're going to go through each mill, but the principal players obviously are Butler and Columbus, and they are in a three- to four-week backlog, right?

For hotband.

And to be honest that's where we typically hold that backlog through the cycle in good times or bad times to be honest.

So we are quite happy obviously with the price, but nonetheless, backlog and lead time there is on target.

All right.

Thanks very much.

Congratulations again on the quarter.

Thank you.

Our next question comes from the line of Evan Kurtz with Morgan Stanley.

Good morning.

I think some your commentary on end market demand was pretty encouraging and certainly congruent with everything we're seeing on construction data as far as permits and non-res spending and auto sales and so forth.

So one question that I have in my mind is if you look at the service center data for the past couple of months, their shipments have actually been down year on year, so it's inconsistent with what we're seeing on the bottom up.

I was just curious to get your thoughts on -- for one, what's driving that and then also, would these drivers fade and how long would that take, and any thoughts there would be appreciated.

I'm not so sure I've got any greater clarity than anyone else.

I do believe, yes, you've got a -- you still have a slug of imports still on the dock side, and that is slowing or as they said resistance to that destocking.

We saw just from the order profile that the people are patching holes but certainly not taking positions yet, just sentiment discussions.

It's just a slow draw down, but it will continue.

Okay.

Yes, very strong comments from some of our larger service center accounts, and they don't have any concerns about the year, so can't give you any color on it.

I think the other thing, the service center industry in general is essentially taking advantage of the situation.

I don't blame them, but mill lead times have been short.

They're increasing.

And also the -- on the structure side, rolling schedules, I do believe have been recently shorn down, and that allows sector to be a little closer to the chest so to speak on inventory and in ordering.

So they're ordering almost on a just in time probably basis.

And in some of our products, many of our long products, there's no direct shipments and they don't even go to the service centers in many cases.

Okay.

Thanks.

The other question I had was on some of the trade legislation that's gone through, and maybe you guys aren't as close to this as some of your peers.

But what do you think this all means as far as leveling the playing field, new ways to define material injury, and it sounds like in conference right now on the customs bill there could be some enforcement measures that are added to the market.

How do you see that from a timing perspective actually impacting pricing in the US and any thoughts on magnitude?

I guess I would tell you that I don't see it right now from a pricing perspective, I think it's little bit longer term.

I think it has a real meaningful impact to us because it gives the commerce department greater clarity and gives us a greater opportunity to be more expeditious in our trade case filings and so forth, coming up.

So I think there's a lot of benefit to our industry and other industries in like situations.

But right now from a direct impact on iron coke products or in upcoming cold rolled or hot rolled cases, ultimately it may influence the final determinations which will be in 2016 and so forth, but not in our short-term quarter-to-quarter results.

There will be nothing there for us right now.

Okay.

All right.

Great guys.

Good work on the quarter.

Thanks.

Our next question comes from the line of Matt Murphy with UBS.

Please go ahead with your questions.

Hi.

I have a question just on the longer term margin picture at Columbus with these investments.

I mean, is this -- you talked about when you bought Columbus, trying to eventually get to a sustained Butler type of profitability.

Do you think these investments put you on track for that, or is there more to be done beyond this?

The addition of the paint line.

Yes, you mentioned 15.

I don't know where the 15 came from, but I would say we are actually confident that the earnings profile of the Columbus mill is every bit -- surpass, equal, surpass the Butler mill with the change that we're doing.

Again, as I said earlier, the collaboration of the Butler and the Columbus teams bring in, actually, benefits to both the patients but certainly has brought great quality, great prop part diversification capabilities there.

The synergies, the near-term synergies that we advertised for 2015 are intact, and having been down there the week before last, the team is incredibly focused and passionate and have a lot of opportunity to fill the cost structure.

Obviously as we expand, the valued add coded output that's going to bring our margins up appreciably, and the Galvalume and paint expansion that we announced is going to be a major catalyst I think to greater earnings there, to greater prop diversification in great times and also improved profitability in the troughs.

Great.

Okay.

And then I guess longer term on fabrication profitability, in the short-term it sounds like the outlook is good, which is great, but medium to longer term, I'm just wondering has anything changed from -- if you look at 2006 to 2013, it was basically a break-even segment.

So we're in this great market for demand right now, but has anything changed do you think in the long-term from an operating income perspective in your ability to sustainably report this type of operating profit?

I think this only in recent years has been a market shift.

Obviously, if you go back a number of years, there was a pretty fragmented market.

Today, there are essentially three players, Nucor has got the lion's share of the market, we're second and then CanAm is another principal player.

There are a couple of other little organizations out there, so I think the industry has changed.

It's allowed stronger spreads, stronger margin on its own basis.

The team I think has done a phenomenal job in recent years positioning New Millennium for this expected growth.

We have a national footprint, and we're leveraging that incredibly well across the country.

So I think the earnings profile long-term is higher highs and higher lows for that business.

Matt, we're structurally different.

You went back to 2006.

In 2006, we only had a couple of facilities in Indiana and in Florida, and we had just added a couple from an acquisition.

Today we have six facilities that are throughout the United States, so structurally we have the ability to earn more as Mark said on a more sustainable basis.

So I would suggest you not compare back to the 2006 time frame.

Sure, that's fair.

And I guess, if I look at 2013 and 2014, you had a pretty strong bump-up in volumes in Q3.

I'm just wondering on the short-term basis, you talked about adding a shift.

Should we, is there a possibility we see that Q2 to Q3 type of volume bump that we've seen in recent years?

Given that we're looking at construction the summer being obviously the strongest time frame and given that we've been ramping up the facilities over the last several years, I think that volume and appreciation is something that would be reasonable.

Okay.

Thanks a lot guys, that's helpful.

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

Please go ahead with your question.

Hey, good morning guys.

Good morning.

So I don't want to beat a dead horse here, but I think one of the things that I hear from a lot of people is a concern that it will be difficult to see steel prices rise much with scrap prices weak.

What do you -- how do you comment on that?

I know you say there are certain conditions with the trade case and with the scrap market being over supplied, but is it really possible to get much margin expansion in a depressed oversupplied steel market as well?

I think, Timna, we answered that, first of all is probably no greater than most.

It's a case of supply and demand.

The supply side we think in America through the second half is going to tighten.

Imports will mitigate a little.

M3 is coming down, and the trade cases should put us on a more level playing field from a pricing standpoint.

So I think those three in concert will certainly give drivers for price appreciation.

Okay.

If you could address that, I just was clarifying, because this is something we hear a lot about.

I hear you.

With that being said, imports is the headwind.

If I think you look at SDI, we're incredibly well positioned across the whole steel space.

We have organic growth.

We have latent volume that we can capitalize on as the construction markets come back, so even in status quo, I think we're going to continue to outperform.

I think just for clarification, on coated products, the five countries -- there were seven countries that supplied more than 3% of the imports.

That's the criteria, the benchmark for filing trade cases, two of them being Canada and Mexico, so they were excluded.

The other five made up 67% of all imports.

And so when the countervailing duties are applied and dumping, it's hard to imagine how quickly that void will be created because no one's going to want to be caught having to owe those duties.

So as soon as the preliminary duties are announced, it's going to become an interesting field.

You already have traders looking for substitutes, but those just don't magically appear.

It's a process.

Yes, no, got you, that's great.

So we address the margins, but talking about volumes a little bit, historically it had been the case that steel makers have more profitable first half than second half, but that's broken down recently.

And I'm just wondering on fabrication, do you think fabrication products with the end of destocking, talk to us a little bit more about what volume recovery or why we could see a nice volume recovery second half from what's normally a typically seasonally strong first half?

I think if you look at the steel consumer economy, and everyone at least when you got blinkers on in our business, it's towards us because profitability isn't where we'd like to see it.

But from the standpoint of, the American economy, it's strong.

If you look at the steel consuming economy, it's strong.

We're consuming, I don't know, around about 120 million, 125 million ton pace right now.

The demand is there.

At SDI, our solitary headwind is the import issue.

The premise would be, Timna, for increased utilization and increased volume domestically, would have to be that the imports mitigate to some degree.

You've got a continued slight increase in demand with an erosion of imports, and that would give you greater utilization in America.

But I was talking more about fabrication and long products.

I hear what you're saying.

If you could address that a little more.

Long products, I was surprised the second quarter declined year-over-year in structural and declining first quarter to second quarter, seasonally I wouldn't expect that.

And similarly on the fabricated side, better profitability but a little lighter volume than we would have expected, thanks.

Again, our order book and our bidding rate is still very strong, I'm not so sure -- strong second half.

Relative to the structural, I think our actual order of structural beams the second half was slightly off.

Our actual market share relative to domestic producers actually increased and -- because imports have been just progressively successfully increasing quarter to quarter.

Okay.

Thank you.

Our next question comes from the line of Michael Gambardella with JPMorgan.

Please go ahead with your question.

Good morning, congratulations on the quarter and the process.

Thank you.

Good morning, Mike.

I have a question, though, on your market share, and if you could just take a look at the -- your flat roll shipments were up 24% quarter on quarter, and while you scrapped -- you mentioned your scrap cost didn't go down as much as the selling prices, clearly they went down a lot more than the iron ore costs of imports and your domestic integrated competitors.

So you must be aiming for market share.

Can you give us some color on that in the flat roll business?

Well I guess the bold numbers would suggest that, Michael.

I think we are.

We don't necessarily specifically publish that or analyze it on a very specific month by month basis.

But I would say, yes, we are picking up market share at a -- what I would consider a reasonable selling value without sacrificing profitability or margin necessarily to add additional volume.

And on the flat roll side of the business, how much more volume capability do you have in reserve that you could possibly push out in the second half of the year?

Utilization there, I don't have --

No, we have let's say the text, again, that's not melding capacity but prop capacity.

We're probably operating at about 70% to 75% of capacity.

All three lines are running at a little less -- a little less or a little more than three crews worth.

We are looking at addressing one of those lines by adding some new products and new opportunities there to boost it up.

We're not sitting idly by just limping along, but we're excited about an opportunity there, but there's about 25% of the texts.

And if we have dry brush he said that's about a million tons or 900 thousand and some.

That's 200,000 tons of idle coating capacity.

And then we do have some capacity down at Columbus.

But Butler, Butler's been running two casters for months now.

Right now we're down for a five-day outage.

We pulled our maintenance outage ahead.

It was supposed to be in October, but we found cracks on our melt shop -- or our melt shop cranes, and we have -- are addressing those right now.

And so we won't take a maintenance outage again until the spring, and so we're pulling all of our larger projects in, and so we're comfortable that.

But then we will be back and going full strength again, so there's no real capacity available at Butler.

So, Mike, we have 7.2 million tons of total flat roll shipping capability, and that includes the Techs.

So if you think about it from that perspective, that's about 1.8, 1.9 million tons per quarter, and I think in the second quarter we had total shipments of just under 1.6.

So you've got 200,000 to 3000,000 tons on a quarterly basis.

But if you look first half to second half, obviously the first-quarter utilization was down significantly, so there's more -- in the second half than that.

All right.

Okay.

Thank you.

Our next question comes from the line of Phil Gibbs with Key Banc.

Please go ahead with your questions.

Good morning.

Good morning Phil.

Mark, we saw a little bit of a pickup in scrap in June, and I think July has come off a little bit.

But is it reasonable to think that in the third quarter relative to the second quarter that we can see your raw material costs stay relatively flat, or should we expect them to be up a little bit given the fact that scrap bounced in the middle of the year?

Well, I will let Russ give you some color, but I think we -- don't see any massive shift downwards like another -- or anything crazy, but I -- Russ, you think general erosion?

I think the trend is definitely going to be down.

I think you've got no exports, the strong dollar and no exports has actually encouraged some imports of scrap, which is going to mean excess scrap or scrap supply in the US is going to be -- logically a little bit of pressure on the -- downward pressure on scrap price in the near term.

Are you thinking August is going to be a reasonable reset given what we've seen in the export markets right now given what they've at least the -- have come off 50, 55 in the last six weeks?

I think the question is what's reasonable.

Your perspective of reasonable is maybe different than mine.

I think certainly there will be a downward price pressure in August and probably the next couple of months.

Okay.

And then in terms of the fabrication momentum, you're running up against a tough volume comparison in the second half of the year.

Are we looking for fabrication volumes to be relatively in line with where they've been in the first half of this year or should they step up and try to compete with the volumes that you had in the second half of last year?

Because I heard you say earlier on the call that you've added some head count.

From a volume perspective, Phil, based on where the markets would allow us, I think that we could see a second half that has pretty reasonable volumes and definitely higher than we've seen in the first half of this year.

Okay.

And then just lastly here if I could, the recycling business Russ, how much of that $12 million or so profitability at OmniSource was driven by some of the work you've done behind the scenes to clean up some of these higher cost operations in the south?

Thanks.

Well, Phil, I don't know that we can point to a specific -- certainly we've taken some steps in idling some shredders or hot idling some shredders closing some unprofitable yards in the South.

We've also done that in the Midwest.

We continue to focus on again, adjusting our business levels and our business is what the market will allow us to operate profitably, and we've still got some work to do.

Thanks.

Our next question comes from the line of Stacey Kerelska with Macquarie.

Please go ahead with your questions.

Good morning guys and congrats on a good quarter.

My first question is how much of the $100 a ton decline in sequential pricing in the flat roll was due to mix and how much due to the lower market pricing?

Hello?

I think the question was how much of the $101 was --

Just for me to clarify, that $101 per ton reduction was not flat roll specifically.

That's over all of our product lines, so that's average pricing both across long products and flat roll products.

So I just want to verify that.

So how much was I guess the mix and how much was lower pricing?

Was it more due to shipping more flats or -- ?

I would suggest that it wasn't unbalanced to mix versus just lower pricing.

We had lower pricing throughout in the mixed.

You're right.

It's flipped a little bit more on the flat roll side of the equation.

I would say it's a little bit more overall reduction in pricing.

Okay.

And my second question has to do with your capacities in galvanized coated and painted products.

Could you give us a little bit of color on how much do you have of those at Columbus, Butler and Techs currently?

It is -- Techs is a million tons.

We're going to give you the exact numbers that we report here I think is the way Theresa would like to.

So from a coating perspective, the Techs has a million tons of galvanizing capability, and at Butler we have 720,000 tons of galvanizing capability and 240,000 tons of painting capability.

And at Jefferson bill, which is included in the flat roll division results, we have an additional 300,000 tons of galvanizing, an additional 190,000 tons of painting.

And then at Columbus we have about a little over a million tons of galvanizing capability and we will be adding the painting capability in 2017, and that will be about 250,000 tons of painting capability.

Okay.

Great.

Thank you.

And how do you think your position from the trade case on coated?

How do we think about it?

Yes, I guess how are you positioned?

I mean you just gave us some of the capabilities you have?

We're very positively inclined.

It was a 6 to 0 passage by the ITC, and the commerce department will be scheduled to -- at least are scheduled to, from countervailing duty perspective give a ruling late in August.

Now, again, they're very -- I tell you they're understaffed and so many times they're -- they delay that and so forth.

But I think we have a very, very strong case on the coated products and that we will only get stronger as people start reporting their earnings for the second quarter.

Great.

Thank you, Mark.

Thank you.

Our next question comes from the line of Jorge Beristain from Deutsche Bank.

Please go ahead with your question.

Just again to recap and beat a dead horse here, what do you think the market is missing here in the sense that I think you guys clearly articulated that two-thirds of coated imports, five countries could be targeted with antidumping duties anywhere north of 100% as early as August.

And yet we're not seeing accelerated buying from your end clients, so what do you read through to that?

Is it that the market is expecting that maybe the countervailing duties will not be as strong?

Has the recent collapse in Asian prices taken a little bit of that potential price hike away?

Can you just comment as to what you think the market is seeing?

Because there seems to be a disconnect.

I think the -- and you probably have more color, but from my perspective you still have a large inventory that has to be consumed.

Again, as we said earlier, the customer base is currently not -- they're reluctant to take a position.

They're patching holes, and you just see that the inventory levels are slowly coming down.

Once they get back to the market and those imports are not available to them I think is when you start seeing the price appreciation.

I think that, again, there will be a preliminary number possibly here by the end of August so there's still time for some deliveries before that.

And as we noted, prices are still coming down, which mostly from the Chinese.

And so they're in almost total disregard, which in that will only improve the duty calculation in the very end for the final determinations.

But I think -- I think what people are expecting is a delay in that ruling that may go -- I mean directly it could be delayed until the end of December.

So they're hoping and anticipating that delay and to still get some tons in before the hammer falls, and so that's their -- I guess their right to do that.

But once it -- once the antidumping ruling comes, which is pretty firm in November, I think everything will firm up very quickly, and no one will want to have steel on the water a couple weeks before either of those two rulings.

Perfect, that helps tighten up the timing outlook.

Thank you.

Thank you.

And our next question comes from the line of Andrew Lane with Morningstar Research.

Please go ahead with your question.

Hi, good morning all.

Good morning.

Just one question here.

I'd also like to ask about the fabrication segment.

By my count we've now seen margin expansion for six straight quarters and really impressive results this quarter.

Can you provide some color as to the texture of the improvement in nonresidence construction activity that you're seeing?

Are there any particular project types or particular regions that have really been driving the pickup in activity?

Thank you.

I think the projects have shifted.

last year there tended to be a lot of big bulk warehouse, Amazon type construction.

That's shifted to more institutional I do believe today.

It's across a broader spectrum of construction segments, and so it gives us optimism that it's sustainable.

Again, we have certainly a plethora of engineering backlog on the tables, so we continue to see that, a strong market.

So one thing I would add to that, Andrew, is that we are at record spreads right now in the fabrication side of the equation, so you mentioned that in the last six quarters we keep seeing improved margins.

It wasn't just about the volume side of the equation.

We've been able to, because of the strength in the market, elicit prices that have stayed fairly steady as our raw material which has been pliable steel has been declining so that there's really been a benefit there.

I'm not sure that one should expect that we stay at record levels in the second half of the year necessarily although I believe volume can more than offset that.

Great.

Very helpful.

Congrats on a good quarter.

Thank you.

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

Please go ahead with your question.

Thank you very much.

There have been reports in the trade press of Chinese billet exports to turkey near $100 a ton, and while this is a liquid contract, the LME steel billet future has been at $100 a ton for seven weeks.

Why don't you buy some of those cheap Chinese billets and either run them through your long mills or chop them up and mill them as scrap?

Well, we like quality.

(laughter) But John, I think you raise a good point, but again, that's a -- that's a big step to take.

We've got some loyal dedicated employees doing some great things out there, and the improvement that we would see is -- I don't think would be massive.

Do you think the scrap prices we read in the trade publications are accurate given the overseas markets being in a different place in terms of pricing?

Well, John, I hadn't seen the $100.

I saw like $202, and I was doing my calculations going back through the metrics.

And beating on me.

Beating on Russ trying to figure out how I get lower cost scrap in Roanoke and compete because I'm after them to try to figure out how to move some billets a little less expensively and so forth.

But I've never seen the $100 numbers, and even $200 is distressing with the $202 and $210.

So, again, it's just -- there's -- yes, I don't know how to even stand on that.

I mean, again, we were pressed to bring in Chinese coils to the Techs to coat, and we had a customer who demanded it, and when a customer demands it and it's only part of the portfolio, I succumbed.

Originally I had said no, but I didn't want to jeopardize the value of that customer's business.

It's been long standing, and we had a tough time supplying any other reasonably priced product.

I was willing to take a hit on a certain amount of product, but truth be told, after -- it was after Sparrow's Point went away and the light gauge became a tighter market and people -- it was a tough time to find the product, we brought some in and thank goodness it didn't run real well and the customer wasn't happy with the supply.

They're the ones who source it.

It wasn't us.

But even that was distressing but I justified it because it kept our employees working and earning bonus and so forth.

But any time you start dabbling in that world, you start worrying about -- me, I worry about the appropriateness of it because I'm fighting them every day in Washington through trade cases and so forth.

How would I look if I was an importer of the same product and I'm asking my customers not to enjoy the benefits of the cheap steel?

Some steel is out there at less than scrap values, you don't want the Chinese to be subsidizing your nice Turkish competitors when they could be subsidizing you instead.

Well, we -- we're not looking for the subsidy.

We want the fair and free trade and we want to compete on the basis of what we do well, and so we haven't considered that.

Thank you.

Our next question comes from the line of Frank Duplak with Prudential.

Just a quick one.

You may have already done this, I hopped on and off the call.

Have you guys updated your CapEx forecast for 2015?

We have, Frank.

We're expecting 2015 CapEx to be in the range of $150 million.

Okay.

Thanks a lot.

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

Please go ahead with your question.

Thanks.

Just had a question, broad question for you Mark on M&A as to whether or not you see that as a potential in the next 6 to 12 months for your company or would you continue to do more of these internal investments like you've been doing and things like a downstream assets in Columbus?

What's the priority for your company in terms of capital allocation within that view of M&A?

Thanks.

Well, as we've spoke in the past, I think we frequently assess our cash allocation.

We are blessed to have a phenomenal team doing phenomenal things in the challenging market, and our cash generation remains incredibly strong and to a point what do we do with it.

From a balance sheet standpoint, it's -- that leverage is under 2.4, I think.

We've got great liquidity of $1.6 billion, yep.

And so we got a phenomenal foundation to grow.

We will continue to consider growth opportunities, but first, going back to earlier this year, obviously we increased our dividend 20% or so to obviously return some of our value back to the shareholder, but from a growth standpoint, we continue to look at organic opportunities.

There are I would say fewer from a standpoint of capitalizing on the assets, but Roanoke has excess mill capability, arguably some excess departmental capability, so we're looking to optimize that and further diversifying and looking at that --.

On the MA front, I do believe there will be opportunities -- have been and will continue to be opportunities available to assess.

Thank you.

Thank you.

This concludes our question and answer session.

I would like to turn the floor back to Mr. Millet for any final and closing remarks.

Thank you everyone.

Just I guess to recap, SDI I think is incredibly well positioned, we don't manage to hope.

We try and control our destiny.

Obviously the import arena is a little bit of out of our control maybe, but we're certainly managing our business, I think, prudently.

Low high variable cost structure and low fixed costs and a highly diversified product mix I think continues to generate strong cash flow through the cycle.

I think we've clearly differentiated ourselves.

We've consistently outperformed our peer group and will continue to do so.

We talked about the latent capacity that we've yet to unleash in our steel capacity and total 11 million tons, and we've got a million plus tons to truly leverage.

Going to continue to capitalize on engineered bar expansion and our rail expansion, and we're going to continue to capitalize on the contact position going forward.

So we continue to partner with our terrific customer base, and we've got a phenomenal team, I believe, that is passionate and is driving the whole company toward a new level of excellence.

So we are fully engaged, fully focused, fully passionate and fully optimistic about our future, and certainly appreciate your support that you've given us in the past and do some calling and hope you're with us for our growth in the future.

So thank you everyone.

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

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