Steel Dynamics Inc (STLD) 2016 Q1 法說會逐字稿

Good day and welcome to the Steel Dynamics first-quarter 2016 earnings conference call.

(Operator Instructions)

Please be advised that this call is being recorded today April 21, 2016 and your participation implies consent to our recording this call.

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

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

Thank you.

Please go ahead.

Thank you, Adam.

Good morning everyone and welcome to the Steel Dynamics first-quarter 2016 earnings 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 our Metals Recycling Operations, Russ Rinn, Executive Vice President.

Our Steel Fabrication Operation, Chris Graham, Senior Vice President, Downstream Manufacturing Group.

Our Steel Operations, Glenn Pushis, Senior Vice President, Long Products Steel Group; and Barry Schneider, Senior Vice President, Flat Roll Steel Group.

Please be advised that certain comments made today may involve forward-looking statements about future events 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.

We refer you to a more detailed form of this statement contained in the press release announcing this earnings call.

These productive statements speak only as of this date April 21, 2016 and involve many risks and uncertainties related to our businesses and the environments in which they operate.

Many of which may cause actual results to turn out differently than anticipated.

More detailed information about such risks and uncertainties may be found in our most recent annual report on Form 10-K under the heading, special note regarding forward looking-statements and risk factors.

In our quarterly reports on 10-Q or in other reports that we from time to time file with the Securities and Exchange Commission.

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

Thanks, Tricia.

Good morning everyone.

Thank you for joining our call this morning.

First I'd like to take a quick moment to welcome our new call participants, Barry and Glenn.

Upon Dick's recent retirement at the end of March, Chris, Barry and Glenn were named Senior Vice President's reporting directly to me.

Chris retains oversight of the New Millennium fabrication group and also manufacturing as we seek downstream value-added growth opportunities.

Barry is in charge of our flat roll steel group and Glenn of our long products platform.

Each of these gentlemen has extensive experience in the steel industry as well as the unique distinction of being with Steel Dynamics from the very beginning some 20-plus years ago.

They are well-versed in our performance driven, low-cost operating culture.

And are passionately aligned with our commitment to creating superior value for loyal customer base.

Fortunately Dick isn't going to far.

His vast expanse and talent will be retained as he continues on the Board and I'm sure he will be turning up from time to time in the mills.

He will also be actively assisting me to ensure a smooth leadership when transition over the next couple of months.

Now before talking about the market environment I asked Theresa to comment on our first quarter and financial performance.

Theresa?

Thank you, Mark.

Good morning, everyone.

Within a continued challenge steel industry environment we achieved solid financial results in the first quarter.

Our net income was $63 million or $0.26 per diluted share, which was at the top of our guidance of between $0.22 and $0.26 per share.

These results compared to the sequential fourth quarter adjusted net income of $22 million or $0.09 per diluted share, which excludes the impact of non-cash goodwill and asset impairment charges of $1.13.

And compares to prior year first quarter adjusted net income of $40 million or $0.17 per diluted share, which excludes certain refinancing costs of $0.04.

First quarter 2016 revenues were $1.7 billion a 9% improvement over the sequential fourth quarter based on increased shipments from our steel operations.

Our first quarter 2016 gross margin as a percentage of sales increased to 14%, driven primarily by increased volume and represents a vast improvement from fourth quarter results of 9%.

As result our operating income for the first quarter 2016 was $132 million.

Compared to adjusted fourth quarter results of $47 million.

For the first quarter steel shipments increased 17% to 2.3 million tons as volumes improved across all divisions but most significantly in flat roll.

Flat roll steel imports declined and customer inventory levels are better aligned with actual demand, which is supporting increased domestic steel production and now also flat roll pricing increases as we head into the second quarter.

Especially for value-added products.

And as a reminder about 40% of our flat roll volume is contractual.

And generally tied to a one to two months lag in CRU price index.

First quarter 2016 steel platform average selling price decreased $40 per ton to $574.

More than offsetting decreased average scrap costs per ton of $21.

Despite lower metal spreads the improved volume resulted in significantly higher sequential operating income from our steel operations of $136 million.

Just over double fourth quarter results.

Our sheet operations drove this increase improving operating income by over 180% with a 20% increase in shipments.

While our metals recycling platform continues to operate in an extremely challenging environment, the team was able to achieve significant improved profitability in the first quarter.

Recording $6 million of operating income versus an adjusted operating loss of $16 million in the fourth quarter.

Increased domestic steel mill utilization and export volumes resulted in improved recycling demand and pricing.

Ferrous shipments increased 9%, while metal spread improved 36% compared to the sequential quarter.

Additionally, internal ferrous shipments increased 27% and represented 60% of mills recycling quarterly volume.

Effectively levering the strength of our vertically integrated business profile.

Our fabrication operations continue their ongoing strong financial performance in the first quarter.

Achieving operating income of $32 million.

Not only improving sequentially, but also a result only slightly below their record of $37 million set in the third quarter of last year.

We continue to see steady nonresidential construction demand resulting in a slight increase in quarterly shipments, which partially offset modest metal spread compression as product pricing declined more than raw material steel costs.

Based on first quarter quote activity we could see some additional metal spread compression in the second quarter as flat roll steel prices have risen in the interim.

During the first quarter 2016 we continued to generate significant cash flow from operations of $289 million.

Working capital provided $130 million of funding in the quarter.

First quarter 2016 capital investments totaled $28 million.

We currently estimate full year capital expenditures to be in the range of $250 million, which includes the $100 million paint line addition at our Columbus flat roll division, which is still expected to begin operations in the first quarter of 2017.

We increased our cash dividend in the first quarter $0.14 per common share.

Our history of sustained and increasing cash dividends demonstrates the confidence that we and our Board of Directors have in the strength and consistency of our cash generation capability, financial position and optimism concerning our future.

As demonstrated through the years our business model generates strong cash flows through varying market cycles based on the low highly variable cost structure of our operation and our diversified value-added product offering.

We achieved record liquidity of $2.2 billion at March 31, 2016, comprised of our undrawn revolver and available cash of $977 million.

During the quarter total debt remained flat, while net debt decreased $246 million to $1.6 billion.

Our first quarter 2016 adjusted EBITDA was $214 million resulting in the last 12 months EBITDA being $748 million.

Net leverage then was 2.2 times down from 2.7 times at the end of the year.

Our credit profile continues to be solidly aligned with our preferred through cycle net leverage of less than 3 times.

A testament to our disciplined approach to growth, creating shareholder value through sound capital allocation and efficient balance sheet.

Additionally our debt maturity outlook continues to provide great optionality having no meaningful maturities until 2019, but in the interim period having call provisions flexibility.

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

Thank you.

Super.

Thanks, Theresa.

As I've said on every call the safety and welfare of our employees is our number one priority.

Nothing surpasses the importance of creating and maintaining a safe work environment.

Our safety performance remains better than the industry averages and continues to improve toward our goal of zero incidents.

Year-over-year the Company continues to improve with 2015 performance being the best so far.

The trend continued into the first quarter.

The team is doing a great job, over 80% locations achieved zero recordable injuries so far this year.

We also reduced our total recordable injury rate in the first quarter by 20% when compared to last year's full-year results.

And by 40% when compared to prior year's first quarter.

We're definitely beginning the year in an even better position.

My sincere thanks go to the entire SDI team for their continued focus and dedication to our most important priority.

The steel platform performed well in the first quarter.

2016 has certainly provided a changing landscape to the domestic flat roll market.

Several positive macro shifts have resulted and significantly improved flat roll product pricing go into the second quarter.

Flat roll steel import levels have declined and global steel pricing has appreciated.

Customer inventory levels are better aligned to actual consumption, supporting higher domestic steel mill utilization and mill lead-times have extended.

While demand has remained steady, these supply-side drivers have led to much improved market dynamics.

Our flat roll steel divisions have operated at basically full capacity for the quarter.

Supported by the strong auto build and construction pick up.

Although sequential long products steel shipments improved 9%, our long product mills were still challenged with end market weakness.

Operating at only 67% of their capacity.

As the heavy equipment, agricultural and energy markets remain weak, grabs for market share resulted in extensive published pricing discounts especially in the structural steel arena.

For the steel platform as a whole driven by our flat roll operations, our production utilization rate for the first quarter 2016 increased to get 88%.

This compared to overall industry utilization of approximately 71%.

Despite a material decline in scrap costs in the quarter our metal spread contracted.

As average product pricing declined more than our actualized average scrap costs.

Pricing declines were felt in all areas.

However the recent prices increases in flat roll especially for value-added coated products is sticking and we should see the positive impact in the coming months.

The successful market and product diversification we achieved at Columbus during 2015 is one of the key differentiators for anticipated improved profitability in 2016.

As a testament, Columbus achieved near record quarterly shipments in the first quarter of 2016 and increased value-added shipments almost 80% compared to the prior year's first quarter.

The new paint line project is on budget and on schedule.

With expectations for shipments to begin in the first quarter 2017.

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

We already have two paint lines and Galvalume capability in Indiana.

This new project allows for higher-quality double wide steel and access to the southern markets, including Mexico.

We plan to sell surface critical, appliance grade steel as well as construction related products.

Our steel platform also continues to benefit from our other organic growth investments.

Some of which began contributing in 2015.

But should continue to increase momentum in 2016.

The $26 million investment premium rail, the $96 million investment in engineered special bar quality diversification and capacity expansion, generally geared toward the automotive industry.

This diversification has already facilitated increased mill utilization and cost compression during this weak heavy equipment and energy demand environment.

And lastly, the $22 million investment for an additional 600,000 tons of annual flat roll pickling capability at our Butler flat roll division.

This will increase value-added sales while deemphasizing commodity grade hot roll.

The team began operating the line in January and the production ramped up is going extremely well.

Increased domestic steel mill utilization is also benefiting our metals recycling platform.

While the platform remains free cash flow positive in 2015, we have now returned to operating profitability in the first quarter of this year.

As pricing stabilized, metal spreads expanded and volumes improved.

Additionally I want to thank the team for cost reductions of approximately $25 million that were achieved during the last 18 months to 24 months through cost efficiencies and [some] location and shredder idling.

Recycling environment definitely remains challenging.

Many regional players in the industry are either for sale or headed to insolvency.

As such, the number of active shredders has declined meaningfully which should benefit the industry in the years ahead.

Earlier this year we believe the ferrous scrap market would remain essentially flat in 2016 aside from the seasonal January uptick.

Our premise was based on a strong dollar, low iron ore costs and cheap Chinese billet restraining exports.

However, what we didn't anticipate was such a rapid and significant increase in flat roll utilization in pricing.

During a period of low obsolete scrap flows driven by low scale prices.

In aggregate, these market dynamics resulted in scrap price increases of about $10 to $15 per ton in March.

And another increase of $50 per ton in April.

Looking forward we expect the market to stabilize as the rush to regain mill inventories subsides and obsolete scrap flows improve.

Combined with the expectation of a continued relative strong US dollar and relatively low scrap export volumes, we anticipate ample scrap supply and don't see drivers for further significant increases in ferrous scrap prices this year.

The fabrication platform continues to achieve exceptional performance.

Steady demand resulted in near record quarterly operating income of $32 million.

The team is executing on all fronts and doing a phenomenal job.

The CSi acquisition at the end of last year's third quarter gained market share in deck achieving 34% in the first quarter this year compared to only 25% in prior year's first quarter.

We also increased our joist market share over the same period from 32% to approximately 37%.

Additionally the acquisition provides an opportunity for steel supply options for our Columbus flat roll division.

Over the last three years the acquired assets averaged over 60,000 tons of annual flat roll steel purchases, predominantly galvanized.

We plan to source a substantial amount of this steel from Columbus which will help further shift Columbus' product mix and increase mill utilization in weak demand environments.

The power of pull through volume was certainly helpful in last year's steel environment.

Our fabrications operations purchased over 300,000 tons of steel from our steel operations in 2015.

As I said the New Millennium team continues to perform exceedingly well.

Leveraging our national footprint to gain market share.

And the strength of their business provides positive insight into the continued growth in nonresidential construction activity.

Relative to the macro environment, the steel consuming sectors that were weak in 2015, such as energy, heavy equipment and agriculture, will likely remain so in 2016.

However, those that have been strong or recovering are also expected to continue this path, such as automotive and construction.

2016 forecast for these two largest domestic steel consuming sectors remains positive.

Automotive has continued forecasting strength and overall construction expanding continues to improve with additional forecasted growth in 2016.

SDI has growing exposure to both of these sectors through our Columbus flat roll division, additional long products production capability and growing fabrication operations.

Driven by the strength in the US dollar, low iron ore costs and global over capacity, steel imports were the 2015 principal headwinds.

However recent import levels have declined and the trade cases are likely to erode them further.

Reduced imports, idling of domestic capacity, and increasing global pricing along with steady demand and rebalance supply chain inventory, have created a positive pricing and volume environment for flat roll products.

As raw material prices moderate there's likely some margin expansion opportunity.

Importantly as we typically do we are not waiting around.

In order to help insulate ourselves from imports, part of our strategy is to not only to develop strong customer relationships but to also to manufacture products that are more difficult to compete with on a global basis.

Such as our painted flat roll steel, highly engineered SBQ steels and longer length rails.

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.

We continue to strengthen our financial position through strong cash flow generation an the execution of our long-term strategy.

We also have additional Company specific earnings catalysts and are well-positioned for growth.

Customer focus coupled with our market diversification and low-cost operating platforms support our ability to maintain our best in class industry performance.

We believe we are uniquely positioned to capitalize on growth opportunities that will benefit our customers our shareholders and employees and communities alike.

Driven to maintain a sustainable differentiated business we're focusing on growth opportunities to maximize our financial performance through market cycles.

We will concentrate of growth opportunities that will improve the quality of our margins with a particular focus on downstream value-added growth to mitigate the impact of imports and the inevitable cyclicality of our business.

The strong character and determination of our employees are unmatched.

They are phenomenal group and I am proud to stand with them.

We look forward to creating new opportunities for them, our customers, and shareholders in the months and years ahead.

So again thank you for your time today.

Adam, we would like to open the call to questions.

Thank you.

(Operator Instructions)

Our first question comes from Matthew Korn, Barclays Capital.

Please go ahead.

Good morning, everyone.

Thanks for taking my question.

A couple, if I could, on the scrap markets.

Scrap tightness appears to be fairly profound right now.

And so when you think about flows improving on the obsolete side, how much friction do you think there could be from you or the recyclers having shrunken head count over the back half of 2015?

Or the potential bankruptcies you said of certain shredders?

Also I want to know if there's a sense any dealers are holding back supply right now in expectation of higher prices in the next month?

A quick follow-up there, too, on the industrial side for scrap -- on bushelling bundles, are you or the other EAF-based producers maybe seeing some of the effect of your own success here?

Volumes are looking good, the numbers out of Charlotte looked good, but maybe bushelling and bundles -- I wouldn't expect those to necessarily proportionally increase in supply.

Any comments there would be helpful.

Thanks.

I would say -- this is Russ, Matthew -- the flows certainly have increased somewhat.

Not to an overwhelming degree on the obsolete side.

We have seen an increase, particularly in our retail side more so than the regular flows from dealers.

I think the pricing, the new pricing, the up $50, will bring out some more obsolete grade into the marketplace.

But it's still it hasn't manifested itself in big way as of yet.

Back to the prime side of the equation -- again, I think the prime levels are going to remain fairly consistent as they have all year, because the manufacturing -- particularly automotive manufacturing -- is strong.

So I don't, as a proportion of the scrap flow that is available, it necessarily will have to go down as a percentage.

But at this point it seems fairly static.

And while demand increases, that will mean a percentage of that will have to be replaced by other grades; we do think it's going to be reasonable enough to support the needs of the steel mills.

Thank you.

Next question comes from the line of Evan Kurtz, Morgan Stanley.

Please go ahead.

Hello; good morning, guys.

Good morning.

Just maybe trying to put a couple of your comments together, Mark.

You mentioned that you that pricing would start to have a positive impact in coming months.

You also have an outlook for stabilization scrap.

Is it safe to say that you're expecting metal margins to expand in the 2Q and 3Q?

Yes, I think so.

I think, obviously from a pricing standpoint, as we mentioned in the last call, we have about 40% of our sheet products indexed against the CRU.

And as there is sort of a lag there of a month or two for that pricing to kick in fully.

And so as we move into the second quarter, obviously the pricing profile should be dramatically different.

And assuming a relatively moderate scrap market through the quarter, I think one can imagine the margins will expand some.

Thanks for confirming.

And I may, just one follow up on what's going on in flat roll markets right now.

One thing -- some chatter I've been hearing is, integrated mills have been out trying to take advantage of the spread between hot roll coil and cold rolled coil by maybe buying some hot roll coil from some of the mini mills and rolling that, turning that into a higher value product.

Is that something you are participating and seeing?

And is that impacting your mix in any way?

Is it a big enough needle mover to shift the mix?

I think whatever is happening in that environment is positive for the industry in general.

Because obviously we are benefiting as an industry with the idling of Granite City, Fairfield of Ashland.

If they are moving those tons around and utilizing others to provide or get the hot band supply and keep those operations idle, I think that's very good for the industry.

And for the market in general.

Thank you.

Our next question comes from the line of Tony Rizzuto, Cowen and Company.

Please go ahead.

Thanks everybody -- and boy, what a difference a couple months make, huh?

Boy, it's incredible.

My question is just a follow-up on scrap a little bit, and your comments, Mark, and then Russ.

Are you guys concerned about exports which appear to be recovering after a lengthy period of dormancy?

And also, if scrap stabilizes near term, is there any further scope for price increases in flat rolled steel do you think?

Or is it more of a situation where you look for more margin gains as your spreads improve?

I think from the standpoint of export scrap there is obviously some positive activity there.

And that is, I think, helped the recent uptick in pricing.

Again, I think the predominant increase in pricing in April was forced by a surprising increase in utilization of the electric art furnace sheet mill in an environment where flows were still low.

And as Russ said, those flows should start to pick up with the higher pricing.

And I think if you consider that we operated our sheet mills at near capacity, let's just say, and others are likely to be doing the same because of the increase in demand the last couple of months, the incremental or the additional prior scrap needs are going to be minimal and that should contain pricing at the current levels.

I think from the standpoint of domestic pricing it should be sustainable, for sure for the near-term.

I think the market is looking good for us into Q3 and certainly early Q4.

The Asian pricing -- the trade cases have certainly eroded the import volumes.

And more importantly, the US, the global spread is very low.

And in fact it would allow, I do believe, even further upward momentum in pricing before you start seeing any major import interest.

The Chinese market seems to be inspired.

Their pricing is up and there is room in that spread to appreciate domestic pricing further, I do believe.

Fantastic.

Mark, if I may ask a second question -- perhaps you been pretty vocal about section -- the need potentially for section 201.

I was wondering if you could maybe elaborate a bit on your thought process as it relates to that?

I think as an industry we are all firmly aligned that the existing trade laws need to be enforced.

And they need to be enforced in a much more expeditious manner going forward.

There is total agreement there.

On a sort of safeguard, I think my issue is that a large portion of the hot band market, which is pipe and tube, has been absolutely decimated.

And so it's one thing to erode imports coming into the country, but we still need a market, a marketplace to sell our goods.

And those folks need some protection.

It's over 50% or 60%, I do believe, of their consumption is imported today.

And they need some sort of safeguard before, again, that industry gets decimated.

I think personally there should be a long-term solution, which is in place; it just needs to be enforced.

And a short-term safeguard to safeguard that particular industry.

Thank you so much, Mark.

Appreciate your insights.

Thank you.

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

Please go ahead.

Great; thanks for taking my question.

I just have one shorter-term forward-looking type of question.

Typically Q2 and Q3 are very strong volume quarters relative to Q1, and often times it's actually meaningfully stronger.

Any reason to expect that pattern to be different this year?

No.

I don't think so.

I think the markets are generally good.

As we said earlier, it's a little bit of a mixed bag.

Equipment, energy, agriculture is definitely soft.

But the more intense consuming sectors -- automotive and construction -- are remaining strong.

I think the nonresidential construction numbers -- both the macro indices, but also our order book -- would suggest that we're going to see continued [growth] in that arena.

And we're fortunately highly leveraged.

We have about 2.5 times million tons of excess capacity that we haven't been able to exploit yet, most of which is correlated to construction.

We do see the second quarter and the third quarter being very strong as we go forward.

The one thing I would add to that, David, is that with the big bump that you saw in the first quarter -- that was related primarily to the flat roll divisions.

The flat roll divisions were basically at very high capacity already, so any additional volume improvement you see would need to come through markets that are attached to the long product mill.

Okay; thanks for that.

And then just as a follow-up can you just talk a little bit about any changes you've seen in the order books specific to any of the particular end markets, et cetera?

Thanks.

I don't think there's any basic change, David, in all honesty.

Again, the areas that were weak in 2015 will continue to be weak.

Automotive remains very strong.

Residential, I think, although it ticked down a little bit here in the last month or so, year-over-year is improved and will continue to improve.

Our garage door business is off the charts right now.

There is residential strength, we do believe.

And nonresidential construction for all reports -- as I said, macro indices and from our customers and also just a order book within New Millennium -- they have year-over-year much higher backlog and quote activity right now.

We feel quite optimistic that there is going to be incremental growth.

The apparent consumption last year was about 108 million tons, and we would love to see that grow into perhaps 111 million to 112 million tons this year.

Thank you.

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

Please go ahead.

Yes -- good morning, Mark and Theresa.

Congratulations on another good quarter.

Just looking back, today's net debt to capital at 35% -- that's the lowest number net debt to capital that you've had since 2006, I think.

And since 2006 you have grown your steel shipments 75%.

Can you give us some perspective?

You've had tremendous success basically since the Company originated.

Can you give us some feel for what type of growth?

And then, on your capital structure, with the net debt to capital coming down to such a low level, what your plans are for use of capital going forward?

Maybe tie it into that growth?

Certainly, Michael.

And as you point out, I think we clearly demonstrated the earnings strength, the cash flow strength of our business model through tough times.

We've identified several what I would consider capital-effective organic growth opportunities.

Obviously we're in the middle of building the paint line in Columbus.

But we have about 400,000 tons or so of excess hot metal capacity at the structural mill.

We have excess production capability at Roanoke.

And we need do something with the hot and steel at West Virginia which will ultimately give us an even greater hot mill capability.

And Glenn is charged with finding out that best effort for that excess capacity.

We're also expanding the hot roll galva line in Butler, which will be a meaningful event for us.

There is a lot of organic opportunities.

Again, that cash won't be expended in the near term in, the next six months or so.

And they're not massive consumers of capital either.

We are actively exploring downstream value-add opportunities, with a very specific eye on pull-through volume, such as the model that we see at New Millennium.

It helps dramatically in the down cycle to maintain utilization, maintain cash flow, and a more uniform earnings profile.

And also mitigation of imports -- looking at opportunities that we can separate ourselves from the import world that is going to continue for years to come.

And as we do that in parallel, we are obviously exploring and evaluating the many M&A opportunities that are coming to market early.

What about, in terms of using some capital to give back to the shareholder in dividend?

Mike, we do want to keep that positive dividend profile, but we also want to keep in mind that we are a cyclical industry.

And so we want to make sure that it's sustainable at the levels that it is because we view dividends as forever.

It's definitely one of the outlooks the we're [going to] look at.

And we look at other outlets to return value to shareholders as well.

And to your point, the credit profile that we have today is extraordinarily strong.

And so I think right now it's a matter of waiting for a period of time to see where the inorganic opportunities fall out as they come to bear for us to look at those over the next -- call it 12 months or so.

And then, as we're generating cash flow on the way, we will make some decisions; possibly do some other allocations as well.

Maybe not just in the inorganic arena, but the organic and another possibilities.

So I think right now we're looking at everything.

But the most important strategic move for us, as Mark mentioned, was to look for pull through volume and to make sure that we're using the assets we have in place as efficiently as we can.

Okay.

That's a great place to be.

Again, congratulations.

Thank you, Michael.

Thank you.

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

Please go ahead.

Good morning.

Good morning, Timna.

I wanted to drill down a little bit into the discussion on flat rolled markets really strong.

Everything we're hearing is quite robust.

Steel Dynamics has a tradition of offering or opening the order book later than peers.

So I just wanted to ask you if that's still the case?

And ask about how to think about utilization in flat roll going forward?

Do you max out Q1?

Is there a little more tonnage to expect going forward?

Or is this the run rate we should expect in this market environment?

On the flat roll side, I would say there's a little more gas in our tank, but not much.

We operated at a great rate in the first quarter.

I think there was some commentary from you folks regarding our pricing, and maybe a little disappointment there -- to the level of pricing, given the environment we're in.

And again, I think this is focused principally to flat roll and to the fact that 40% of our equity is indexed at CRU and is a one-month, two-month lag there.

Additionally the techs, because of the business model, they're a converter; they tend to be looking about two months out.

So it slows the uptick in pricing.

Our overall philosophy remains to keep a short order book -- hot band not much more than four weeks.

I would tell you that our Butler facility has been doing that for many years.

Our Columbus team has not necessarily done that in the past.

And so, coming into the first quarter in January we were probably stretched out a little more at Columbus than we would typically be.

But that is well in hand now.

Okay; that is great.

Just a follow-up and make sure I understand that you're talking about -- I think we just alluded to the margin compression and some surprise around that.

What you're saying is that, that is really a function of some of the lag effect in pricing due to this CRU indices?

And also the way that Columbus had operated somewhat in the past and maybe going forward?

Correct.

But in addition to that, Timna, remember -- the long product pricing came down in the indices across the industry.

It's not just flat roll.

That price that you have is a mixed average.

No.

Of course.

That makes sense.

Thanks for the help.

Thank you.

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

Jorge with DB here.

Congratulations Mark and Theresa on your results.

I just had a question -- really drilling down a little bit on your utilization.

You guys are at 88%; rest of the industry is at 71%.

You've obviously picked up share in the environment we saw, due to those mill closures of some competitors.

But do you see with the improved pricing that there is a risk that you could give back some volumes to your competitors?

That is my first question.

No.

I don't think so.

I think we are well-placed.

Some of the market share we gained, such as in Columbus, is on the value-add end -- the coded arena.

We struggled -- or the facilities struggled -- a couple of years ago with quality.

And I think the teams, Butler and Columbus working together, have done a phenomenal job getting the quality to where it should be.

We've reclaimed a lot of those former customers.

And they are loyal customers.

We should retain them.

So, no.

I think we're in a good spot.

I think we have gained market share.

We've gained market share on flat roll.

We've gained market share dramatically on our fabrication division, and I'm comfortable with where we are.

Great.

And my second question was on the Columbus paint line.

Could you talk a little bit about what type of contracts you are now able to get with your new Promise paint line there?

And how much of those would be domestic versus Mexico-based or export contract?

If you could just also talk about the type of pricing that you're able to achieve for a painted product?

Is it going to have a bit more defensiveness vis-a-vis imports and vis-a-vis the underlying CRU pricing?

I think for sure the more customized the product is, the more defensive you can be.

Also, the margins in that business are a little better and gives you flexibility to protect your turf, so to speak.

From a standpoint of contracts -- again, it's a little early for us to be securing definitive volumes there.

There will be a shift of some of our products from Butler and Jeffersonville down there immediately to give us a baseload.

But again, we don't have contracts per se down there as of yet.

Is that fair Barry?

Absolutely.

It's a little early to make any agreements in place.

But the supply chains will naturally dictate some of this work.

That is what we're first to optimize.

Okay, sorry -- could you just discuss a little bit about how the pricing for that kind of product would work?

Is it still going to be based off an underlying HRC index?

Or is it going to be more towards a fixed-period type of pricing?

It will be certainly market-driven.

Okay.

Thanks.

Thank you.

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

Please go ahead.

Good morning.

Good morning, Phil.

I had a question on the SBQ business.

It looked like it picked up a decent bit quarter on quarter.

Is that an indication to you that the destocking may be abating?

Or pickup in auto?

Or market share?

And how do we think about that momentum right now for you?

This is Glenn Pushis, Phil.

Hey, Glenn, good morning.

Good morning to you.

The engineered bar products division -- our capacity utilization for the first quarter was right at 72% in melt and cast and 60% rolling.

In those markets the automotive is still very strong for them.

They had a great new first quarter with a small mill that they fired up there last year and ran some good tonnage through that facility.

That helped us out in the first quarter.

If you think we're growing market share in that arena, I would tell you it's in the small bar area, with the start up of that new facility down there last year.

Again, as typical you've heard Mark say: the automotive strong, ag and energy is still soft, the cold finish business has been, I'd say, stable, steady as well as [forgers].

That's kind of where we at, and what we see coming.

Should we expect a pickup in the business in terms of the volumes from this level?

Or more stability than anything, until some of those later cycle markets kick in?

Yes, I would agree with your later comment.

I think it's more just a stable market right now until we see what happens here in the second and third quarter.

Okay.

Appreciate that.

And Theresa -- any comments you can help us on with the mix in flat-rolled?

Yes, I can.

So for the first quarter, across flat roll group, hot roll and P&O shipments were 790,000 tons.

Cold rolled was 129,000 tons and [co-id] was 738,000 tons.

Appreciate that.

I have one last one.

The CapEx started the year off pretty modestly.

Are you still on track to spend that $250 million more back-end loaded?

Or have you pulled some of that off the table?

No.

The expectation, Phil -- the best estimate I would give you would be to around $250 million.

It will probably be a bit less than that.

But with the paint line it's definitely loaded more toward the back half of the year.

Okay.

And I know inventories are low right now.

Are you expecting any further free cash flow generation this year, given that you probably have a little bit of improvement in working capital in terms of it going higher?

Yes.

So we did some framework changes in the working capital, which should reduce some of it effectively from here on out.

But you are right -- the pricing moves will have an impact, as well as maybe some inventory volumes on the raw materials side.

And so I would expect the second quarter could have some draw from working capital, both from receivables and an inventory perspective.

And then as you go to the second of the year, I think that pretty much gets mitigated.

And working capital won't have that much of an impact.

But still some expectation for further free cash the rest of this year?

Yes, absolutely.

Okay.

Thanks so much.

Have a great morning.

Thanks; you too.

Thank you.

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

Please go ahead.

Good morning.

Good morning, Charles.

Over the last year or so, the rail industry has been hit pretty hard by the debacle in coal and to some extent the reduced movement of oil by rail.

Have you seen the railroads switching at all to maybe repair and re-railing, if you will, some of their other lines to offset their maybe reduced needs for the rail -- for especially coal?

Well, I think, Chuck, the Class 1 railroads in particular obviously have trimmed down their capital spend.

And that will influence a little bit of their track expansion plans.

Repair and maintenance is ongoing.

Our shipments of rail are still projected to be in the 240,000 to 260,000 tons for the year, I do believe.

Glenn?

Yes; that is right, Mark.

And I think you're right -- there is little bit of a shift to maintenance away from mainline track build.

But we seem to be continuing to pick up a little market share in that product line.

Thank you very much.

Thank you.

Our next question comes from the line of Aldo Mazzaferro, Macquarie Research.

Please go ahead.

Good morning, ladies and gentlemen.

And I have a question on the mix at Columbus.

Mark, I read that you had 80% increase in the value-add volume on a year-to-year basis there.

Can you frame that for us in terms of what defines that value-added?

And what percentage of the mix the value-added was?

So the value-added prospective, Aldo -- we are actually probably being a little bit light on that, because we are just including anything that is beyond hot band.

But there is actually some hot band that I think some of us would say is value-added as well; so that number really is higher.

And so really it's just 45% hot roll for them and the rest was P&O and cold rolled, hot rolled, and cold rolled galvanized.

Are you using the de-gasser there very much now?

The vacuum de-gasser at Columbus -- how much utilized was that in the quarter would you say?

We currently utilize vacuum de-gassing for approximately 5% of the grades.

It's development work primarily right now.

There are some continuing products, but part of our long-going strategy to get more into automotive.

We use the device more and more each month.

Great.

And one follow-up, Teresa.

You mentioned something just now about you changed your framework in the working capital.

Can you say if there is anything unusual in that first quarter, big source out of payables and inventory?

No.

Those were really changes we made throughout last year, Aldo.

We just have a re-emphasis on making sure that we're being disciplined and watching what the raw material volumes are, what finished good volumes are.

And there's also been a change at Columbus and there is probably still some opportunity there, just based on how we typically operate versus how Columbus may have operated with their working capital in the past.

Great.

Well, congratulations on the balance sheet, Theresa.

Thanks.

Thank you.

Our next question comes from the line of Richard Yu from Citigroup.

Thanks for taking my question.

I was wondering if you could talk a little bit more about your acquisition plans and the acquisition environment.

Maybe, given your cash position, what kind of acquisitions are you looking for?

What are you seeing in the market?

And would you look to increase your position in markets that have been weak, such as oil and gas?

I think we have already spoken to the extent of that, actually.

Again, it's focused on value-add downstream type opportunities.

We want to enhance the quality of our margins.

We want to see greater pull-through volume so that we can at least slow or mitigate some of the cyclicality of our earnings profile.

So that we have higher highs, but higher lows going forward.

I think one needs to recognize that we are intensely global industry today.

And that imports are going to be with us forever.

And so we need to ensure that our business model tends to insulate us from that import pressure.

Additionally, again -- the financial stress in the system is bringing a lot of opportunities to market and we just assess those as they show up.

And see where some opportunities may or may not align with our long-term plan.

Okay.

Thank you very much.

Thank you.

Ladies and gentlemen, that does conclude our question-and-answer session.

I would now like to turn the call back over to Mr. Millet for any closing comments.

Thanks, Adam.

And thanks to all of you that remain on the call for your support of our Company.

We have an absolutely phenomenal team.

I think the -- assuring how we are differentiated as a team and as a business model, we have colossal cash flow generation again in tough times.

And it will continue.

It gives us great opportunity for the future.

Again, thank you to you all; and to those customers on the line -- my sincere thanks for your support.

And for the employees on the line -- guys and girls stay safe and keep doing what you're doing.

You're making us a special Company.

Thank you.

Thank you.

Once again, ladies and gentlemen, that does conclude our teleconference for today.

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