Steel Dynamics Inc (STLD) 2016 Q2 法說會逐字稿

Good day, and welcome to Steel Dynamics' second-quarter 2016 earnings conference call.

(Operator Instructions)

Please be advised this call is being recorded today, July 19, 2016, 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 call over to Theresa Wagler, Executive Vice President and Chief Financial Officer.

Thank you; please go ahead.

Thank you, Brenda.

Good morning, everyone.

Welcome to Steel Dynamics' second quarter 2016 earnings conference call.

Leading today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics and myself.

We're also joined by Russ Rinn, Executive Vice President over Metals Recycling; Chris Graham, Senior Vice President of Fabrication and Manufacturing; Glenn Pushis, Senior Vice President of Long Products Steel Group; and Barry Schneider, Senior Vice President of 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 1955.

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

These predicted statements speak only as of this date, July 19, 2016, and involve many risks and uncertainties related to our business and the environments in which we operate, any 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 Forms 10-Q; or in other reports which we file from time to time with the Securities and Exchange Commission.

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

Thank you, Theresa.

Good morning, everybody.

Welcome to our second quarter earnings call.

I hope and trust you all are enjoying the summer and having a safe summer at that.

It seems difficult to believe that we are already halfway through 2016.

I guess time flies when you're having a lot of fun.

But thankfully we have a notably improved profile compared to last year.

To begin this morning, I'd ask Theresa to comment on our second quarter financial performance.

Thank you.

With a continuing challenging global steel industry environment, the team achieved strong operational and financial results.

For the second quarter of 2016, our net income was $142 million, or $0.58 per diluted share, slightly above our guidance of between $0.53 and $0.57 per share, and really based on the strength from the Flat Roll Group.

These results are over double those of sequential and prior year quarters.

Sequential first quarter net income was $63 million, or $0.26 per diluted share; and prior year second quarter adjusted net income was $53 million, or $0.22 per diluted share, which excludes expenses primarily associated with idling our Minnesota Operations.

Second quarter 2016 revenues were $2 billion, a 16% improvement over the sequential first quarter based on both increased shipments and product pricing from our Steel Operations.

Our second quarter 2016 gross margin as a percentage of sales increased to 19%, driven by the improved performance at our Steel Operations, most specifically from our Flat Roll Group.

This represents a significant improvement over near-term history, including first quarter 2016 performance of 14%.

As a result, our operating income for the second quarter was $256 million compared to first quarter results of $132 million, a 94% improvement.

For the second quarter, steel shipments increased 9% to 2.5 million tons as volumes improved across all divisions except in special-bar quality products.

The SBQ market continues to be challenged by weak demand dynamics.

Conversely, domestic flat-roll steel utilization is strong, as imports have declined and customer inventory levels are better balanced with actual demand.

Even though second quarter platform utilization was 95%, it's a bit misleading, as the Flat Roll Group produced over the theoretical quarterly capacity, offsetting lower utilization at the structural and engineered bar divisions, which operated at 82% and 53%, respectively.

Second quarter 2016 steel platform average selling prices increased $67 per ton to $640, outpacing increased average scrap costs of $44 per ton.

Increased metal spread and continuing improvement in volume resulted in our second consecutive quarter of significantly higher profitability generated by the steel platform.

Operating income was $276 million, just over double first quarter results.

Our Flat Roll group continued to drive this performance, with 159% increase in group operating income based on an 8% increase in shipments coupled with meaningful metal spread expansion.

While our metals recycling platform continues to operate in an extremely challenging environment, the team was able to achieve significantly improved profitability, recording $15 million of operating income versus $6 million in the sequential first quarter.

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

Second quarter 2000 shipments increased 3% and ferrous metal spread increased 30% compared to the sequential quarter.

Additionally, internal ferrous shipments represented 60% of OmniSources' second quarter volume, effectively levering the strength of our vertically integrated business profile.

Non-residential construction demand was steady throughout much of the United States, but negatively affected by inclement weather in the southwest, resulting in a slight decrease in our second-quarter fabrication shipments, but order entry and quoting activity remained strong.

As we suggested on the first-quarter call, fabrication experienced metal spread compression as higher steel prices increased raw material costs while product pricing modestly declined.

As a result, second quarter 2016 operating income from our Fabrication Operations was $24 million, a decrease of $8 million when compared to the first quarter.

Although we anticipate stronger fabrication volumes, we expect to see additional metal spread compression in the third quarter as higher price flat-rolled steel inventories flow through the system.

During the second quarter 2016, we generated cash flow from operations of $158 million, as working capital used $136 million in the quarter due to increased sales.

For the first half of 2016, we generated $447 million.

First half 2016 capital investments totaled $63 million.

We currently estimate full year 2016 capital expenditures to be in the range of $225 million, obviously, weighted to the second half of the year, and this includes the paint line addition at our Columbus Flat Roll division, which is still expected to begin operations in the first quarter of 2017.

We maintained our cash dividend in the second quarter at $0.14 per common share.

Our history of sustained and (inaudible) cash dividends demonstrates the confidence that we and our Directors have in the strength and consistency of our cash flow generation capability.

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

We achieved record liquidity of over $2.2 billion at June 30, 2016 comprised of our undrawn revolver and available cash of $1.1 billion.

During the second quarter, total debt remained flat, while net debt decreased $82 million to $1.5 billion.

Our second quarter 2016 adjusted EBITDA was $340 million and trailing 12-month EBITDA $903 million, resulting in net leverage of 1.7 times, down from 2.7 times at the end of the year.

Our credit profile continues to be solidly in line with our preferred through-cycle net leverage of less than three times.

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

Mark?

Thank you, Theresa.

Some may think it redundant, but I want to reiterate on each call that safety and welfare of employees remains our number one value.

Nothing surpasses the importance of creating and maintaining a safe work environment, and our safety performance remains better than industry averages, but our goal is to have a zero incident environment.

We reduced our total recordable injury rate in the first half of 2016 by a further 15% when compared to last year's full-year results.

The team continues to do a phenomenal job and we are on track for another record performance this year.

But everyone must remain focused.

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

The steel platform performed well in the second quarter.

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

Several positive macro shifts have resulted in significantly improved flat-roll product pricing.

The year-over-year first-half flat-roll steel import levels have declined and customer inventory levels are better aligned to actual consumption, all supporting higher domestic sheet mill utilization.

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

Our flat-roll steel mills operated at full capacity during the second quarter, supported by the automotive and construction sectors.

Looking, firstly, even though sequential long product steel shipments improved 14%, they operated at about 75% of their full production capability, with engineered bar being the most challenged.

So, for the steel platform as a whole, our production utilization rate for the second quarter of 2016 increased to 95% compared to the overall domestic steel industry that's been operating at around 74%.

Despite a significant increase in second quarter scrap costs, our overall average steel metal spread improved, as average product pricing outpaced the increased costs.

However, as a sub group, our combined long product divisions actually experienced flat pricing and metal spread compression in the second quarter.

Although overall construction continues to improve, the competitive landscape for structural steel, [emerging] shapes, and engineered bar is extremely aggressive.

The robust increase in second quarter 2016 Long Product Group shipments was due to customers buying ahead of the significant scrap increase in April and in May.

While we anticipate third-quarter 2016 metal spread expansion for the Long Products Group, the buy-ahead customer activity will likely result in slightly reduced related shipments.

Part of the investment thesis for our recently announced $126 million planned acquisition of Vulcan Threaded Products is the potential volume improvement for our Engineered Special Bar Products Division that could result as being a supplier to Vulcan.

Historically, Vulcan has purchased nearly 20,000 tons of steel from SDI, but based on our production capabilities this could increase to as much as 30,000 to 50,000 tons, just under 10% of our Engineered Bar Division's 2015 shipments.

Vulcan purchases special-bar quality steel products for the manufacture and sale of higher-margin threaded steel rod, cold-finished bar, and heat-treated bar.

We are excited to soon welcome the Vulcan employees to the SDI family.

Vulcan has a great reputation in the industry for supplying high quality products with excellent customer service.

We have recently received the required regulatory approvals for the deal and hope to close the transaction shortly.

At Columbus, the successful market and product diversification that we achieved during 2015 is one of the key differentiators for the improved profitability that we are realizing this year.

As an example, Columbus achieved record six-month production stats in the first half of 2016 and continues to increase their value-add product capabilities.

The new paint line project is on budget and on schedule, with expectations for the painted product shipments to begin in the first quarter of 2017.

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

We already have two paint lines and a Galvalume capability in Indiana and 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 from this line.

As part of the project, this month we are installing equipment in one of Columbus' galvanizing lines to allow them to sell value-added Galvalume products into the construction sector.

We anticipate the installation and resulting disruption to result in about $5 million of lost earnings in the third quarter of 2016.

Our steel platform also continues to benefit from other organic growth investments, some of which began contributing in 2015, but should continue to increase momentum into 2016.

The $26 million investment in premium rail is continuing to improve the ratio of premium to standard rail shipments.

The $96 million investment in engineered special-bar quality diversification and capacity expansion, generally geared toward automotive industry -- this diversification has already facilitated increased mill utilization and cost compression during the ongoing weak heavy-equipment and energy-demand environment.

Finally, the $22 million investment for an additional 600,000 tons of annual flat roll [pickling] capacity at our Butler Flat Roll Division, which will increase value-added sales while de-emphasizing commodity-grade hot roll.

The team began operating the line in January and has already achieved 75% utilization.

The continued increase in domestic steel mill utilization is also benefiting our metals recycling platform.

The team was able to achieve meaningful improvement and profitability for the second consecutive quarter.

The recycling environment remains challenging.

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

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

Earlier this year, the rapid and significant increase in flat roll steel mill utilization and product pricing during a period of low obsolete scrap flows resulted in significant ferrous scrap-price increases.

April pricing increased about $50 per ton, followed by another increase in May of about $20 to $30 per ton.

Looking forward, we expect the pricing environment to decrease somewhat and stabilize as the rush to regain mill inventories subsides and obsolete scrap flows perhaps improve.

We saw this occur as June and July's price trend was basically unchanged for prime grades, but down $10 to $20 per ton for obsolete grades.

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

The fabrication platform continues their ongoing strong performance.

Since our acquisition of additional deck assets in September 2015, we have gained considerable market share for deck, achieving 31% for the first half of 2016 compared to only 24% in the same timeframe last year.

Additionally, the acquisition provides an opportunity for steel supply options from 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, and predominantly from our competitors.

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

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

The Fabrication Operations purchased just over 300,000 tons of steel from our Steel Operations in 2015 and has already purchased over 160,000 tons in 2016.

The New Millennium team continues to perform extremely well, levering our national footprint to gain market share.

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

We continue to see strong order activity and expect increasing volumes, but the increased cost of flat roll steel, which benefits our 7 million-ton capacity Flat Roll Group, will result in further margin compression for our Fabrication Operations in the third quarter.

This natural hedge continues to benefit the overall Company.

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 are recovering and expected to continue this path, such as automotive and construction.

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

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

SDI's 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 of the US dollar, low oil costs, and global overcapacity steel imports were 2015's principal headwind, however, recent import levels have declined and the trade cases are likely to erode them further.

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

As raw material prices moderate, there is likely margin expansion opportunity.

As in the past, importantly, we aren't waiting.

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

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

As you've seen, we continue to strengthen our financial position through strong cash flow generation and 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 poised to capitalize on growth opportunities that will benefit our customers, shareholders, employees, and communities.

Driven to maintain a sustainable differentiated business, we are focusing on growth opportunities to maximize our financial performance throughout market cycles.

We will concentrate on 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 absolutely unmatched.

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

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

So, again, thank you for your time today, and, Brenda, we would love to open the call up for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Tony Rizzuto with Cowen and Company.

Thank you very much, and good morning, Mark, and Theresa.

My question is, one, you've done such a tremendous job at optimizing your flat roll plants at Butler and Columbus.

I'm wondering how much further is there to go in terms of volume growth and aside from mix improvements that you clearly are implementing at these facilities?

Well, I think the team at Butler has done an absolutely phenomenal job.

If you look back when a little Englishman was running the place up there we ran at 2.2 million tons to about 2.4 million tons, and all they have to do was kick me out and they went from 2.4 million to, I think, they probably have about 3.1 million tons of capability there, way above the rated capacity.

I would say at Columbus they have already demonstrated on the hot side the ability to get around about 3.4 million tons, and that's without the prodding and the innovation and the creativity of the employee base, and I would say there is good room for movement there.

Okay, may I ask another question?

I know that it said one question, but I'd like to ask a question on the market, if I could.

You mentioned, Mark, about the imports that have come down; obviously, that's been a key shift in supply this year, but the import license data has been beginning to trend higher, and, obviously, looking at higher imports later this year and we're starting to see some signs that the market is becoming a little bit less tight, if you will.

I was wondering if you could just address that along with your comments about scrap maybe being a little bit sloppy here over the near term?

And just generally speaking, how do you think about pricing, where we are in the market today, and do you think we've hit a peak for hot rolled at this juncture?

Well, that was a compound question, Tony, but let me start off by saying I think import levels are down about 25% year-to-date, but we do indeed see activity picking up a little bit.

The global spread for hot band is in excess of $200 a ton today, and so it's natural for that to occur.

But I think it's been amazing that the import pricing, though, remains pretty resilient, I would say unusually resilient, and maybe those import offers are about $50 off the domestic market.

And as I said, that's a little unusual, a little more resilient.

The trade constraints of totally eliminated China and the other primary importers from the marketplace, and import offers are coming in through what we would consider somewhat non-traditional sources -- Vietnam and others -- and those are a little less accessible and the networks from the customer base importing those steels is a little less reliable at this moment in time.

And in any event, import pressure is not going to materialize in any great form in Q4, and I am somewhat confident that it's not going to return to the levels that really imploded our markets at the end of whenever that was, 2014 and early 2015.

From a pricing standpoint, cold rolled sheet and coated, they remain very, very strong; lead times are out around about eight weeks.

In the hot rolled coil arena, you're right, the market seems a little hesitant, and I think they are uncertain of its direction.

Their lead times are perhaps down to two to three weeks today, and I think it's because some are anticipating softening given that high global spread and the recent deterioration in scrap pricing, and so they aren't placing orders today.

They really are just placing exactly what they need.

There's a good side to that.

The recent MSCI data shows that inventories are 2.3 months on a shipping basis, while actual shipping or shipments are strong.

And I think that is a good position to be in, in all honesty.

I think there could be actually an opportunity for restocking, and they can hang out there and hope for lower pricing, but the scrap arena is going to support the prices, whereas today we don't see any real downward tick in scrap pricing, so that's going to support it.

I think the lean inventory will support pricing in the region it is today.

Does it come off $10 or $20, yes, maybe, but it is certainly not going to implode.

And you never know; history may repeat itself, and invariably it has in our industry, where inventories, silver centered industries get real, real tight, then all of a sudden, folks, they all seem to jump into the market at the same time.

Lead times stretch out because the domestic industry, from a production capability, just can't recover as quickly and you actually get a price pressure environment.

So time will tell.

Thanks for all of that color, Mark, I greatly appreciate it.

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

Hi, good morning, everybody.

Thanks for taking my questions.

Regarding the US auto market, we saw US auto production had a nice June after some softness earlier in the Spring.

I'm wondering, are you seeing signs, as you're out there expanding that business, that there is any step down in optimism on growth among the OEMs, the parts makers?

And, secondly, have you had any substantial wins within that industry, within that market, over the quarter that you could highlight?

I'm not so sure there's optimism for further growth in the automotive world.

I think they are at a hell of a build right today, and I think everyone would forecast that that build rate is going to be maintained going forward.

So I think it's a very healthy environment to be in.

On the market share, as we have advertised or communicated in past calls, have had a dedicated initiative in Columbus in particular to go direct to the automotive producers.

We've put a team of eight, nine, 10 folks together, and it's unbelievable the traction that they have gained.

And I think for 2016 we're on track for about 180,000 tons of other events of automotive shipments, which is up dramatically year-over-year, and we're looking for that amount of gain in addition to that in 2017.

Our target is just around about 500,000, maybe a little more, but 500,000 tons of output at Columbus eventually.

I was just going to say, Matt, just another thing, if you look at the growth expected in Mexico from an automotive production perspective, that also bodes well for Columbus given the freight that we have into Mexico, so it's another thing that we're looking at.

Got it, thanks.

Let me just really quickly follow-up here.

Your cost performances look good.

I'm wondering outside of raw materials, with the advantage that you're getting from high capacity utilization where are you when it comes to your conversion cost performance at Columbus, or even the whole system, versus a year ago and where would you expect it to be around this time?

Without going into specifics, Matt, I kind of led into it a little bit in my opening comments that the utilization number is a bit misleading, because at 95% it's really heavily weighted toward the fact that Butler and Columbus actually operated at 105% to 110% of their rated capacity for the quarter, which, obviously, isn't sustainable for a year, but they did it in the quarter.

And so that masked some of the capability and the opportunities that we're going to have at the long products, so there's still some meaningful cost compression that we should have across actually the structural mill and definitely the engineered bar division, so there's some leverage there.

And as it relates to Columbus, Columbus conversion costs are very strong right now, being that we've brought them very much in line.

There was a lot of progress that was made in 2015, yet there are still some contractual obligations that are outstanding and we're trying to work through those.

They have varying dates of expiration, and so that's probably still another $5 to $8 a ton of additional costs that we're incurring at Columbus that we hope one day we won't have to.

Thanks, Theresa, that's very helpful.

Best of luck for the rest of the quarter.

Thanks, Matt.

Thank you.

Our next question comes from the line of Brett Levy with Loop Capital.

Hi, Mark, hey, Theresa, thanks for all of the detail.

Can you talk a little bit about the continued efforts to gain market share in the long rail business?

And then as more of a bond guy question, you are now at BB+ with a positive outlook, given that you're at 9.6 times interest coverage.

Is there a chance you've become accidentally investment grade even though you've stated that mid-BB is your target range?

And if the rating agencies stick you in investment grade range do you feel like you aren't growing fast enough or anything like that?

I'm asking about do you plan to be aggressive enough on the acquisition front that investment grade may not be something that's in the cards pretty soon?

I'm going to let Mark take the rail question first.

Okay, well, I think we've targeted about 300,000 tons of rail for the mill, and it's not a question really of us searching for a lot more than that market share.

We need to balance the mill between beam and rail products.

We are, obviously, pushing the percentage of premium rail as much as we can, and that is being well, well received today.

And, in fact, I think we're now, we had one railroad that just was a final one, which one was that?

Canadian National.

Canadian National, yes.

Canadian National finally came and approved our product, so we are approved at all major Class I railroads today.

We're going to fall short of the 300,000 tons, I do believe, this year.

We are aiming for I think 260,000 tons to 270,000-ish, because as you appreciate that Class I railroads have throttled back their CapEx spending pretty dramatically.

But we're on target for 260,000-ish for the year.

Related to the second part of the question, Brett, we're very, very open and transparent with the agencies, and so I think S&P just came out and moved our position of liquidity from strong to exceptional, which I'm not sure what that means, but it sounds good.

But we're very open with them about our plans for growth, and that's both inorganic and organic.

And so I don't think we're accidentally going to become IG, I think at some point we will just by the nature of our cash flow generation and the maturity of which we're gaining on the operational platform.

But right now, we feel like we're really strongly positioned, and that BB+ range, we've got access to all of the different capital markets.

We have great support from the investors, and so for us it gives us, I think, maximum optionality and flexibility when we're really in this growth driven state today.

And acquisition plans not slowing down?

Well, I think, Brett, we continue to explore non-organic growth opportunities that will provide strong shareholder return, so that continues.

Okay, thanks very much.

Thanks.

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

Hi, good morning, Mark, and Theresa.

Good morning.

A follow-up on that last one.

So I know you talked in the past about looking forward to targets that would help you fill the mills, but when you go and look for things like Vulcan, what are some of the parameters that you look for as far as profitability, EBITDA margins?

What multiples are you kind of willing to pay to get that EBITDA pre/post synergy, just to help us think about what M&A means for evaluation going forward?

Well, we are continuing to evaluate and we're evaluating not only inorganic, but I don't think one should forget the organic opportunities that we have.

We have about 400,000 or 500,000 tons of hot metal excess at structural rail division at Columbia City.

That will be a very, very effective use of CapEx.

For $200 million or so, you pick up some tremendous value, tremendous volume there.

And we're also working at Roanoke to fully utilize its mill and cast capability.

But on the M&A front, obviously, we're looking at opportunities that leverage our core strengths.

We want sustainability of quality returns, returns that can appreciate our existing margins.

So, Evan, from the perspective of evaluation, obviously, we don't want to be too specific, but I think Vulcan is an example of something where we've been able because of the management team and different things sometimes to be able to elicit really great value.

And so Vulcan was about a five times multiple, which I think is extraordinary.

I know it might seem like it's on the smaller side, but that's an example.

If you remember going all the way back to Columbus, Columbus was actually less than a six multiple.

So I think that gives you a track record for how management feels about valuation.

And regarding your question on the EBITDA margins, we're really looking to drive that as high as we can, so we would look toward to being higher than our average EBITDA margins today, but more importantly, higher than what we've seen in the historical path to that through cycle we can maybe mute some of the volatility.

Super helpful, thanks.

Maybe just one quick follow-up, since I think most have been doing it.

On the engineered bar front, you mentioned that demand was a bit weak.

Could you provide any color there on which end markets are driving that?

I assume it's energy, but if we were to see recovery in the engineered bar business, what end markets should we be focused on?

Well, engineered bar is quite a diversified mill in all honesty, and I'm probably going to get the specific percentages wrong.

But energy has been around 15% to 20% in the past, so that, obviously, is very, very challenged.

You've got about the same going into automotive now, which remain strong.

Off road equipment, mining equipment, the Caterpillars, the John Deeres, those folks, probably 30% or so.

So that has been weak for sure.

And I think the more recent downturn or softening there has been the Class A truck and trailer.

First the Class A trucks earlier this year turned down, and then the trailer, just the last couple of months in all honesty.

So the Eatons of the world are not necessarily buying as much as they did.

Great, super helpful, again, I appreciate it.

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

Hello.

Good morning.

Good morning, Timna.

So I just had a couple.

So as you pointed out, things have softened a little bit, and I just wanted your take on how much that might be a seasonal phenomenon?

And you mentioned that historically we've seen times where everybody sits on the sidelines and has to rush in because inventories get too low.

But we've seen historically, as you know, gaps between us and the rest of the world not get this wide.

So I wanted a little bit more color on what you're seeing relative to normal seasonality and why we might get to a squeeze rather than see the import response this time around?

Thanks.

Firstly, just to be clear, I think from a market perspective that that remains somewhat stable.

With the exception of the softening in the trailer industry, I would tell you that the markets are generally as they have been and construction continues to incrementally grow.

So it's not necessarily a structural underlying demand issue, so I don't call it softening per se.

The order book, obviously, on the structural side of the business anticipation of scrap pricing changes the mentality and the sentiment of the buyer there.

They bought a little bit ahead when April and May ticked up.

And as I said earlier, we'll see somewhat of an impact, it's not massive going into the third quarter for the long product shipments.

In sheet, there's really no softening at all in the cold rolled [vault].

I would say in hot band is a hesitancy.

I don't think it's a underlying softness.

Folks are just holding off, they are buying exactly what they need right now.

They think the market is going to go down, and to be honest it's anyone's guess.

The import market arena, as I suggested, the activity, the inquiries and the chatter has definitely picked up a little.

Pricing is remaining quite resilient, and for $50 a ton, people aren't going to get overly, overly excited.

You'll see some pick up probably in volume, but it's not going to get, I do believe, to the levels that created our past problems over 2015.

Okay, that's helpful.

And then just, if you could remind us as a follow-up on your cash uses, if maybe Theresa could give us any updated thoughts on priorities for use of cash?

Are there a lot of additional value-added processors that fit your business model that may be attractive, or do you think you'd be more skewed toward higher dividend or buybacks at this time?

I would say that, again, just to repeat what I said earlier, we'll just continue to explore non-organic growth opportunities in the M&A field with a focus, obviously, on providing strong shareholder return.

While that's our primary focus right now, we, obviously, always evaluate other shareholder value return mechanisms that you can get through capital structure, dividends, or share buybacks.

Okay, thanks.

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

Yes, good morning, Mark, and congratulations on the quarter.

Hi, Michael.

Last quarter, in the first quarter, you had indicated that you were selling a fair amount of hot rolled to the integrated producers.

Did you continue that in the second quarter?

I don't think that I ever said that, Michael.

I thought in the Q&A you did.

I'm not so sure I suggested we sold -- I'd have to reread my transcript.

Well, did you sell hot rolled to the integrated producers in the second quarter?

I think that is probably a question that is going to go unanswered, Michael.

Okay, then let me give you another question then.

When you look at the sheet market, do you think about like what is the new normal in terms of the sheet market dynamics when you basically eliminate China from the US market with the tariffs that have been put in place on cold rolled and coated, and then the 90% tariffs that have been in place for 15 years now on hot rolled, you eliminate basically a producer that produces over half of the world's sheet products to the US market.

Can you discuss what the kind of new normal is, or implications on spreads, or whatever you'd like to talk about in terms of evaluating the new market conditions?

Well, I'm not so sure I, or we, are any smarter than anyone else.

Obviously, the elimination of China is void the market currently.

I do think that the coated and cold rolled sheet spreads, which are at historical highs, will probably remain so as long as China is shut out, as long as the trade cases are in place to impede -- it's not going to eliminate -- but they will impede import pricing.

So I think those spreads are not just an aberration, I think they are going to be around for awhile.

Ultimately, longer term, when I say longer term, years out, or over the years, I think some of that material will somehow or other find its way back into the American market, either through other converters or through manufactured goods.

There's a good portion of import steel in refrigerators and cars and other things.

So seriously, I'm not smart enough to know long term what the impact is.

Obviously, we're in a commodity market, it's a supply and demand equation.

We take supply out, it's going to benefit and bode well for the market environment and for pricing and for your profitability profile.

Okay, and just by the way, good luck with -- hope you don't stress out too much about becoming investment grade.

(laughter) We'll try not to, Mike.

Thank you.

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

Hello.

Congratulations on a strong quarter.

Thank you.

I just wanted to ask maybe about how to think about your acquisitions, particularly the one you just did with Vulcan.

You mentioned that they were already a large consumer of your product, and it would seem that you are forward integrating into owning what used to be a client.

Is that a way that we could think about some of your future M&A, where you want to go more downstream in terms of owning some of your potential current clients?

Downstream is definitely a focus, yes.

I think we're in a cyclical business and in times of depressed or recessed markets, having pull-through volume will allow greater utilization of our mills, which are capital intensive assets in our portfolio.

New Millennium platform, obviously, has done that well in the past and will continue to do so in the future, and it would be nice for us to get good assets that support or parallel our core competencies.

We aren't going out on a limb and buy something that we don't know.

As Barry said, I think when we toured Vulcan last, there's absolutely nothing here that we don't know.

And, in fact, our incentive systems, our culture can, I do believe, lower their cost and increase their productivity and efficiencies, and, obviously, give them an even better profitability profile.

But bottom line, yes, we are looking.

One of our focuses is to look downstream at higher margin, pull-through volume-type assets.

Okay, and my second question was just how should we think about with the new paint line coming on in Q1 2017, you said that cost was $100 million of CapEx.

How should we think about the incremental EBIT or EBITDA bump that you would get from that kind of investment?

Well, I think just to calibrate it we would look at the payback with today's margins within 24 months.

Perfect, thanks very much.

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

Good morning.

Good morning, Phil.

Theresa, just curious if you could remind us of the lag in flat rolled pricing?

I know you had given some clues as to the fact that the long products pricing was relatively flattish.

So the hot rolled band price probably was up something less than $100 and we know the market is up clearly a lot more than that.

Should we think about the difference between current market pricing, and then maybe what was realized off the bottom as likely to be the type of pricing that you're going to be realizing in the third quarter?

So, Phil, first of all, over the Flat Roll Group about 60% of overall volume is spot and so that trades as the spot market trades.

If you think about the other 40%, most of that is tied to CRU in some form or fashion, and CRU already lags about four weeks, and our contracts lag another two months probably.

Up to two months.

So you're looking at potentially two months to a quarter worth of lag over that 40%.

Okay, so that's -- I think that's still insinuates with your lead times on hot rolled, or at least what they were a couple months ago, that you're still catching up to where the market is now relative to where we were in the second quarter in terms of what you realized.

Mark, if we, let's say, lead times, which have come in a little bit on hot rolled persists for a little bit longer and, let's say, the service centers are able to take another 10% out of inventory, do you choose to do maintenance activity, or do you choose to still run as aggressively as you did in the second quarter and try to maintain that share that you've had?

I think, Phil, as we've said in the past, it's a balance.

You've got to be careful taking one's price down to -- in search of an order and just get 500 tons and you find it takes the whole price of the market down.

Right this second, I don't think there are a lot of orders to be achieved and I think the market will remain firm.

Well, I think, Phil, your question was around maintenance and whether we're taking maintenance or not.

And so related to that, I'd just remind you that we mentioned that Columbus facility actually will be taking one of the Galvalume lines down for a bit of time because they want to put in, as part of the paint line investment itself, and so that's probably going to impact some volume in the third quarter and we're estimating that to be around a $5 million impact.

Columbus will have its maintenance shutdown in the third quarter, as well.

Okay.

What are you doing, Barry, for Butler?

Is that third quarter or November?

Right now we're leaning towards fourth quarter, or into the fourth quarter for the Butler outage.

Perfect.

And, Theresa, can you provide the mix on the flat-rolled side as you typically do, and I'll hop off?

Thanks so much.

Yes, sorry, Phil, I neglected that.

Second quarter flat-rolled shipments across the flat-rolled group, hot rolled and P&O combined was 872,000 tons.

Cold rolled was 166,000 tons, and coated, which will include painted, galvanized and Galvalume, was 750,000 tons.

Thanks so much.

Thanks.

Thanks.

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

Hi, thank you, and good morning.

I wonder if you could talk about scrap for a moment, Mark, and Theresa.

The market for scrap seems to be weakening a little bit on the -- maybe due to China slowing or the dollar or whatever it could be.

I'm just wondering, in your network of scrap collection as well as processing, can you lower your intake prices at this time as fast as the scrap price declines without losing volume, or how is that balance going these days?

Aldo, this is Russ.

Thank you for the questions.

Again, I think, we certainly can lower the buy price, but it does impact the flows, particularly of obsoletes.

I think as you look at the outlook and I think Mark has it nailed spot on, I think we're soft sideways in the near-term future.

The strength of the US dollar has slowed exports, but more importantly than that, it's also encouraged some imports, because you had cargos out of Britain in particular that are much more affordable in today's dollar terms.

So that import/export balance there is, I think, will continue to keep a lid on any major pricing moves, particularly on the upside.

Certainly, I think there will be a little bit of downward pressure, but, again, I think that we're going to trade in a range probably for the rest of the year.

If I look at it right now, I think we're going to be in a very narrow range for the rest of the year.

Right, and, Russ, as the Company looks to grow, they mentioned, you mentioned through acquisitions maybe looking at downstream businesses.

Would any of your scrap assets, maybe some shredders, be available for sale, you think, at some point?

Well, I think, although we look at everything that comes at us regardless, whether it makes sense to us or not.

But I think our intent is to be strategic and particularly to make sure we're supporting the steel mills of our Company, that's the key factor that we've got as a group.

So again, we look at anything and everything, whether it's buy, sell, or repurpose.

Great.

Thanks very much, congratulations on the progress.

Our next question comes from the line of Alessandro Abate.

Mark and Theresa, good morning.

It's Alessandro Abate from Berenberg.

My question is related to your strategy for Columbus, specifically Mexico, and just going back to what we just said the target seems to be 500,000 tons to automotive.

Can you just give a little bit more color related to how much of this target is coming from Mexico and how much from the US, and whether the recent investment of Tanium in the galvanizing line and Nucor with GSE can actually represent the kind of potential threat to your target, or your target is already taken into consideration for future development?

Thank you.

Well, I don't think their expansions will threaten our plans to be honest.

Much of the automotive work we've got to date is actually in the southern US.

So if you think we've got 180,000 tons this year and we've got another 180,000 tons next year, we're quite well on our way to get into our target even without Mexico.

Obviously, Mexico is boom town for steel consumption, both on the appliance, HVAC, automotive side, and there's no doubt that we will get some volume down there.

A lot of our existing customers have facilities or are building facilities, or partnering with folks in Monterey and the Mexico City arena.

But currently most of our output is within America.

And, Mark, thanks for the answer, but is it possible to really be more color on the potential, say, volume you might be getting from Mexico, let's say, in the next two or three years?

Barry?

Well, I believe in the painted products we do see some growth opportunities in the Mexican markets through existing customers that we have relationships here in the United States, so we do see the painted products going down into there both appliance and construction type products.

As Mark mentioned, some of the automotive we will envision down there, as well as some general, just general service center type applications.

So I do think there's a reason to expect that we will be somewhere above 200,000 tons into that marketplace for the next couple of years, but we are not limiting what we do.

We have very good freight access to the area, and we have a developing Mexican strategy that will purpose all of our platforms together.

Thanks, just a little follow-up.

Out of these couple hundred thousand tons of shipment, could you also give me a split between HVAC and automotive?

That would be very difficult at this point.

Okay, thank you very much.

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

Hi, good morning, Mark, and Theresa.

I just have a question about, again, it's on scrap pricing and it's more the dynamic of domestic versus international.

Can you talk a little bit about what you've been seeing in the market?

Have you been seeing Turkey import scrap out of the US?

Have you been seeing scrap come over from Turkey?

How have the flows been and how is the state of the market with respect to that?

Sean, this is Russ.

I think Turkey continues to be in and out of the market as they balance off the billet cost or the slab cost against what it takes them to get scrap.

Again, with events in Turkey last weekend, I'm not sure what the Turks are going to be doing in at least the next two or three weeks.

So, I would anticipate that that's going to be -- well, it's going to be a tough question to answer.

The bulk of the scrap that it is being imported in the US today is generally of the higher grade scraps that is coming from Europe, again, based on the strength of the US dollar.

So, I think those are similar types of origins of scrap that the Turks have access to it as well, so if it makes sense for the US, it more than likely makes sense for the Turks, as well.

Right, and how has that trended this year?

Have you seen that increase or decrease over time or until the last couple of months?

Are you talking about importing scrap?

Yes, please.

I think I read an article just a week or so ago about the volumes in the South, of the southern US, and based on everything that I got out of that article it looked to me like the amount of imports the first half of 2016 are already more than the entire 2015 level of imports.

Okay, and then has a lot of that -- a lot of that hasn't been offset by exports, right, because the dollar has been strong, so nobody is going to buy our scrap?

Is that the right way to think about it?

There's ample supply of scrap in the United States via imports and via lack of exports.

Right.

Hey, thank you very much, Russ, I appreciate it.

I think it would be our position that given the economic turmoil out there that and the fact of the US economy is stronger than most that dollar strength will remain for some time to come, and so that will just continue to dampen the export market and encourage imports.

Thank you.

Our next question comes from the line of Garrett Nelson with BB&T.

Hi, thanks.

Most of my questions have been answered, but just wondering whether your full year CapEx guidance has changed at all since the April call?

Yes, the full year guidance right now is $225 million and, obviously, that's pretty much back loaded to the second half of the year, and it's really primarily related to the expected payment streams for the Columbus paint line.

Great, thanks a lot, Theresa.

Ladies and gentlemen, that concludes our question-and-answer session.

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

Thank you, Brenda.

Well, just quickly thank you for your support.

I think we are uniquely positioned for growth and we'll take advantage of the opportunities that come our way, and we're supported by a phenomenal group of employees and a phenomenal group of customers.

So we're in great shape, we're excited.

So from Russ, from Barry, from Chris, from Glenn, and Theresa and I, thank you for your time today.

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

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