Steel Dynamics Inc (STLD) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

Please be advised that this call is being recorded today, October 20, 2016, and your participation implies consent to our recording of this call. If you do not agree to these terms, please disconnect.

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

Thank you, Doug. Good morning, everyone, and welcome to the Steel Dynamics third-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 (technical difficulty) Metals Recycling Operation, Russ Rinn, Executive Vice President; our Steel Fabrication Operations Chris Graham, Senior Vice President, Downstream Manufacturing Group; and our Steel Operations, 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, and we refer to you a more detailed form of this statement contained in the press release announcing this earnings call.

These predictive statements speak only as of this date, October 20, 2016, and involve many risks and uncertainties related to our businesses and the environments in which they 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 special headings note regarding forward-looking statements and risk factors, and our quarterly reports on Form 10-Q or in other reports which we from time to time file with the Securities and Exchange Commission. And now I'm pleased to turn the call over the to Mark.

Super. Thanks, Tricia. Good morning, everyone. Welcome to our third-quarter 2016 earnings conference call. We appreciate you sharing your time with us today.

I hope everyone has enjoyed their summer. It seems hard to believe we're already headed into the home stretch for 2016. We recognize you all have a busy day today, so we're going to keep our prepared remarks a little briefer than normal.

I do want to take a moment to welcome our newest team from Vulcan Threaded Products to the SDI family. We completed the acquisition in August and integration is going very, very well. We're excited to have everyone aboard and look forward to growing our futures together.

I'd also like to thank the whole SDI team for an incredible job in producing an excellent quarter that was this past quarter. I think when earnings season is complete, it will show their effort has once again driven a Best-in-Class performance relative to our peers in the industry. So again, phenomenal job guys and girls. To begin this morning I ask Theresa to comment on the financial perspectives of our third-quarter performance.

Thank you, Mark. Good morning, everyone. Excluding the litigation settlement charge of $4.6 million, third-quarter 2016 net income was $160 million, or $0.65 per diluted share. On an unadjusted GAAP basis net income was $157 million or $0.64 per diluted share, both within our guidance range of between $0.63 and $0.67.

An additional note, the Vulcan integration is going very well, and the transaction was accretive to our third-quarter results, despite the $2 million non-cash purchase accounting charge. Despite lower volumes across the operating platforms, third-quarter 2016 revenues of $2.1 billion were slightly higher than sequential second quarter sales, as realized flat roll prices increased over 20% and sequential long product pricing also improved, although to a much lesser extent.

Our third-quarter 2016 gross margin was steady at 19%, driven by the performance of our Steel Operations in an increasingly challenging environment. As a result, our operating income for the third quarter was $284 million, compared to second quarter results of $256 million, an 11% improvement.

For the third quarter of 2016, steel shipments decreased 9% to 2.3 million tons. Volumes declined across all divisions, but most notably at our Columbus Flat Roll Division, which was partially attributable to both a planned galvanized outage to install Galvalume equipment and to an unplanned maintenance outage in late September. Additionally late in the quarter customers were hesitant to make purchases ahead of anticipated scrap price decreases.

Third-quarter 2016 steel platform average selling values increased $100 per ton to $740, outpacing increased average scrap costs of $24 per ton. Improved steel metal spread more than offset lower shipments, resulting in operating income from our Steel Operations of $311 million, a 13% improvement over sequential quarter results and another strong performance.

The operating environment for our Metals Recycling platform continues to be challenging. Third-quarter 2016 platform operating income was $10 million, compared to $15 million in the sequential second quarter. Lower domestic steel mill utilization resulted in decreased ferrous scrap demand and an 8% decline in shipments, although metal spread remained steady. Ferrous shipments to our steel mills represented 62% of total mills recycling third-quarter volume, as we continued to effectively lever the strength of our vertically integrated business profile.

Nonresidential construction demand continues to be steady throughout much of the United States, although the recent severe weather on the East Coast has slowed projects in that region. We continue to see strong quote and order entry activity as we head into the seasonally slower winter time frame.

Third-quarter 2016 fabrication shipments were consistent with the sequential second quarter. However, as we suggested on last quarter's call, metal spread compressed as the inventory stream contained higher price flat rolled steel which more than offset the 4% improvement in fabrication average selling values. As a result, third-quarter 2016 operating income from our Fabrication Operations was $18 million, a decrease of $6 million when compared to the sequential second quarter.

During the third quarter we generated another strong cash flow from operations result of $196 million. For the first nine months of 2016, we have generated $643 million of cash from operations, with very flat working capital levels. Our business model generates strong cash flow from varying market cycles based on the low highly variable cost structure of our operations and our diversified value-added product offerings.

We maintained record liquidity of $2.2 billion at September 30, 2016, comprised of our undrawn revolver and available cash of $1.1 billion. Our third-quarter 2016 adjusted EBITDA was $359 million, and trailing 12 months was over $1 billion, resulting in net leverage of 1.5 times which is down considerably from 2.7 times at the end of 2015.

Our credit profile continues to be solidly aligned with our preferred through cycle net leverage of less than 3 times, with considerable room for growth, a testament to our disciplined approach to growth, creating shareholder value through sound capital allocation, and an efficient balance sheet. Our debt maturity outlook continues to provide great optionality, having no meaningful maturities until 2019, but in the interim periods having ample call provision flexibility. Looking forward, we continue to believe that our capital structure and credit profile have the strength and flexibility to sustain current operations and support strategic growth, both organic and inorganic.

We maintained our cash dividend this quarter of $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 looking toward the future.

Based on this confidence, the Board authorized up to a $450 million share repurchase program to complement our dividend and growth strategy as a vehicle to return additional capital to shareholders. This represents over 7% of our current market cap. The strength of our balance sheet and cash flow generation capacity allows us the flexibility to initiate this program while maintaining our strong focus toward organic and inorganic strategic growth.

We intend to not only use our existing cash and free cash flow to opportunistically repurchase our shares from time to time, the timing and amount of repurchases will depend on market conditions, share price and other shareholder value enhancing opportunities. Absent large strategic opportunities or a materially negative change in market conditions, we would anticipate possibly completing the program in the coming 18 to 24 months. This program in no way changes our focus toward growth. It simply offers us another tool to consider when allocating capital to optimize value creation.

Thank you. Mark?

Super, thanks, Theresa. As in the past calls, I want to reiterate that the safety and welfare of our employees remains our number one priority. Nothing surpasses the importance of creating and maintaining a safe working environment. Safety performance remains better than industry averages, and we continue to work toward a zero incident environment at every location.

We have reduced our total recordable injury rate by 14% so far this year, and 64% of our locations are incident free. We are on pace for another record year, and my sincere thanks go to the entire SDI family for their dedication and continued focus on our most important priority.

The steel platform performed well in the third quarter, in spite of lower shipments. The divisions, especially the Flat Roll Group, achieved meaningful metal spread expansion as increased average product pricing outpaced higher scrap costs. Additionally, due to our diversified value-added product offerings, our third-quarter steel production utilization was 85%, compared to the domestic steel industry operating rate which decreased to about 69%, 70%.

2016 has certainly provided a changing landscape to the domestic steel market. Demand from the automotive and construction sectors remains positive, but demand relative to heavy equipment, agriculture, and energy, while not deteriorating further, is still anemic. Specific to Flat Roll, year-over-year imports have declined while customer inventory remains lower than historical levels.

Longer-term demand outlook is relatively unchanged, but later in the third quarter customers were hesitant to make purchases ahead of expected scrap price declines, and as a result steel shipments were lower than anticipated, especially for hot roll coil. Despite this, our Flat Roll production utilization rate was still 97%, as the Butler Flat Roll Division continued to operate above estimated production capacity.

Conversely, third quarter 2016 production utilization for our Long Products Group declined 66%, with engineered bar being the most challenged. Even though on SBQ expansion into smaller diameter bars has significantly helped utilization this year, because these sizes are generally tied to the automotive sector, which has been strong, operating rates are still far less than we would like. The competitive landscape for engineered bar, structural steel, and merchant shapes remains extremely aggressive.

Quality investment thesis for the Vulcan acquisition is the potential volume improvement opportunity that brings to our engineered bar division. Historically, Vulcan has purchased nearly 20,000 tons of steel bars from us annually. Based on our actual current production capabilities, we can actually supply up to 50,000 tons to Vulcan, or just under 10% of our engineered bar division's 2015 shipments. Vulcan purchases special bar quality steel products for the manufacturing and sale of higher margin threaded steel rod, code finished bar, and heat treated bar. Integration is progressing smoothly, and there are opportunities for further synergies between the two divisions heading into 2017.

At Columbus the successful market and product diversification that has been achieved over the last 18 months is one of the key differentiators for the improved profitability that we are realizing this year. Columbus has been producing at historically record rates and continues to increase their value add product capabilities. The paint line addition is on budget and on schedule, with expectations for painted product shipments to begin in the first quarter of 2017. The $100 million investment will provide 250,000 tons of annual coating capability and further diversification into higher margin products for Columbus.

We have two existing paint lines in Indiana, but this new line allows for higher quality double wide steel and access to the Southern US and Mexican markets. We plan to sell surface critical appliance grade steel as well as construction related products.

I want to congratulate the Columbus team on already successfully installing the Galvalume coating equipment and shipping their first value add Galvalume coils in August. However, the required down time associated with this addition resulted in about 25,000 tons of lost shipments in the quarter.

Our steel platform also continues to benefit from other organic growth investments, such as our premium rail and SBQ expansion, as well as the $22 million investment for an additional 600,000 tons of annual flat roll pickling capability at our Butler Flat Roll Division that started in January of this year. The addition increases value-add sales while de-emphasizing commodity grade hot roll.

More recently, we also approved a $15 million investment to increase annual galvanizing productivity by as much as 180,000 tons at the Butler division. We anticipate completion of the project in the second quarter of 2017.

We also plan to invest $28 million in our Roanoke bar division to utilize excess melting and casting capability by adding equipment that will allow for multi-strand slitting and finishing rebar. With a highly competitive cost structure, we expect to grow strong market penetration in this product with conflict-free supply to independent rebar fabricators. Operations are expected to begin in 2018.

The team is still working on solutions to utilize the excess melting and casting capacity at the structural rail division of about 450,000 to 500,000 tons. We anticipate announcing a project early next year.

The profitability of our Metals Recycling platform declined in the third quarter even though scrap metal spreads were relatively stable as reduced domestic steel mill utilization resulted in weaker demand. The recycling environment remains challenging. Many regional players in the industry are either for sale or headed into insolvency, and as such the number of active shredders has declined which should benefit the industry in the years ahead.

Looking forward, we expect the pricing environment to continue to stabilize. We will likely see some price support through the rest of the year as we move into a period of seasonally lower obsolete scrap flows. We saw this dynamic when October's pricing was down about $30 for prime grades but down only $10 to $20 for obsolete grades. With the expectation of a continued strong US dollar and a relatively low scrap export level, we anticipate ample scrap supply and don't see likely drivers for significant increases in ferrous scrap prices in the months ahead.

The fabrication platform continues their ongoing historically strong performance. Since our acquisition of additional deck assets in September of 2015, we have gained considerable market share for deck, achieving approximately 30% for the first nine months of 2016, compared to only 24% in the same time frame last year.

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 from our competitors and predominantly a galvanized product. We are sourcing a substantial amount of this steel now from Columbus which helps further shift Columbus' product mix and increase mill utilization. The power of pull-through volume was certainly helpful in last year's steel market environment.

Our fabrication operations, purchased just over 300,000 tons of steel from our steel mills in 2015, and we have already purchased over 245,000 tons this year. The new millennium team continues to perform well, levering our national footprint. The strength of this business provides positive insight into the continued strength of nonresidential construction activity. We continue to see steady order activity but anticipate lower fourth quarter volumes due to seasonality.

Relative to the macro environment, the steel consuming sectors that were weak in 2015 and into the first half of 2016, such as energy, heavy equipment, and agriculture, remain so but are not deteriorating further. And those sectors that have been strong or recovering are continuing on this path such as automotive and construction.

Reduced imports, idling of domestic capacity, and relatively higher global pricing coupled with steady demand and rebalanced supply chain inventory have created a year-over-year improved environment for flat roll products. Just recently there certainly has been some mixed signals within the flat roll arena, especially related to hot roll. Hot roll selling values have seen significant downward pressure. Additionally, we are heading into a seasonally lower demand environment with customers hesitant to significantly increase inventories before the end of the year.

Due to these factors, we anticipate lower sequential volumes in our operating platforms, which is seasonally typical for the calendar fourth quarter, coupled with sequentially weaker realized steel pricing. We have a constructive view on directional 2017 steel consumption. Domestic automotive production may be coming off record levels, but we believe total 2017 NAFTA automotive steel consumption will be steady as Mexico grows production, which is complementary to the strategy of our Columbus Flat Roll Division.

We believe there will be additional growth in the construction sector, especially for larger public sector infrastructure projects, which will greatly benefit our Long Products Group. We could also see some improved activity, albeit slight, within the energy sector next year.

Going forward, we will also continue to focus on adding value products to our portfolio that help insulate ourselves from imports and create long lasting customer partnerships. Through broad product diversification and manufacturing value-added products that are more difficult to compete with on a global basis, such as our painted flat roll steel, highly engineered SBQ, and longer length rail, we're able to maintain higher steel mill utilization rates than our peers.

Our business model will 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 will support our ability to maintain our Best-in-Class industry performance.

In addition to the value creation derived from strategic growth, and growth will clearly remain our focus, our first focus, we are pleased that our Board authorized a new share repurchase program based on our strong balance sheet and continued free cash flow generation. This authorization I believe underscores the confidence Management and the Board have in our strategy and our ability to continue to invest in our business and drive long-term profitability while returning capital to shareholders.

The foundation of our success is undoubtedly the strong character and determination of our employees, which I believe are unmatched in our industry. They are a phenomenal group, and I'm proud to stand with them. We look forward to creating new opportunities for them along with our customers and our shareholders in the months and years ahead.

So again, sincerely thank you for your time today and, Doug, we're pleased to open the call for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from the line of Evan Kurtz with Morgan Stanley. Please proceed with your question.

Good morning, Mark and Theresa.

Good morning.

Good morning.

So my one question will be on your internal growth strategy. Sounds like you're headed for the low 300,000 level on shipments to your own downstream. I'm just trying to get a sense of what inning we're in here.

If you look out five years or so, where do you think that number will be? Are there a lot of opportunities out there for reasonably priced downstream operations that can feed off of maybe Pittsboro or Columbia City?

I believe there are numerous options. We've actually had a very, very, very busy summer reviewing those options. We're very, very disciplined, though. We want to make sure that any opportunity conforms to our culture, conforms to the fact that we can bring that culture to leverage better performance, making sure that there's diversification, and making sure that it really differentiates ourselves or we're going into businesses where we differentiate ourselves from whoever that competitor might be.

I would say in general, again, there's no algorithm or formula, but as a gut feel we're aiming for roughly 20% of our total capability. So that's probably a couple million tons. The New Millennium building systems, they push about 600,000 tons of product in total.

If we wanted to, they could have bought a lot more this past year, but as you know in the second and third quarters our steel mills had better options to sell that product at higher margin to others. Our New Millennium was able to take advantage of the lower commodity prices that some of our competition were offering.

So I think the model is a very valid one because again, as steel pricing did come down this year, that lowers New Millennium's raw material input cost and their earnings. Having that pull-through volume allows us to hedge through the market, insulate us a little bit from -- help mitigate a little bit the cyclicality of our business, and it will be a focus for ours going forward.

Very helpful. Thanks. I'll hand it over.

Our next question comes from the line of Matthew Korn with Barclays Bank. Please proceed with your question.

Hi, good morning, everybody.

Good morning.

Let me ask, last quarter you mentioned the expectation that your -- that some long product buyers in looking at the increase in scrap that was pending actually pulled forward a little demand into the second quarter, and that was going to lead into the third quarter a little bit of a decline in shipments. Question for you is you think whether or not in the sheet business you had some of the similar effect now in hindsight where buyers try to get ahead of the price hikes, and then right now some of the demand softness is due to the fact that they're sitting fairly ample inventory-wise.

Not quite. I think the sheet buyers out there anticipated further price erosion and have been sitting on the sidelines over the last couple months, probably two or three -- three months, for that matter. But I do think that we are approaching an inflection point for sure.

So let me ask about that.

But if I may, the slight dampening of demand that they suggest I think is principally seasonal. There's obviously a lot of noise out there as to the marketplace and as there are certain markets that are off.

I would tell you, we are strong believers that there are no -- there is not a structural change in demand. It's principally seasonal. And that we're going through a similar cycle as we saw last year. The fourth quarter of last year was pretty well parallel to what we're seeing today. And that the volatility is driven more by I think procurement decisions, by inventory positioning than any structural change in demand.

Got it. That's very helpful. Let me follow up on that then. You've got inventories that are fairly light. You've got lead times that are short.

You've got current pricing that doesn't really attract a lot in the way of imports. Do you think we're potentially coiled for pretty sharp rebound in pricing once the buying activity does return, and would you think maybe that returning comes more into the new calendar year?

Well, I think we are certainly at the bottom of the marketplace. I think there's an inflection point around the corner. Whether that's next week or whether it's a month or two, your guess is as good as mine.

I would tell you that I know whether one week makes a market, but the order activity and the inquiry activity just in the last week and-a-half is considerable compared to the last two or three months for sure. But if you look at the probability of price direction and inflection point, there are several factors that in my mind would suggest that pricing is going to be moving up.

The import arbitrage has certainly reversed itself. Import pricing today is very, very unattractive. Hot roll coil Q1 offers are probably $460 to $480 today, Barry, give or take a little bit on a delivered basis.

The import light gauge coated products, the spread domestic product was I think peaked around $180, that's down to $100 today. You have a strengthening Asian market and customers are starting to see the import deliveries now from the smaller countries where boats have to pick up coils from different ports and deliver them to different ports, there's a certain unreliability there that's creeping in.

But there's no doubt that the import scenario has changed dramatically. I think Russ would tell you that scrap prices has likely reached a floor, so that's eliminating that resistance to ordering steel due to any anticipation of falling scrap prices, so that's beyond us. And I think scrap is somewhat at parody now with Chinese billet conversion for Turkey.

That's probably going forward kind of a flat, up a little type pricing environment. And so there's no incentive for folks to hold off ordering today from a raw material perspective. As you said, supply side inventories are at very low levels. Some may look at the fact that while it's on a shipment rate basis 2.4 or 2.5 months, well that's at a pretty low shipment basis. When the tide turns, that suddenly is a very tight position for those folks to be in.

And then the raw material cost structure at the integrated mills, coke has gone orbital, doubled or more than doubled in the last few months. That's putting pressure, pricing pressure on the integrated mills. And trade cases are going to remain in effect and limit the import levels as well.

One other side note, the speculators out there that tend to take large positions, and they're the ones that tend to draw the market pricing down in a trough like period that we're in today, most of those folks have taken those positions. And so I think the pressure is off. So you have a multifaceted premise that we're nearing an inflection point.

Great, Mark. Very helpful. Best of luck next quarter.

Thank you.

Our next question comes from the line of Alessandro Abate with Berenberg. Please proceed with your question.

Good morning, Mark and Theresa. My question is related to Columbus, it's a kind of double question because you mentioned you might be seeing some recovery in the energy segment. So I was wondering, considering the exposure of Columbus to the energy market, in terms of the potential upside margin, what are you going to be able to quantify in terms of expectation?

And the second one of course is a follow up. Considering the significant investment in the market in Mexico, was wondering whether you're planning potential stepping into the market and seeing activity like for example your competitors are doing at the moment. Thank you very much.

I think from an energy recovery perspective, I'm not sure that we are doing cart wheels that the volumes are going to be dramatically higher in the first half of 2017. I think energy prices are up, which is supporting a little more activity on the rig side.

OCTG inventories have drawn down. I think they're still four, five, six, months, so still pretty considerable. But it is I think an indication that the energy market is certainly bottomed. There is some glimmer of activity there.

I think even in our engineered bar products division, those folks are seeing a couple of pockets of order activity. So it's just going to be I think a slow but positive momentum. Barry, would you agree with that?

Absolutely agree. I would add that in some cases we're developing more products to service that market at Columbus. So some of it is just being able to make newer products that are being asked for there.

And then to your second question on Mexico, obviously that is an incredibly -- it's boom time for steel. A couple weeks ago I spent some time down there, and even though you read about it and you hear about it and you study it, the growth there is -- it's unimaginable. Most of it is steel consumer.

We're in an incredibly good position with the Columbus acquisition. Those folks are on the KCS line. They have a direct access down through the spine of Mexico from Monterrey, Saltillo, and I can't pronounce these names, San Luis Potosi, [Wastazi] and the real difficult one Queretaro or whatever.

Nonetheless, we have a great, great logistics avenue to penetrate that market. The recycling platform actually has been developing quite well down there, and we have about 240,000, 250,000 tons of material that we're responsible for processing and distributing and selling.

As the US automotive companies, Ford, Chrysler, the stampers as they move down there, they want us to continue to service them in that environment because we're a public company, someone they know that they trust. So that business has developed quite well.

On the steel side, I think Barry we're going to sell about 180,000, 200,000 tons of product into Mexico this year. Our aim is to move that up to somewhere between 400,000 to 500,000 tons. The advent of our paint line coming online in the first quarter will certainly help and facilitate that volume. But we're well on our way there already.

Thank you very much, Mark.

I would add --

Sorry, Chris.

I was just going to add, because I had some early involvement with Columbus. Barry and his team have done a tremendous job to change that.

I think the word exposure to energy is maybe a misnomer these days. We have an opportunity as energy recovers to leverage our capabilities, but we're by no means dependent on that as the diversification has happened over the last year.

Agree.

Thank you very much.

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

I just had a quick question regarding the near term outlook. We did get some results out of one of the I think the biggest service center this morning. I believe they're guiding shipments down close 6% to 7%.

I'm wondering if that's consistent with what you're seeing with regard to your order books on a short-term basis in terms of order of magnitude? And is that a reasonable range to assume on volumes for you for fourth quarter? Thanks.

David, we tend to try not to give expectations even near term going out. We did mention the fact that we are expecting lower volumes actually across the platforms as well, primarily because of seasonality. And so yes, we will see a reduction. I'm not sure that it will be in the same magnitude, but it will be meaningful probably compared to third quarter.

All right. Thanks. That's helpful.

Our next question comes from the line of Alex Hacking with Citi. Please proceed with your question.

Thanks, Mark and Theresa and good morning. You mentioned on the call that you have some confidence in demand for infrastructure steel next year coming from large public sector projects. Could you elaborate a little bit on what indications or data is giving you that confidence? Thanks.

I would just comment, part of the optimism is coming from the advent of the highway bill and conversations that if you've paid attention to some of the states have actually committed significant dollars to these infrastructure type projects. However, given the election year it's really not dependent upon who may win the election but it's just trying to understand which administration will be in place. There has been some pullback.

The expectation is that that construction will start in 2017. So we believe that there could be some pent-up type of construction projects available coming into the first half of next year.

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

As you -- thanks for taking my question, Mark and Theresa. As you look to continue to be a growth stock and grow through either organic or acquisitions, I'm just wondering where do you look next? I think most of the big things are either bought or controlled by somebody else.

You might look at Mexico. You might look at other things like Vulcan further downstream or the paint line. But as your EBITDA to interest or adjusted EBITDA to interest is now over 10 times and you're looking at some call dates coming up, is it possible you look to go investment grade?

I guess it's a two-part question. One is, what areas do you look to buy geographically and business sector-wise, and then also the potential move to investment grade, you're very close already now.

On the growth side of things, as you said, we're very focused on downstream, value-added type opportunities that would perhaps have a higher margin or a better quality margin as I'd like to call it and gain that pull-through volume. And I think there remains -- we've looked at a lot of them this summer and have discounted them.

Again, I think we hopefully demonstrated that our acquisition or inorganic growth strategy is very disciplined. We're not going to be emotional and outbid someone just to get it and pay an exorbitant number, nor are we going to grow just for growth's sake. We're going to be very, very patient.

Relative to investment grade, I would suggest that we will eventually get there. We're not looking to engineer that in the near term.

Brett, I would just add to the IG comment is that if you look at where our notes are trading today, we're basically only about maybe 15 to 20 basis points wide of investment grade. And so we would like to retain the flexibility and optionality that being in the position we're in today affords us for growth, and then to Mark's point eventually we'll just get to IG on our own. But for right now I think we're well positioned.

Thanks very much.

Our next question comes from the line of Curt Woodworth from Credit Suisse. Please proceed with your question.

Hi, good morning.

Good morning.

Mark and Theresa, I have a question more technically looking at your conversion cost performance in the mill segment this quarter. I understand that sequentially you would see unit level cost increase on the lower volume, but the way we derive the total conversion just by taking total COGS less the implied scrap buy, it looked like the aggregate amount of spend was up about 8% sequentially, yet your volumes were down 9%, which is pretty rare looking back historically to see that type of divergence.

I'm just curious what drove that? Was it energy, profit share, and can you give any sort of color on how you see conversion costs trending into the fourth quarter?

From the flat roll side of the business, the Columbus operations went through a pretty significant regular maintenance outage in the third quarter. So some of the additional costs you see in conversion have to do with some of that -- some of the bigger jobs that we took the opportunity to get behind us.

They all went well, but some of those jobs are expensive. So that's the Columbus side of the business.

And I would say heading into the fourth quarter, it really will depend upon obviously volumes, but I think from a one-off perspective we won't have more significant items such as the Columbus outage.

Absolutely. We do have an outage that we did fourth quarter here in Butler, but less costly overall than what we saw at Columbus.

Can you quantify the impact of the Columbus outage?

We really can't. I apologize. But I just don't have that information available right at my hands.

Okay. Thank you.

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

Hey, good morning everyone.

Good morning.

Good morning.

Just making sure you heard me. Sorry. Maybe I heard wrong on the comments regarding scrap in the introductory statements there, Mark, but I understand the inflection point on steel. I thought that was quite interesting.

But then I thought I heard you say that you didn't see a lot of catalyst for scrap. So can you elaborate on or clarify that position on scrap, please?

I already stated my piece. Russ, why don't you weigh in with your in the trenches knowledge there, mate.

I think we've seen, based on the strong dollar, low mill utilization rates, that scrap has fallen the last three months. We believe it's at the bottom and should flatten out. I think you've got -- steel you've got to get the utilization rates to come up.

We have seen some activity in the export market starting to pick up a little bit which further tells me we reached a bottom point, inflection point on the scrap. That also combined with the fact that you've got potentially winter weather which slows the flows down coming in front of us. So we believe we're at the bottom on the scrap side, not necessarily anticipating any significant move in the upward direction, but again we also don't see that there's much downside push either.

Very helpful. I wanted to ask a little bit more about the infrastructure (technical difficulty) within your long product. Because I always (technical difficulty) that to be a bit more mean and not as material. So if you could elaborate on your exposure by long products as a percentage of your overall product mix.

Timna, you were going in and out there. I don't think we had a clear --

Can you hear better now?

There you go. There you go.

Sorry about that. Sorry. So real quick, on the exposure to infrastructure. Can you provide some sort of gauge of how much you have relative to your overall long products or how much infrastructure exposure you have within your mix?

We have probably around 1.5 million tons or so, maybe 2 million tons of what I consider latent capacity, or that we just haven't had a market to totally exploit. And most of that is correlated to construction.

Okay. That would be beams mostly, or also some of your sheet? Is that what you're referring to?

That is principally beams, merchant shapes from Roanoke as well.

All right.

Obviously, some of it would be -- a little bit would be from engineered bar products, but no too much.

Got it. Okay. Thank you so much.

You're welcome.

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

Good morning.

Good morning, Phil.

Got a couple of easy ones and then I'll pop right off. One for Theresa just on the sheet mix in the quarter and then two for Mark, the galvanized investment in Butler, I believe you said 180,000 tons. Just what are you -- question basically on that is what are you trying to accomplish? How do you do it? And what's the time line? Thanks so much.

The time line is, the expansion is --

The equipment has all been ordered. The products that we sell on that line for the most part we have a great mix of products that are developed. So as we get closer to implementing the -- be through second quarter next year when most of the equipment is actually being installed.

It's also going to allow us to do a lot more housekeeping between the two galvanizing lines of Butler as to what products we specifically run on which line. So for us, we do see the ability to add some new customer base there, but we're really exploring what we want to grow with our existing customer base.

I think that will come online the second half of 2017.

Second half, most of the equipment construction and installation will be first half, mostly second quarter and then third, fourth quarter we'll start seeing those improved production numbers.

If you think about it, Phil, that was a $15 million investment, so very cost effective. And then you wanted the volumes. Hot roll and P&O for the quarter was 770,000 tons, cold rolled was 163,000 tons, and coated products were 688,000 tons.

Thanks very much.

Thank you.

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

Hi, Mark and Theresa. Mark, I'll help you out with Queretaro in terms of pronunciation. I wanted to just dive more deeply, maybe going back to the met coal situation and just trying to understand, obviously you said it's gone orbital.

Our back of the envelope numbers indicate it could be as bad as $100 per ton cost increase to the integrated. So I'm trying to understand if you're concerned that perhaps the integrateds that the margin shift more of their blast furnace mix to scrap and therefore put more upward pressure on scrap prices, or are you more bullish overall that you think that the higher cost base that the integrateds will face just means it's setting a new bottom for HRC?

I think the latter. I don't think that the increase in scrap consumption by the integrateds is going to make a meaningful impact on the price, the supply/demand balance. So pricing there -- pricing there really is driven more by exports than anything over the last few years and as Russ articulated, we don't see that changing much from the last few months.

So not too much pressure there. I think it really does pressure the cost structure of the integrateds. You certainly see the Asian pricing, Chinese pricing going up largely because of the increasing coal cost. And I think it sets a nice environment in the US that at some point they're going to have to compensate for that and increase their pricing. So to your last point, yes, I think it's supportive of hot roll coil.

Okay. So it sounds like in 2017 you'd be setting yourselves up for a pretty good environment with flattish scrap, if you believe the integrateds will not pressure demand there, and on the flip side potentially higher HRC for all the reasons you outlined earlier?

Yes.

Okay. And then on your steel ops, just to dig a bit more deeply on that quarter-over-quarter cost increase, your unit costs were up $71 a ton sequentially. We only saw a $24 per ton sequential increase in scrap.

So can we attribute the bulk of that $50 per ton differential to the Columbus regular maintenance outage, or was there anything else in that number? Because you did talk -- I think Theresa mentioned about a normalization and not having that one off again in the fourth quarter. So we just want to understand how much of that was really driven by Columbus.

No, I wouldn't suggest that all of that is because you did have a significant reduction in volume. So 9% reduction in volume does have an impact on conversion costs.

So I can't really tell you how much of that was relate to Columbus offhand. I don't have those numbers. But it certainly wasn't all of it.

But as we look into 4Q --

I was going to say, there's also a Columbus -- we acquired scrap yards in the region, and right now we are doing quite a bit of housekeeping in those yards to bring those up to where we want them to be. So it's not capital investment right now at this point.

But we've been bringing those costs in and not exactly seeing the volumes to offset those yet, because we're more interested in making sure that the infrastructure there, the process of bringing scrap to the yards. So we're spending more money on those scrap businesses right now that will be offset in the future, but it's not really a structural change, it's just a new cost for Columbus that's some of the additional cost you've seen.

Great. Thanks very much.

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

Hi. Good morning. I wonder if we could just chat a little bit about --

Good morning.

Thanks. Yes, very good. I was wondering if we could chat a little bit about the average selling price you had in the quarter? It surprised me in the upside and the metal spreads were wider. Compared to the index, you seem to be catching up.

I'm wondering if you were to say our prices were strong in the third quarter because reasons one, two, three, how would you rank the reasons being if you looked at it between mix, the fact that the mix improved, or the fact that maybe you sold more steel in the early part of the quarter before prices came down a little bit? I'm just trying to get a feel for let's say prices fall in the fourth quarter by $100 a ton, what do you think your prices might do under a scenario like that for flat roll I'm talking?

Good try on the end there, Aldo. Those compound questions are tough to handle. The pricing environment I would say it's principally product mix, and also we have on the sheet side of the business a reasonable amount of indexed contract which lags. And so that helps support our price in a downward pricing environment.

Have you got time for one more, Mark?

Yes.

On the stock buyback, you said it depends on market conditions and you're thinking maybe 18 to 24 months. Is that the outside amount of time that you would expect? I'm surprised you're not looking to do it quicker.

Let's simply say that we feel that our share price is dramatically undervalued right now. I'll just leave it at that.

All right. Good luck. Congratulations.

Thanks, Aldo.

There are no further questions in the queue. This does conclude our question-and-answer session. I'd like to turn the call back over to Mr. Millett for any closing remarks.

For anyone on the call, again, thanks for sharing your time with us. We are fully focused on yourselves, we're fully focused on our employees, and fully focused on our customer base and other constituents. I would like to thank everyone for their support of our Company.

And to the employees that may be on the line, guys and girls, absolutely phenomenal job this past quarter and for everything you do for us, you do set us you apart. We are Best-in-Class and we'll continue to be so. And just be safe in everything you do. Thanks everyone.

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