Steel Dynamics Inc (STLD) 2017 Q1 法說會逐字稿

Good day, and welcome to the Steel Dynamics First Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please be advised this call is being recorded today, April 20, 2017, and your participation implies consent to our recording this call.

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

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

Please go ahead.

Thank you, Rob.

Good morning, everyone, and welcome to Steel Dynamics First Quarter 2017 Earnings Conference Call.

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

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

We also have our leaders for the company's operating platforms, including our Metals Recycling Operations' Russ Rinn, Executive Vice President; and our Steel Operations' Glenn Pushis, Senior Vice President, Long Product Steel Group; and Barry Schneider, Senior Vice President, Flat Roll Steel Group.

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

They are intended to be protected by The Private Securities Litigation Reform Act of 1995 should actual results turn out differently.

Such statements involve risks and uncertainties relating to our steel, metals recycling and fabrication businesses as well as the general business and economic conditions.

Examples of these are described in our annually filed SEC Form 10-K under the heading Forward-Looking Statements and Risk Factors found on the Internet at www.sec.gov and is applicable on any later SEC Form 10-Q.

You will also find any reference to non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports First Quarter 2017 Results.

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

Super.

Thank you, Tricia, and good morning, everybody.

Welcome to our first quarter 2017 earnings conference call, and we certainly appreciate you and thank you for sharing your time with us today.

Simply, the entire SDI team performed phenomenally well this quarter.

Each of our business platforms improved earnings, with many divisions achieving record line operating rates.

And I believe the results really speak for themselves, and the intentional positioning of the company will continue to reap the benefits of improving market dynamics.

But to begin, Theresa, would you comment on our financial results?

Absolutely.

Good morning, everyone.

I also want to recognize the team's performance across our platforms, delivering an excellent first quarter performance.

Our first quarter 2017 net income was $201 million or $0.82 per diluted share, slightly above our guidance range of between $0.77 and $0.81 per share.

This compares to net income of $63 million or $0.26 per diluted share in the first quarter of last year and $20 million or $0.08 per diluted share in the sequential quarter.

First quarter 2017 revenues were $2.4 billion, a 24% improvement over the sequential fourth quarter.

All operating platforms improved.

However, the growth was primarily driven by our steel operations as both average selling values and volumes improved.

Our operating income for the first quarter increased over 75%, to $335 million, compared to sequential quarter adjusted results.

Again, a solid performance by everyone as almost each location improved profitability, although the steel platform experienced the most significant growth of $135 million, a 62% increase from last quarter.

For the first quarter 2017, steel shipments increased 12% to 2.5 million tons.

Volumes increased across all divisions.

Flat roll improved 11% as demand was strong and customer inventory levels continue to be at historically low levels.

Our long products mills increased shipments 16%, largely driven from our Engineered Bar and Structural and Rail divisions.

Metal spread expansion in flat roll and increased volume across the platform resulted in operating income from our steel operations of $352 million, a significant improvement from fourth quarter.

First quarter 2017 steel platform average selling prices increased $63 per ton to $743, outpacing the increased average scrap cost at $44 per ton.

For our metals recycling platform, higher domestic steel mill utilization also resulted in increased ferrous scrap demand and a 14% improvement in our ferrous shipments as well as a 12% improvement in metal spread, resulting in strong operating metrics.

First quarter operating income for our metals recycling platform more than doubled to $21 million compared to $10 million in the sequential fourth quarter.

Additionally, we closed on the sale of several non-core scrapyards located in southeastern U.S. The sale was basically transacted at book value, and therefore, no significant gain or loss was recognized.

The team continues to effectively lever the strength of our vertically integrated model, benefiting both the steel mills and the scrap operations.

Metals recycling has maintained a higher-than-historical percentage of total internal ferrous shipments to support SDI steel mills at 64% in the first quarter.

For fabrication, driven by record shipments, first quarter 2000 (sic) [ 2017 ] operating income was increased 34% sequentially to $24 million.

It was typically a seasonally lower period.

Nonresidential construction demand continues to be steady throughout much of the United States, and we continue to see strong quote and order entry activity.

During the first quarter 2017, we generated cash flow from operations of $240 million, with operational working capital using just over $150 million in the quarter.

The increased working capital was primarily driven by higher customer count values based on increased prices and volume.

Inventory values also increased in the quarter somewhat.

We grew our cash dividend in the first quarter by 11% to $0.155 per common share based on our ability to consistently generate strong cash.

We also repurchased $61 million of our common stock during the first quarter, pursuant to the October 2016 board-authorized $450 million program.

We believe these actions reflect the strength of our capital structure and liquidity profile and the continued optimism and confidence in our future.

As a result, we maintained liquidity of $2.2 million at March 31 comprised of our undrawn revolver and an available cash of $967 million.

First quarter 2017 adjusted EBITDA was $421 million, and trailing 12-month EBITDA was nearly $1.4 billion.

The strength of our through-cycle cash generation coupled with a strong credit and capital structure profile provides great opportunity for continued organic and inorganic growth.

We are squarely focused on the continuation of sustainable optimized value creation.

Mark?

Super.

Thank you, Theresa.

Well, the welfare of employees remains our #1 priority, and nothing surpasses the importance of creating and maintaining a safe at work environment.

Our safety performance remains significantly better than industry averages, and we continue to work toward a 0 incident environment.

The team is doing a phenomenal job there.

Also, over 80% of our locations achieved 0 record injuries so far this year.

We also reduced our total recordable injury rate in the first quarter by 11% when compared to last year's full results, which, I'd remind you, was the best ever for our company.

My sincere thanks to the entire team for their dedication and continued focus on our first and foremost priority.

The steel platform had an outstanding quarter in part because we have one of the most diversified and value-added product profiles in the industry.

We operated at utilization rate of 95% during the first quarter, once again, markedly better than the domestic industry rate of about 75%.

Demand from the automotive sector remained steady, and construction continued to improve.

Additionally, the energy-related demand improvement that we discussed on our January conference call actually strengthened further during the quarter.

We received related orders both at Columbus Flat Roll Division and Engineered Bar Products Division.

Additionally, there was an overall general demand improvement for our SBQ steel, which typically suggests broader industrial sector momentum.

Our earnings improvement was primarily driven by the flat roll group.

Domestically, flat-rolled steel utilization rates remained much higher in the first quarter compared to long product utilization rates.

Flat-rolled steel benefited from sturdy demand coupled with continued favorable supply dynamics.

Customer inventory levels remained at historical lows, and imports in total were down year-over-year for the quarter.

It should be noted, though, that despite hot-rolled coil imports being down considerably, cold-rolled sheet and coated were up materially year-over-year.

Additionally, pipe and tube imports grew over 35% in the quarter.

Our long product steel shipments improved in the quarter, but selling values remained under pressure from excess domestic production capability coupled with elevated import levels, which grew over 15% in the quarter.

Although our consolidated quarterly production utilization rate was 95%, our long products divisions operated at 78%.

While not as high as we'd like, it's an improvement from last year's average rate of 68%.

The most significant change was seen in SBQ.

Our Engineered Bar Products Division operated at over 70% of its current capacity compared to just over 50% in 2015 and '16.

Not only did we see improved demand environment, but the Engineered Bar Division is also benefiting from the bulk and pull-through volume.

Based on 2016 shipments, the SDI steel platform has over 1.5 million tons of unused shipping capability.

And most of this latent capacity is in product types that would potentially be consumed by infrastructure and large civil engineering projects.

The flat roll mill in Columbus provides another significant and sustainable earnings catalyst.

The changes the team has already made are transformational.

The successful market and product diversification that was achieved over the last 2 years is one of the key differentiators for the improved profitability realized in 2016 and will continue to benefit the coming years as well.

It remains an exciting time for the Columbus team as they continue to focus on product diversification and increasing their value-added product capabilities.

The team completed construction of a $100 million paint line in the fourth quarter of 2016.

This investment provides 250,000 tons of annual pre-paint capability and further diversification into some of the highest-margin products.

We have 2 existing paint lines in Indiana, and this new line is truly state-of-the-art facility, allowing for even higher-quality double-wide steel and facilitates access to the southern U.S. and Mexican markets.

Our existing customer base is excited to have that geographic and product diversification optionality.

The startup is going well with painted shipments of just under 13,000 tons in the first quarter.

And I've got to add, after being down there just recently, and I've seen many lines over my lifetime, but it is the most phenomenal facility I've ever seen.

And any time you folks have a chance to get down there, you should go visit.

It is phenomenal.

The team did a marvelous, marvelous job.

Our steel platform continues to benefit from other organic growth investments as well.

We're investing $15 million to increase annual galvanizing productivity by 180,000 tons at Butler, further increasing the mill's value-added production capability.

We anticipate commissioning the equipment this summer and increase production capability available for the second half of this year.

We're also investing $28 million to utilize excess melting and casting capability at our Roanoke Bar Division.

We're adding equipment that will allow for multi-strand slitting and rebar finishing.

With a highly competitive cost structure, we expect to have strong market penetration as we will be the only noncompeting producer for rebar in the region selling to independent fabricators.

Commission is on schedule to start at the end of this year.

Regarding our raw material platform, the profitability of our metals recycling platform more than doubled in the first quarter 2017.

As increased domestic steel mill utilization strengthened, ferrous scrap shipments and improving market dynamics allowed metal spread appreciation.

Shipments improved 14%, while average ferrous selling values rose over 35% in the quarter.

We anticipate a continuation on the relatively strong U.S. dollar and associated low scrap exports, supporting ample scrap supply and a more stabilized scrap price environment as the year progresses.

We also closed on sale of some recycling assets located in the southeastern U.S. at the beginning of March.

This transaction better aligns our remaining metals recycling locations to directly serve our mills and also provides the opportunity for additional administrative cost savings.

The fabrication platform continued its strong performance, achieving record quarterly shipments in what is typically a seasonally lower demand period.

In fact, the order backlog at the end of March was at a record high volume.

The team is achieving great market penetration in both joist and deck.

Fabrication operations purchased 330,000 tons of steel from SDI steel mills in 2016 and are on track to continue to purchase meaningful quantities in 2017.

The power of pull-through volume when fabrication sources steel from our own mills is a significant advantage to keeping our steel platform utilization rates higher during weaker demand environments.

The New Millennium team continues to perform exceptionally, levering our national footprint and providing quality product.

The ongoing strength of this business and continued customer optimism also provides positive insight into the continued strength of the nonresidential construction activity.

With steady to growing demand, lower-than-historic supply chain inventory levels and trade constraints in place, the flat roll supply-demand environment is very positive, and we expect these dynamics to continue.

We have a constructive view on the domestic steel consumption in the coming years.

Domestic automotive production may be edging off record levels, but we believe total NAFTA production will grow slightly as Mexico continues to grow production with current assets in place.

This is highly complementary to our Columbus Division's automotive strategy.

We believe there will be additional growth in the construction sector, especially for larger public sector infrastructure projects, which would greatly benefit our long products group.

We also anticipate continued improvement within the energy sector.

So going forward, we continue to focus on adding value-added products to our portfolio that help insulate us from imports and create long-lasting customer partnerships, such as our painted flat-rolled steel, highly engineered SBQ and longer-length rail.

In addition, the pull-through steel volume strategy remains one of our focuses for ongoing inorganic growth.

Our business model and execution of our long-term strategy continues to strengthen our financial position through strong cash flow generation, demonstrating our sustainability and differentiating us from our industry competition.

Customer focus, coupled with market diversification and low-cost operating platforms, supports our ability to maintain our best-in-class financial performance and differentiation.

The company and the team are poised for continued growth.

The strong character and determination of our employees provides the foundation for our success.

I thank each of them for their hard work and dedication and remind them that safety is always the first priority.

We continue to focus on providing superior value for our company, customers, employees and shareholders alike and look forward to creating new opportunities for all in the years ahead.

So again, thank you for your time today, and Rob, we are open for questions now.

(Operator Instructions) Our first question comes from Seth Rosenfeld with Jefferies.

Seth Rosenfeld from Jefferies.

I have one question picking off on -- I have one quick question picking off on your realized sale prices over the last quarter.

Your ASP seems like it's stronger than what we were forecasting.

Can you just talk a little bit about any shift you're seeing in product mix or contract mix to help us better understand what's driving your current robust realized prices and, I guess tied to that, where we're seeing the outside strength in your sales volumes in flat steel as well?

You discussed in the report some of the drivers on the long side, but I'd like to hear a bit more detail on flats there.

So on average sales price perspective, Seth, you've seen a pretty significant product shift with the addition of the volume from SBQ, from our Engineered Bar Division.

So that was impactful to the average sales price for the quarter as well as just the long products in general as well as some appreciation in product mix within the flat roll group.

Although the paint line is just having a little bit of impact right now in Columbus, we're seeing very good strength at Columbus on the rest of the value-added side of the equation.

So we're seeing an overall product shift toward the value-added side, and that volume impact from long products actually helps support the average sales price being maybe higher than what you would have forecast originally.

As it relates to demand for flat roll, we've seen a lot of demand, both steady demand in automotives.

A lot of that's been impacting core Columbus.

Construction is remaining very strong for us, but we're also seeing increased demand from the energy sector, specifically at Columbus.

And that's something that we didn't expect to see as much strength in the first quarter as we've seen.

Barry, is there anything else to add on an end market perspective for flat rolls?

Just that we continue to work on the energy products that fit our mix very well.

And it's good to see the return of buying activity in that sector.

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

I just have a couple of quick questions.

First of all, I think in your prepared remarks, you said you expect a more stabilized scrap price environment, I think, for the remainder of the year.

My question is given, obviously, the drop in iron ore and more recently, Chinese billet prices, do you think that will actually have a negative impact on scrap prices in the U.S. over the next few months?

That's my first question.

Russ, do you want...

Yes.

Thanks for the question.

Again, I think as we look forward and look out into the balance of the year, it looks to us that the supply balance is well maintained throughout.

Although we've had some iron ore prices go down, the pig iron prices have remained very bullish with the disruptions out of the Ukraine, and that's really a more closer benchmark to what happens domestically for us.

So I think if we look out, we don't see anything that moves the needle drastically down or drastically up.

We see a pretty steady state going out through the balance of the year from this point.

Okay, that's helpful.

And then just a quick follow-up.

Any early, early comments on the headlines this morning about the potential special investigation on steel imports under the Trade Expansion Act?

I guess it will be too early to speculate, David.

I think it does give you insight to the positive trade environment in Washington right now, but time will tell.

Our next question comes from Jorge Beristain with Deutsche Bank.

I guess just really following up on the Trump Buy America, could you point to any specific subsectors of products where you think that this would make a difference, that historically, they may have been supplied by imports, but now, because of these new potential regulations, there'll be a switch to American-based products?

Well, I think obviously, energy is a big focus, and as the energy markets continue to rebound -- and one has to remember, energy used to be, not too long ago, only 2 years ago, about 8% to 10% of steel demand in the States.

And that is a big outlook for hot-rolled coil, certainly, for us at Columbus.

So I think energy would be a principal focus there.

And I think also, in the long products side of things, if you look at the heavy beam market recently, imports of what I call roll bar, just straight bar, have increased over the last few years.

But most significantly, prefabricated beam has been increasing at a dramatic rate.

And so there are several projects, the Hudson Yards project in New York, the Sasol chemical plant down in Louisiana.

A lot of imported prefab material has come in, and Buy American doctrine would certainly help that, particularly at least for government-sponsored projects.

Right.

That's helpful.

And then just on finished product imports of steel, we've been seeing they're up still pretty sharply quarter-on-quarter, year-on-year about 7%.

Can you speak to what's going on there with particularly the still high CRC prices in the U.S.?

Are you starting to feel a little bit of import pressure at the margin just because, despite the trade cases, we're still seeing imports up year-on-year?

We're not seeing much pressure at all, in all honesty.

I think the -- absolutely, there's a little attraction there on the cold-rolled sheet, coated side because the arbitrage has grown compared to hot-rolled coil.

Hot-rolled coil imports, obviously down dramatically.

And despite Asian pricing for hot-band coming down, that stuff just can't get in.

On the coated and cold-rolled sheet side, part of that, I do believe, is demand and -- or the supply and demand balance because the coating lines are full in America today.

And so there's almost a need for a slight uptick in that product line.

Our next question comes from Curt Woodworth with Crédit Suisse.

Mark, you talked about inflecting demand, certainly, for SBQ and merchant bar, yet it seems like the industry hasn't been able to get much price support for those products.

I know that you and Gerdau rescinded a $40 per ton price increase in early April.

And I think on the rebar side, I know you don't do a lot of commodity rebar, but Nucor rescinded that as well.

So can you just talk about why, despite stronger demand momentum on the long products side, it hasn't really been able to get more material metal spread expansion?

And do you think that there's an opportunity for any potential trade action with respect to either beams or specialty bar going forward?

I think when you look at sort of the merchant shapes, long bar, that side of the industry, if you look at utilization rates as an industry, yes, we're 74%, 75% or thereabouts.

But I think one needs to bifurcate that into sheet and long products.

Sheet is running, I'd say, almost flat out, 95% today to a large degree.

On the long products side, utilization rates are still -- they're improving, but they're still struggling.

And so you don't have a strong sort of sellers' market environment to dictate an increase in pricing and spread.

So I think it's just a matter of competition.

We do believe that demand is growing across virtually all steel sectors, steel markets, and that will certainly improve.

We're certainly seeing in SBQ -- SBQ order rate has grown dramatically.

The utilization at that mill is very, very positive, and so you're going to see, I think, some pricing strength in that arena.

Merchants, rebar, still going to be a little challenged.

And the potential for any trade action on long products?

Well, right now, you have a rebar case, I think pending, right, Glenn?

Yes.

And I think the market in that arena will have to take care of it, and it will.

(inaudible).

Our next question comes from Brett Levy with Loop Capital.

You've talked with, I don't know, some enthusiasm about the energy sector and that sort of thing.

And I'm just wondering, as you look at your portfolio, is welded pipe or seamless pipe or -- is there something that sort of fits into your front-end capabilities that would make sense in terms of expansion ideas in the energy sector?

I will answer that.

As we normally do, we look at all opportunities out there.

And whatever opportunities check all the boxes, we will pursue.

Got it.

And then in terms of share buybacks, are you guys still feeling fairly aggressive about that?

Hey, Brett, I was going to say this is Theresa, but I hope you recognize that.

I recognize it.

We were active in the quarter.

We repurchased about 1.8 million shares for about $61 million, and we continue to be active.

We continue to be opportunistic and enter the market from time to time where it makes sense to us to do so.

We still believe that it's a valuable thing to execute.

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

I was wondering -- I know you talked a little bit already about the imports on galvanized and cold-rolled maybe because the markets are running pretty full out on those products, but there's some concern among distributors specifically about large amounts of product coming from a few countries, say, Turkey and Russia.

I mean, do you think that there's a potential to continue to pursue trade cases?

Or do you think we're tapped out on the flat-rolled side?

I think the trade cases in place will -- should be enforced, and obviously, the political climate in Washington is proceeding in that manner.

I think a huge case is the anti-circumvention case against Vietnam.

That is ongoing and should see the light of day June, July or -- this summer.

I think people need to focus more, in all honesty, on the marketplace in America than worrying too much about the import level and worrying too much about more ore is coming off.

And there seems to be a commentary or view that the price has peaked and softening is going to occur midyear.

And perhaps, on the -- Timna, perhaps, I'm a little bit of a contrarian, but I think the market dynamics in place is -- they're strong and are certainly going to support the current pricing environment, if not more.

You've got a domestic market strength that is supply-side driven today and is supported by strong and, I think, growing demand, and it's going to mitigate any softness in raw materials.

We mentioned, on the demand side, automotive still remains strong.

Yes, it may have turned over a little bit, but it's going to remain strong for the rest of the year.

Nonresidential construction is continuing to grow.

Energy is coming back.

All we have to do is look at the recent MSCI data, where shipments in March, which I think normally month-over-month tends to lighten up a little bit, they increased, I think, significantly, materially.

And the inventory levels in the system today are at 2 months.

If you look at sheet or flat roll, they're only 1.8 months, which is a very, very, very low level.

So supply chain inventory is very, very tight.

You do have the import cases in place today, and they're going to be enforced in a much stronger vein going forward.

Then you have an industry with lead times stretching out.

So it's, I think, a very good, positive market environment that's going to support good pricing and good spreads through the rest of the year.

And it's -- I would argue that we're at a bit of a tipping point.

I think inventories today are at a very precarious position.

The short inventory sort of maximized turn business model or the consolidating service center industry has been accommodated these past years by a challenged market, mills with low utilization rates, lead times short, and they've been able to sort of buy off the floor, almost, of the mills.

And I think that's about to change.

So I view the market in a very positive vein right now.

It will be fantastic to see the skeptics proven wrong on the scrap side and concerns over Chinese hot-rolled, and to focus again on the U.S. market and demand would be refreshing.

I guess I'll switch gears here to ask just about the war chest that you've developed, and there's a lot of speculation about what you plan to do with it.

I just wanted to know if you could clarify a little bit in terms of I know the value-added focus you've talked about.

Is that more organic or acquisitive?

Is there anything else you can detail to us on the way you're thinking about growth opportunities?

Well, thanks for pointing that out, Timna.

I think the strategic positioning of the company is certainly clearly demonstrating our cash flow generation capability.

Up to this point, I think we've approached cash allocation in a very balanced, sort of strategic, intentional way.

We've taken advantage of the capital markets over the last 18 months to reduce debt.

We've continued the positive dividend profile.

You saw that we increased it 8%.

11%.

11%, sorry, 11% this first quarter.

And not only did we come up or advertise a share repurchase program, we are executing on that program going forward.

And that's a $450 million program.

So I think our approach -- we've demonstrated a positive approach today.

With that, growth, both organic and inorganic, remains our first priority.

You've seen -- we've talked about very small projects, I guess $75 million, $100 million worth of small organic projects across the company being implemented and coming onstream kind of this year, early next year, all of which have less than a 24-month payback.

The Columbus paint line is a phenomenal facility, as I said earlier.

That is going to further amplify the earnings capability at Columbus.

And I've got to emphasize Columbus.

That mill has gone through a transformation.

The breadth of product or market diversification and geographic penetration is phenomenal, pushing a lot more product down the value-added stream, pushing material into Mexico.

We shipped about 200,000 tons into Mexico last year, and that will grow to probably 400,000 tons over the next 18 months.

They penetrated the automotive arena, gaining market share dramatically.

We shipped, I think, a couple hundred thousand tons in '16, and over the next 18 months, that will grow to about 400,000 tons also.

And as the energy markets are coming back, the team has continued to develop better grades, and so we're taking advantage of the premium of those stronger grades there in Columbus.

So that mill has transformed itself, and we always said that it has the potential to outearn the Butler facility, which has been in ores for many years and probably the most profitable steel mill in the world.

Well, we had one month in the first quarter that the Columbus guys have been (inaudible), so that's coming to fruition.

So I think the sort of organic growth is going to be material.

On the inorganic side, again, not to get into specifics, the pipeline was full last year with opportunities that we assessed, and it remains full.

It's surprising, actually, what opportunities are coming to the table.

And we will continue to assess them with a focus on value-added downstream processor that our team has showed a propensity to outperform most, a focus on pull-through volume and not forgetting that we are steel producers, first and foremost, and have done an okay job in the most part, and we'll continue to pursue those sorts of opportunities, too.

Our next question comes from Phil Gibbs with KeyBanc.

Is the Pittsboro mills supplying billet right now to the North American seamless tube mills?

And if so, was the ramp in OCTG production that we've seen more recently here something that you benefited from on the seamless side?

No.

This is Glenn Pushis.

We are not supplying any billet to anyone out of the Pittsboro plant.

It's all being self-consumed at the plant itself.

Okay.

That's helpful.

And Theresa, the mix within the sheet business, can you provide that?

Yes, I'm sorry, Phil.

I can, absolutely.

So hot-rolled and pickled and oiled were 884,000 tons, cold-rolled was 141,000 tons, and coated was 711,000 tons.

And just -- there's a little bit more to add, I think, on the energy market.

I want to make sure that we're clear.

We actually are shipping to energy customers from...

Well, Phil, this is Glenn.

When you asked about billets, some of what we do, we take those billets and then roll them on a large mill down there in Pittsboro, so some of our customers, we do supply a rolled product to them for seamless tubing.

So I don't want to be disingenuous and tell you that we're not supplying that market.

We certainly are, but we don't supply any raw (inaudible) billets out into that market.

Okay.

Yes, I'm just trying to figure out whether or not Pittsboro is supplying, I guess, the seamless tubing market.

And I guess the answer is yes, but it's a little bit more a refined product that you're putting in there.

Exactly correct.

The 3 main drivers for the increase in the SBQ shipments, Phil, from an end market perspective were energy and, actually surprising, mining equipment kind of and some automotive as well because we've been gaining automotive share in Pittsboro very effectively.

So those were the 3 main market drivers.

Got it.

And then last question here is just on the general outlook for metal spreads in the second quarter versus the first quarter, maybe anything that you can provide on that as you see it today.

Again, we feel not to look too near, and I think we prefer just to say, hey, we see a very positive market environment for the rest of the year on the pricing side and a very sort of stable raw material scrap profile.

Our next question comes from Alessandro Abate with Berenberg.

I just have 2 quick questions.

I mean, the market seems to be obsessed by the fact that China's steel price has come off quite a lot.

And you, Mark, just have a contrarian view at the moment.

Just to clear up the things from any kind of doubt related to your assumption, we're seeing the HRC is going down quite a lot in terms of ex imports to the U.S., with Korea and China completely almost disappearing.

Beyond the advantage that you get from reduction of import of HRC, can you also support the view that the average steel price at import level from the rest of the exporter to the U.S. has significantly increased considering that the 2 most aggressive exporters are basically disappearing?

And the second one is related to Mexico.

I mean, the first indicator of the threat and risk of potential deterioration of U.S.-Mexico trade relationship is clearly the FX, which has appreciated as of late.

What is your view on domestic steel demand in Mexico for the next 6 months?

Well, I'll take the Mexican question first, and I'll probably forget the first question by the time I finish that.

The Mexico market, at least from our perspective, is still strong and growing.

They have -- well, they're still short in a big way down there.

They will continue to need imports.

Just with the current assets in place, you can argue whether or not people are going to continue to build down there.

I think they will.

But nonetheless, just the current assets in place there, the consumption will -- is strong and will continue to grow.

And given our location of the Columbus sheet mill having one of the, if not one, the cheapest freight into Mexico, we're very, very well positioned to benefit and exploit that growth there.

So I don't see an issue with Mexico.

I think the administration has softened or kind of moderated its stance.

There's a recognition that we need to be good trading partners.

Maybe the NAFTA agreement should be modified.

I think it's been around for a long time, and I think both parties will benefit from a new look at that, but I think it's going to be a prudent, pragmatic review.

So I don't have any concerns, any issues with trade with Mexico.

The earlier question, I think, is kind of focused on the arbitrage between domestic pricing and Asian pricing.

Obviously, on the hot-rolled coil side, essentially, the duties have shut China and a lot of those folks out of the marketplace.

We are seeing a little bit of hot-rolled coil coming from other folks, but again, year-over-year, hot-rolled coil imports is down significantly.

The import arena, that -- it's grown year-over-year.

Again, we talked about it earlier.

Total sheet and coated, there, the arbitrage has grown.

But also, the demand in the States is very, very strong, and you've got an industry that is pretty well maxed out today.

So I'm not surprised to see a little expansion in those products.

If I can just quickly add, I think you made the point earlier, and I think it's a very valid point that some people don't understand, there's an overfocus on China right now on hot-rolled coil prices, where if you look at European prices, which they don't have the trade cases necessarily, those prices are still very high.

And so to your point, the arbitrage there to bring those into the U.S. really isn't that attractive because their prices have remained much higher than China.

Just a quick follow-up.

I mean, what I wanted to say is that considering China is off the market at the moment, also, South Korea has been shut down at the moment, I mean, the average import price that you have is significantly lower than what the China's export price would imply.

So the effect of an arbitrage, which is calculated between the U.S. HRC and China HRC, has lost a lot of power.

Do you agree with that?

Sure.

Absolutely.

I totally agree.

Our next question comes from Novid Rassouli with Cowen and Company.

Mark and Theresa, I had a question -- I think you touched on it in a previous question -- or a couple of the previous questions, Mark, but in last quarter's conference call, you'd mentioned that supply side tightness -- you're seeing supply side tightness on the sheet side and that you expect that to be sustained.

I was wondering if you can just update us on how the market has evolved since then and your current thoughts and outlook.

Well, I hopefully articulated that to some degree already.

The sheet arena, I think, just continues to be tight.

It's somewhat balanced, I guess.

You have a large sector of our industry not buying or hasn't really been buying, and that's the service center industry, and hence, inventories have shrunk as their shipments have increased.

So I think generally, there's going to be a catch-up there over the next few months.

And as I said earlier, I think the supply chain is in a precarious or at a precarious point.

1.8 months of flat-rolled products out there, I mean, it's almost unheard of.

And I would imagine that the folks are going to need -- if they're going to support the OEM customer when demand continues to grow, that industry needs to be restocked.

So that unto itself is going to fuel additional demand.

On top of that, demand in general, for us anyway, continues to grow.

We're seeing market share growth in automotive.

We're seeing growth in the energy arena.

And I think it's just going to continue to go over the next couple of quarters, for sure.

Right.

And just to touch on the low inventories, so pricing sentiment has definitely shifted basically in the past few weeks, and so traditionally, we kind of see buyers pull back a bit.

But given the low inventories, I mean, are you seeing any shift in buying activity from the shift in sentiment or -- and do you expect to?

I think we're seeing the typical profile, and it's a little frustration -- frustrating, I guess, for us.

But people try to anticipate where the scrap market is going and buy or order in relation to that.

Again, we're not in a raw material or cost-driven environment today.

We're in a supply side-driven environment.

And I think we're going to see less and less of an impact of scrap here going forward on pricing.

Well, we have seen a profile a couple of weeks or 3 weeks ago, folks took their foot off the order pedal a little bit, and the scrap market didn't come off quite as strong as they anticipated.

Pricing has not softened dramatically, and we're starting to see the order rate pick back up again today.

Our next question comes from Alex Hacking with Citi Investment Research.

Just a couple of follow-up questions on end demand.

You mentioned in the press release growth from large public sector infrastructure projects.

Is this something that you're already seeing?

And if so, could you give us some color?

Or is this something that you're anticipating once an infrastructure bill will be put in place?

And then secondly, just on energy sector, if I remember right, Mark, you talked about that this sector could maybe get back to kind of a 5 million ton per year rate.

Where do you think we are in that process right now?

Is there any way to quantify the improvement in demand from that sector?

Well, I think our inference in the (inaudible) to the infrastructure is kind of relative to the potential build, build-out by the administration.

I think we are seeing positive growth in nonresidential construction in general, though, and it will continue.

I just might add to that, though.

We are seeing movement at the state level that really has come prior to any federal infrastructure program, and we have seen some positive signs from that.

And we just have anecdotal information from like the state of Indiana and whatnot that there is some positive movement there for infrastructure.

And on energy, I wouldn't be able to quantify, honestly, where we are at this moment in time, although I would suggest we're way down the curve, and there's a huge runway to be attained here.

Our next question comes from Sean Wondrack with Deutsche Bank.

I'm just trying -- I'm just going through some of the comments you were stating about imports.

When we look at global crude steel production, right, it's up about 15 million metric tons year-over-year, with China being up about 11 million metric tons, at least through February.

And then when you just look at global pricing, right, you have U.S. HRC is obviously the highest, and then Chinese domestic HRC is obviously the lowest.

And it's almost a $300 -- $270 difference at this point.

What prevents -- so considering that service center is basically going through a buyer strike and, like you've been commenting, they haven't been buying, inventory levels have been getting very low, do you think they're expecting imports?

Like are imports on the water since it takes 3 to 4 months to come over and they think they can just get around the tariffs?

I know that service centers, a couple of them I've spoken to, put about 20% of their buy in offshore steel.

So I was just kind of curious how you looked at that, thought about that dynamic.

I'm not aware of any threat on the hot-rolled coil side from anyone.

I would suggest that essentially, the hot-rolled coil arena has been effectively shut down.

Any thrust would be, again, on the cold-rolled sheet and coated side of the business, as we've said earlier.

So that volume is somewhat limited.

A lot of that material today are kind of what I call stock stuff coming in, the 48-wide and 60-wide material.

And as you have a supply chain inventory as tight as we are today, they don't have every size and gauge and coating weight that our customers or that the OEMs want.

And so there's a natural need for stuff produced in the United States, and I think we're at that kind of sort of balance point today.

And we're not threatened.

We don't feel threatened by any further imports there.

So that would kind of indicate that these service centers that have been buying imports would start buying American again, which should be great for the market.

So I guess we should look to see that in the coming quarters?

Well, it'd be good to see some of those folks be a little more patriotic than they are, yes.

The next question comes from Aldo Mazzaferro with Macquarie.

I just had 2 quick questions.

In the pipe market, you got this Trump initiative that seems to be focusing on melted and poured steel in the U.S. rather than rolled slabs and things like that.

And I'm wondering, I think a lot of the steel that gets sold to the pipe market is coming from slabs that might be imported.

I'm wondering whether you see an opportunity from [ stocks ], especially with some of those pipe mills that are sitting around Texas that are underutilized and probably be looking for more materials soon.

Is there kind of a big story in your hot-rolled coil business going to the energy that might be further accelerated by the melt-and-pour rule?

Aldo, this is Barry Schneider.

I would tell you that in recent meetings we've had with the administration and Department of Commerce, the pipe manufacturing in the United States have had troubles on their own in competing on a level playing field across the world.

So in many cases, the materials they can get here in the United States, they are capable of the vast majority of products that would be consumed here.

But in some cases, when hot-rolled is coming in subsidized as in the shape of a pipe or energy sector product, it's very difficult to compare or to compete with that.

So we did -- we were excited to hear that the administration was considering the standard melted and poured kind of language for Buy American projects.

We think that is a good utilization of American business and helping to level that playing field for people that make those products.

But that will regard primarily intrastate business.

So interstate business, we have to convince people we have the right products and earn that business.

But this helps us do that by leveling the playing field and allowing the domestic manufacturers to have what they need, supply it right here in America.

Great.

And then kind of a second question on the topic of possible, any strategy on scrap?

(inaudible) some of the assets you made to commercial lines earlier, is that mostly third-party material that you sold and is that going to be part of your ratio of internal kind of (inaudible) versus the previous in terms of the amount of scrap you sell internally versus outsiders?

Aldo, those yards were kind of on the periphery and certainly not within the shadow of our steel mills.

So the scrap that did go from those yards had a big freight bill on it to get to our steel mills.

So naturally, scrap is going to flow to the most logical freight hauler in most cases.

So again, that -- those assets were better suited for somebody else.

Great.

So Russ, is your strategy on scrap to try to stay slightly long, selling to the market?

Or do you think you'll gravitate eventually towards self-sufficiency?

I think it's a combination of both, although I think our primary role is to make sure we've got the right scrap for our steel mills at the right price.

That's our #1 priority.

(inaudible) we do have (inaudible).

Sorry.

It looks like if you had one more mill, you'd probably be there.

Getting close.

Our next question comes from Matthew Fields with Bank of America Merrill Lynch.

Mark and Theresa, just a couple of smaller things and then one sort of bigger picture.

What kind of auto sheet products are you making at Columbus?

Barry?

We continue to develop new products all the time, but we do sell advanced high-strength steels to market as well as traditional galvanized and high-strength steel members.

We continue out of our Butler facility.

Actually, we've been growing with our automotive team.

We've been growing the participation out of Butler.

And in many cases, it's lighter products that the mill's suited for.

Down at Columbus, on the coated side, we do have much more capability there.

The galvanizing lines were designed for some of these more modern steel applications.

So we try not to get too far ahead of ourselves, and we're trying to respond to what the automakers are asking us to do.

And right now, that works well for the whole product mix.

And as you may know, we do not do exposed automotive, but we do a vast majority of other parts of the automotive, what's going into an automobile.

So we look forward to adding these newer products, but we're always trying to make sure that we're doing the best thing with our assets we can and communicating with the automakers to find where they need us to be.

So it's a changing world in new steels.

It's really exciting.

It really is interesting metallurgically, of course, but for our product mix, it's great, as Mark said, to diversify us.

All right, great.

That's helpful.

And then I think Theresa mentioned one of the bigger -- one of the surprising drivers of growth this quarter was mining equipment out of Pittsboro maybe specifically or maybe sort of the company-wide.

But can you talk about those kinds of products, customers, what kind of equipment you were supplying?

Sure.

This is Glenn Pushis.

Most of those products go into our forging applications, so it will be sold to forge houses that then support the oil patch.

So couplings, different forge applications for different types of machinery.

So it's more oil and gas than it is for actual mining?

There's a little bit of mining.

I consider Caterpillar to be mining, so the yellow goods have picked up a little bit.

Okay.

And then lastly, I think Timna asked the question about inorganic growth, and you were pretty helpful on that.

I know you can't sort of give away the store here, but now that you're 1.0x net leveraged, which is as low as you've been in a very long, long time, would you be willing to sort of flex your balance sheet to go after something bigger on the downstream side?

Absolutely.

I think we recognize where we are, and I think we have the -- and we've been -- we've done here intentionally to build a platform or a foundation for significant growth, and I think we will take advantage of that.

That being said, we continue to reassess where we are and our sort of cash allocation thoughts.

So Matt, just to calibrate a little bit, when we talk about kind of the framework for looking at the balance sheet and the capital structure, we really gear toward net leverage of less than 3x through cycle.

So with that, you can see that we've, to Mark's point, really prepared for a pretty significant growth opportunity, whether that's downstream or otherwise, as Mark mentioned earlier.

And then would you sort of prefer a pipe and tube manufacturer that's on the structural side or maybe a more energy-focused tubular producer?

We are looking for opportunities that will improve our sort of margin profile, that provides pull-through volume for us.

Well, again, 3 avenues or 3 focus areas, as I said earlier.

It's downstream, sort of value-add processing-type capability, pull-through volume, so some form of manufacturing to draw material through based on the model of New Millennium, based on the model of Vulcan, on the sort of threaded run out of Pittsboro, and also just steel assets themselves.

When you say steel assets themselves, you mean like a new mill?

Or existing mills that we believe we can infuse with our culture and our business model to improve their earnings profile.

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

I just realized the call's been going on for an hour and 10 minutes, and nobody's asked the typical one-of-the-first questions everybody usually asks, short-term modeling-type question.

How should we be thinking about volume sequentially overall and margins per ton sequentially overall in the second quarter versus the first quarter?

Well, Dave, this is Theresa, and Mark's smiling very broadly and pointing at me, so I can be the bad guy.

Clearly, we want to focus long term.

And so I think Mark said at the profile, right now, we do expect, and I think you can take whatever you want without me being too prescriptive, but we are expecting demand to continue to increase in the various areas that we discussed.

We're going to say steady.

We definitely see it in a positive trend.

From a perspective of spreads, we do believe that the supply side really is driving flat roll pricing today versus the cost side.

So one would suggest that given supply is still very tight, that would be a very constructive view on pricing for flat rolls.

We are expecting to see continued construction, which should help support the long products side of the equation as well as the energy market.

And scrap, we believe, should stay pretty steady and moderate.

You'll have emotional months here and there, but we can't predict those.

Long term, if you look at the supply and the demand environment, there's no reason why there's a significant driver for it to go either significantly higher or significantly lower.

So you can -- you could take from that what you will, and I'm sorry, I'm not being more prescriptive.

I'm sure everyone would like us to be so.

No, that's perfect.

That's very helpful.

Very much appreciate the longer-term approach and also what seems to me to be very encouraging, supportive commentary regarding the outlook for the market here.

And that concludes our question-and-answer session.

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

Super.

Well, thank you, Rob.

And again, many thanks for sharing your time with us today.

We do value you as we do our customers.

Any customers on the line, we'd like to certainly thank you for your support.

And to our employees, I tell you, guys and girls, you did a phenomenal job in the quarter.

It's you that drives the company's success and will continue to drive it forward in the future.

So it's an honor to be with you all.

So take care.

Have a great day.

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

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