Steel Dynamics Inc (STLD) 2017 Q2 法說會逐字稿

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

(Operator Instructions) Please be advised that this call is being recorded today, July 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, Melissa.

Good morning, everyone, and welcome to the Steel Dynamics Second 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; our Steel Fabrication Operations' Chris Graham, Senior Vice President, Downstream Manufacturing Group; 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 that 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 at 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 Second Quarter 2017 Results.

And now I am pleased to turn the call over to Mark.

Thank you, Tricia, and good morning, everybody.

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

I'd first like to thank the entire SDI team for a strong performance this past quarter and also express my sincere appreciation to our customers for their continued loyalty and support.

We wouldn't be with -- who we are without you [involved].

As usual, I ask Theresa to begin with the comments related to our financial results.

Thank you.

Good morning, everyone.

I'd also like to recognize the efforts across the company, delivering a really solid performance in the second quarter.

Our net income was $154 million or $0.63 per diluted share, which was squarely within our range of between $0.60 and $0.64.

This compares to net income of $142 million or $0.58 per diluted share in the second quarter of 2016 and $201 million or $0.82 per diluted share in the sequential quarter.

Second quarter 2017 revenues were on par with sequential first quarter sales at $2.4 billion based on higher average steel selling values making up for lower shipments.

Our operating income for the second quarter decreased 21% to $265 million compared to the sequential first quarter.

The decrease in earnings was primarily driven by our flat roll operations as increased average scrap cost outpaced average sales price growth.

Additionally, as mentioned in our May quarter guidance, we upgraded and expanded one of our galvanizing lines at our Butler Flat Roll Division, which required a three-week outage in May, increasing expenses and reducing value-added shipments.

The Columbus Flat Roll Division experienced some start-up issues as well in the paint line, which also increased expenses and decreased value-added flat roll shipments in the quarter.

Combined, these 2 events reduced potential second quarter 2017 pretax earnings by an estimated $30 million.

For the second quarter, operating income from our steel operations declined $75 million -- excuse me $79 million or 22% to $274 million, a result of metal spread and compression and some mix shift within the flat roll group, coupled with lower long product shipment.

Our average quarterly steel selling price increased $36 per ton to $779 in the second quarter.

However, our average scrap cost increased $39 per ton to $303.

For the second quarter of 2017, total steel shipments decreased to 2.4 million tons, about 2%.

Flat roll shipments stayed steady.

However, the mix shifted to less value-added sales based on the galvanizing additives.

Long product steel volumes declined 8%, primarily driven by lower structural and merchant steel shipments as increased imports continue to pressure domestic suppliers.

For our metals recycling platform, ferrous scrap shipments decreased 9% and metal spread also compressed.

Demand was down slightly in the quarter, but primarily the driver of lower volume was the March 2017 sale of some of our noncore southeastern U.S. locations.

Despite the metal spread compression, the team did a great job continuing to optimize costs throughout the business, resulting in a second quarter 2017 operating income of $20 million, well in line with the strong first quarter performance of $21 million.

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

Metals recycling continued to maintain a higher than historical percentage of total internal ferrous shipment to support our steel mills at 62% in the second quarter.

Our Fabrication Operations achieved record shipments for the second consecutive quarter, a continued indicator that the nonresidential construction market is improving.

Order backlog also remained very robust.

However, second quarter 2017 operating income from our Fabrication Operations decreased sequentially to $20 million, a decline of 15% due to metal spread compression related to higher average steel input costs, which obviously benefit our steel operations.

During the second quarter of 2017, we generated cash flow from operations of $81 million, lower than the $240 million generated in the first quarter, primarily related to a required $152 million estimated tax payment that was related to the entire first half of the year.

During the first half of '17, we generated cash flow from operations of $321 million, with operational working capital growing by $234 million based on market improvement.

We maintained our cash dividend for the second quarter at $0.155 per share, and we repurchased $138 million of our common stock during the first half of the year pursuant to our board authorized program.

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

At June 30, 2017, we maintained liquidity of $2.1 billion comprised of our undrawn revolver and available cash of $909 million.

Second quarter 2017 adjusted EBITDA was $350 million, with trailing 12-month adjusted EBITDA at a record $1.4 billion.

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

We're squarely focused on the continuation of sustainable, optimized value creation.

And before I pass it back to Mark, I know there are a few of you that use some different categories of shipments for flat roll in your models.

So for the second quarter, our hot-rolled and P&O shipments were 914,000 tons, our cold-rolled shipments were 138,000 tons, and our coated shipments were 685,000 tons.

Mark?

Super.

Thanks, Theresa.

Thanks for articulating, [precisely] some phenomenal financial results there.

I think the team's done incredibly well.

As I've said in the past, the welfare of our employees remains our #1 priority, and nothing surpasses the importance of creating and maintaining a safe work environment.

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

And I would tell you the team is doing a phenomenal, outstanding job.

So far this year, we have reduced our total recordable injury rate by 22%, and 79% of our locations are incident-free.

I applaud the entire SDI team for their dedication and continued focus.

They truly are an outstanding group.

The steel platform performed well in the second quarter.

Our production utilization was 91%, once again, markedly better than the estimated domestic industry rate of 74% and in large part due to our having one of the most diversified and value-added product profiles in the industry.

Demand in the automotive sector remained steady and the construction and energy sectors continue to improve.

Energy still has a long way to go, but we are definitely seeing a very positive demand trend.

In May, we upgraded the hot-rolled galvanizing line at our Butler Flat Roll Division adding 180,000 tons of value-added coating capability for a capital investment of only $15 million.

The additional capacity will benefit the second half of this year.

We also continue to ramp up the production of our new paint line at the Columbus Flat Roll Division, which initiated prime shipments in the first quarter of this year.

The new line provides 250,000 tons of annual coating capability and further diversification into some of our highest margin products.

We have 2 existing paint lines in Indiana, but this new line is truly state-of-the-art facility allowing for high-quality HVAC [and] our clients' products, double-wide steel and facilitates access to the southern U.S. and Mexican markets.

The team did experience some quality-related issues related to an equipment failure in the second quarter, which was quickly identified and is temporarily contained, with the final solution being planned for September.

Columbus continues to be a significant earnings catalyst.

The changes that the team has already made are transformational, and I believe there's still more to come.

The successful market and product diversification that was achieved over the last 2 years is one of the key differentiators for our improved profitability.

It will continue to benefit in the coming years as well.

Domestically, flat roll steel production utilization remained much higher than long product utilization.

Flat roll steel benefited from steady demand coupled with improved supply dynamics.

Customer inventory levels remained at historical lows.

However, value-added flat roll imports continued to increase.

When compared to last year, cold-rolled and galvanized flat roll steel imports are 33% higher.

Additionally, pipe and tube imports continues to grow, up 75% year-to-date.

Despite continued nonresidential construction growth, structural and merchant steel shipments declined in the quarter, driven by elevated import levels of both structural beam and prefabricated steel products.

Although our total quarterly production utilization rate was 91%, our long product divisions operated at a run [rate] of 70%, while our medium section structural beam mill only operated at 50% to 55% of its capacity.

Encouragingly, the Engineered Bar Products Division continues to see excellent momentum and operated 70% of its current capacity compared to just over 50% in '15 and '16.

Not only did we see improved demand from energy and general industry, but the division is also benefiting from internal supply to our recently acquired Vulcan bar operations.

In aggregate, we still have over 1 million tons of unused steel shipping capability, but most of the latent capacity being construction-related that could potentially be consumed by infrastructure and large civil engineering projects.

Our [steel dip] platform has several other earnings catalysts.

Our recently announced $75 million expansion of our Structural and Rail division will utilize existing access, melting and casting capability and further diversify our product portfolio and market sector exposure.

This project provides for the annual production of 240,000 tons of reinforcing bar, including coil, custom cut to length and smooth bar.

Our intended business model should substantially enhance the current supply chain, providing meaningful time, yield loss and working capital benefits for the customer.

In addition, we will be the largest independent rebar supplier in the Midwest region.

Additionally, our Vulcan operation will also provide pull-through volume opportunity for this project.

Vulcan currently consumes between 30,000 to 40,000 tons of smooth coil bar annually.

In aggregate, we should see a material improvement future through-cycle utilization at our structural division.

We expect to begin operations of this new line by the end of 2018.

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 of 200,000 tons.

Similar to our Midwest investment, we expect to have a strong market penetration as we will be the only independent producer in reinforcing bar in the Virginia area as well.

We expect to begin operations of this line at the end of 2017.

The profitability of our metals recycling platform remained well aligned with strong first quarter results despite lower ferrous scrap shipments and metal spread in the second quarter, as the team continues to optimize administrative and operating costs.

Even though we have realigned some of the scrap assets after the March 2017 sale of some southeastern U.S. locations, we are still reorganizing and expect some additional cost savings during 2017.

We anticipate a continuation of the relatively strong U.S. dollar and good scrap flows, supporting ample scrap supply and a more stabilized scrap price environment through the second half of the year.

The fabrication platform continued its strong performance, achieving a second consecutive quarter of record shipments and ending the quarter with a record high order backlog.

The team continues to achieve great market penetration in both joist and deck.

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

The power of pull-through volume and fabrication source [of] 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 well, levering our national footprint and providing quality product.

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

With steady to growing steel demand, low supply chain inventories and the current trade cases in place, the flat roll supply-demand environment is positive.

However, unfairly traded steel imports remains to be a concern as certain foreign producers circumvent the existing trade laws as evidenced by recent increased import volume.

Despite imports, we continue to have a positive [view] on the domestic steel consumption.

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

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

We believe there will be continued 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.

I think our results say it all, but 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 and they're incredibly excited.

The strong character and determination of our employees provides the foundation for our success, and I thank each and every one of them for their hard work and dedication and remind them safety is always our first priority.

We continue to focus on providing superior value for our company, our 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 Melissa, we'd love to open the call up for questions.

(Operator Instructions) Our first question comes from the line of Brett Levy with Loop Capital.

You guys have mentioned energy on a couple of different occasions.

How much of your substrate in terms of sheet goes into the welded pipe business?

And I mean, you mentioned that sort of extra million tons.

It sounds like construction and energy are the targets there.

Talk about kind of what you're seeing in demand for both of those end markets.

I think our exposure to energy is a lot lower today than it was when we first bought Columbus in end of 2014.

Obviously, as we've said in the past and did today, the team's done a tremendous job transforming that product mix away from energy.

That being said, we're still participating in the pipe and tube arena.

Barry and his team are focused on the higher grades there, not just the basic line pipe, but the higher strength grades that will accrue us a greater margin.

But Theresa, where are we actually percentage-wise?

Do you know?

Got it.

All right.

And then let's see, we put out a report in July on a competitor of yours who has the exact same ratings as yours -- I'm a bond guy -- BA to BB+, except if you look at their credits stats, even though the rating is same and they're very strong, you're much stronger.

And then we look against the largest competitor you have, your credit stats tend to look more like BA1, A-, which is their rating, and I'm thinking, if you look at cash debt, net debt, EBITDA, interest, equity market cap and how all of them relate to each other, isn't it time for you guys to be investment-grade -- because you look like it?

Mark's smiling and handing it over to me, Brett.

I'm sorry.

No, no worries.

No, you're absolutely correct with the credit metrics, and we're very proud of those.

We're also in a unique environment where growth is still very much at the forefront, not just organic, but transactional as well.

But I think that as we move, and we've always said this, that we were very happy being where we were because we were treated very much like IG, but we actually would progress to IG just because of our business model and I think we're probably approaching that time line.

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

So it sounds like you're anticipating a fairly steady, maybe modestly improving demand environment on the net over the second half.

So first, is that a fair read?

And then second, it seems like consensus thinking right now in the market is that no matter what may or may not get announced policy-wise, there's been kind of an anticipatory freezing out of import orders now that could drive a tighter market on the supply side as we get into late summer and early fall.

I wonder if that's your expectation too and if that gets you, even on its own, excited about the pricing prospects over the second half.

To answer your first question, absolutely.

We're excited and very, very optimistic to the second half and not just the second half, but going into 2018.

I think the environment has turned, and we're going to continue to see growth.

If you look at flat roll and just picking the markets apart a little bit, to answer your second question, the flat roll arena I think remains very strong, despite a slight turning of automotive.

As we look internally, order rate is absolutely solid and strong there.

Our lead times are right where we want them to be, roundabout 3 to 4 weeks for coil and 5 weeks, 6 weeks for value add.

And it's just a very positive environment there.

Obviously, Nucor came out with a $25 uptick in pricing, and I think the industry will likely follow that, and the environment will I think allow that to stick.

The import numbers, obviously imports continue to come in, and these are imports that have been ordered a month, 2 months, 3 months prior.

The new import offerings, I think, are pretty dry, certainly down.

And most of those import offerings -- in fact, the majority of those offerings, the traders are shifting the risk of any 232 action to the customer.

And I don't think, to be honest, there are too many customers out there wanting to take on any potential liability for tariffs.

So I think end of Q3 going into Q4, actual import arrivals is going to -- I don't know whether they're going to drive it totally, but they're going to be substantially down.

So generally, a very, very, very I think positive pricing environment.

Construction continues its incremental growth, I do believe, and we can certainly take advantage of that.

Energy, obviously, is a very, very positive tailwind.

So I think, I agree with you.

It's a very positive environment relative to just the sheet.

You just look at the environment, you've got rising prices in Asia, you have appreciating ore in kind of an appreciating global cost curve, we've got positive demand trends in the U.S. There's incredibly low inventory, it's almost astonishing that the inventories are as low as they are, given the potential tightness that is right there on the horizon.

And I think that's a positive environment onto itself.

Then on top of that, any trade action from Section 232 or any implementation of trade restraint is just icing on the cake to drive that higher.

So a very, very positive outlook, I would suggest.

We're excited.

If I could squeeze, just to see in.

Can you give us any color at all on what you're looking to have to do on the permanent fix versus the temporary fix for the new lines there at Columbus?

And then I'll hand it over.

Essentially, the issue was in the, what we call the snout that delivers the -- and protects the strip, the heated strip, going into the galvanizing part, and you need to keep that at a very special temperature and also in a protected environment.

The failure related to just bad design and bad construction of that snout.

The guys got in there.

They fixed it.

So temporarily, there's not an issue.

The problems have gone away.

And the brand-new, shiny snout, Barry, is delivering in September?

In the near future.

It should be here for installation in September.

In September.

But Matt, there shouldn't be any incremental costs or outages related to that.

So if you're trying to think about whether or not that was isolated to the second quarter, that was isolated to the second quarter.

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

Just wanted to be completely clear that the $30 million impact you talked about as a result of some of the upgrades that you did in the first half are entirely behind you and like run rate wise to exclude those is a reasonable way to look into the second half?

So Timna, yes, absent any differential market changes, those sorts of things, the $30 million for both Butler and Columbus is isolated to the second quarter.

Okay, super.

And then just want to take a step back and ask you a little bit more philosophical question about capital allocation.

I think Steel Dynamics has a great track record for organic growth and investing first in projects internally.

But it just has me a little bit concerned seeing the capacity growth in rebar, capacity growth in galvanized, you're not the only one that's adding, right?

CMC is adding rebar and Nucor is adding galvanized.

And I'm just concerned why the build over buy at this point in the cycle?

We've seen this play out with SBQ before, where everybody added at the top of the market.

But can you just give us a little bit more explanation of kind of why you're approaching the market in a build versus buy?

Well, the -- first and foremost, these projects are incredibly -- there are incredible uses of capital, effective use of capital.

If you talk about the hot-roll galvanizing line, we're adding a 180,000 tons of new capability for $15 million.

You compare that efficiency or effectiveness against building a new line or any other competition out there.

I mean, it's just the right thing to do.

Relative to rebar and maybe there are those out there that wonder a little bit why or share your thoughts, but again, it's incredibly constructive use of capital.

It's effective.

Getting 200,000 tons or utilizing 200,000 tons of the excess melt capacity at Roanoke is -- just the compression of the additional volume across all tons is -- that's a return unto itself, and similarly for the Structural and Rail Division.

In aggregate, we're looking at roughly 400,000, 450,000 tons of rebar, which is probably only 5% of the domestic market.

But as we've done in the past, if you look at our paint line investments, rail investments, those investments were made in markets that weren't necessarily supply short, but we entered those markets differentiating ourselves, differentiating the supply chain and I believe we're doing the same thing here.

Firstly, we are the -- we'll be the only principal, independent manufacturer of rebar of note.

And so there are a massive number of what they call independent rebar fabricators that don't necessarily like buying their input material from their competition.

Obviously, Gerdau, the CMC and Nucor are large producers of rebar, but they are also large fabricators competing with that independent base.

So we think we're going to be received well.

Import's about 2 million tons of that 9 million-ton market today, and so I think there's ample opportunity to penetrate that marketplace.

In the Midwest, rebar is deficient on a supply side.

So there's a freight advantage that we believe we have there.

And more importantly, we'll be producing spooled -- straight and spooled rebar.

Spooled rebar -- if you go to Europe, spooled rebar is the product of choice because of the effectiveness and efficiency of its use and the reduction of yield loss.

So we -- some folks utilize coil rebar in the States at a lower premium.

But more importantly, we're hopefully going to change the supply chain somewhat.

We're going to inventory that spooled bar and actually give the customer kind of a customized, cut to length, short or quick ship order ability.

That takes a lot of time.

It takes a lot of working capital and takes a huge amount of yield loss out of the supply chain for them.

We believe we'll create sufficient value to allow us to penetrate that market without too much trouble.

Okay.

That's a really helpful explanation.

Just last one, just to follow-up, if you wouldn't mind, on Section 232, not to ask you to speculate.

But assuming that there's some sort of prohibitive tariff and some sort of reduction, particularly on the flat roll side, many mills are already running pretty full out there.

What kind of response do you think Steel Dynamics could contemplate if there were more restrictions and an ability to gain market share?

Are we going to see just the integrated [free] start capacity?

Or do you think there's an ability for many mills to also respond with more capacity?

I think our utilization right now is pretty good in sheet, as you indicate, but the product mix that we have today is not necessarily ideal or does not necessarily maximize our margin opportunity.

Part of the issue has been the sort of whack-a-mole effect out there.

The principal problem is the massive excess capacity in China and how that drives the -- just the imports in general.

Good work was done in 2015 to come up with the trade cases, particularly on cold-rolled sheet and coated.

But since then, the -- after those cases were implemented, we did see a drop-off in volume.

It did diminish, yet it's picked up.

And in the first half of this year, as we've said, you've seen greater total sheet and coated imports than you did prior to the trade cases being implemented.

And that's countries like Vietnam, for instance.

In 2015, they shipped about 50,000 tons of coated into America and '16, that was closer to 700,000, 800,000 tons.

A lot of that product was Galvanneal paint, which totally impacts or directly impacts our line of Jeffersonville and our new line in Columbus.

So for us, it may not be a massive increase in volume, but certainly will allow us to maximize our margin opportunity as to which products we take to market.

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

On 232, to beat a dead horse, I was just wondering if given that the steel industry has again had recent meetings with Ross if you guys could comment about what is the holdup in getting this thing out?

Well, I think, we -- as you said, we're beating a dead horse maybe, and I think it's -- there's a lot of speculation out there as to what the case or what the recommendations might be and when they're going to come out.

Having spent some time in Washington and spending time with the decision-makers, there's obviously politics at play and a lot of things have got to be satisfied.

And I think the very encouraging aspect is you've got the administration or the players, Secretary Ross in particular is incredibly engaged.

I would tell you he absolutely understands the issues, all the issues, very broadly and is going to take a very prudent approach, a very strong approach in his recommendations to the President.

I'm encouraged.

So if it takes an extra week or two to get it done, again, I think they're out there wanting to present a case that's going to be positive and successful and gain some support up on the Hill, such that we don't kick this thing to death and dilute the strength of it.

But I, again, having personally met with them, very, very encouraged that action is going to be taken and it's going to be to the benefit of the industry.

Okay.

And just at a company level for you guys, could you comment on your $36 quarter-on-quarter increase in average realizations in your steel ops, and that's despite the fact that you had lower value added in flat roll due to your outages at Butler and the quality issues at Columbus?

Could you just kind of comment what happened with product mix that you did so well quarter-on-quarter despite those issues?

Right.

So if you look at the product pricing or the product mix, what you did is you see some of it shift more to the longer, long product side.

And you see that the mix related to, I believe, SBQ was higher as well.

And so with that, you just have higher pricing on the long product side.

And so that's why it was able to offset some of the galvanized from Butler and from Columbus.

I think -- just to add more color there.

As I talked about the markets, I failed to mention our Engineered Bar division.

That's an arena as I've said before, at least there's a -- gives me a sense of the broader market because it's in all, especially every single sector of the marketplace.

Now, there, things have taken off.

The order input rate is absolutely dramatically improved to a point where we're almost -- we're almost turning away orders to some degree.

So that arena is incredibly strong.

Energy is very, very strong.

We're into the seamless tube markets there in energy.

Automotive for us is actually, despite the tail off in -- a slight tail off in production maybe in U.S., we're gaining market share there.

The Caterpillars, off-road equipment guys, their forecasts or -- well, their forecasts or actual order rates are exceeding their forecast by an appreciable amount.

Cold finish is strong.

And that's just the manufacturing was stronger.

So that gives me a very, very positive outlook as to just the steel consuming economy in general.

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

(inaudible) result.

I mean, I just have one question, Theresa, related to what you said beforehand, related to your deal product mix.

If you assume the current utilization rates across your mills, could you be able to give a little bit more color about how long it will take you to achieve this ideal mix with current market conditions?

And by how much, if you can, of course, disclose, would you be able to increase your [credit] margin relative to today's point of view?

And the second one, I mean since all my colleagues have asked about the Section 232, what is your perception that the steel used, for example, the oil sector there is a strategic, considered strategic in the U.S., may be benefiting from this Section 232?

Related to the optimal product mix, I'm not sure I can equate it to an actual margin improvement.

I would say that the optimal mix is going to be as we start to see the improvement in Engineered Bars, which Mark mentioned and which has been fairly extraordinary; that's obviously very helpful.

But we still have a value-added improvements that we need to make down at Columbus.

They're continuing to get certified on new products, more difficult products, higher-margin value-added products.

They're also still ramping up the paint line, paint line likely because some of those products need to be certified, likely not to get to full capacity yet in 2017.

You'll see that, I would say, probably first half 2018, where they're continuing to do great things there.

So there's still quite a value-added shift at Columbus.

There's still room at Engineered Bar.

What we do at our specialty shapes mill in steel West Virginia, there's actually adding some new value-added galvanizing dipped, galvanizing capacity as well, which will come online in September.

And there's still quite a bit of room for us to move, but I would suggest you probably don't see that until sometime next year.

And then in addition to that, I think we keep talking about 232, and Mark will answer your last question, but I think sometimes we're missing the fact that it could also impact long products.

And long products is where we're seeing a lot of the imports on the structural and the prefabricated side.

And if you were to see that come through in 232, that could be hugely impactful in a positive way for structural beams and for merchant shapes and for other things that, right now, the industry is not at a high utilization for.

I didn't catch the -- quite the question on the 232.

Could you repeat...

Mark, basically -- can you hear me?

Yes.

Please go ahead, Alessandro.

Yes, basically related to the Section 232.

I mean, there is still a little bit of uncertainty and lack of clarity related to what kind of sectors beyond, probably the most likely Navy and Army.

But how do you think that's -- about the chance that the steel used, for example, for the oil industry, which is strategic anyway for the U.S., could be subject to this Section 232?

What's you expectation about it?

I think there -- one can ultimately expect with this -- because you don't know what recommendations will finally be made and acted upon-- but there are three principal areas that are of concern and focus for us and for the industry, two more so for the industry in general.

We've been pushing one in particular recently.

But those 3, obviously, the first is to bring broad kind of resistance to imports on the sheet side to prevent the circumvention issues, the whack-a-mole issues.

And again, the issue is not to eliminate imports.

The issue is just to curb them to kind of the historic level of about 20%, 21%, 22% of demand.

At that level, the industry can and should prosper and be able to earn its cost of capital.

So it's not -- we're not proposing, at least SDI, Mark Millett is not proposing that we eliminate imports because the manufacturing base does have to be supported.

So sheet is the one focus.

The second focus, and it's related to energy, and that's the pipe.

As energy has come back or even before energy was coming back, 60% of pipe imports were -- or 60% of demand was satisfied by imports, largely from Korea.

And as energy has trended up, that percentage and that volume has only increased.

And so that I think is going to be a focus.

That is obviously to the benefit of the domestic industry in that energy pipe.

It used to be about 8%, 9%, 10% of demand.

And so that will help the hot-rolled coil sector of our business, which is probably the one that if there's a challenge or weakness, that's the area.

The third focus and something that we've been working on very, very strongly, as Theresa mentioned, is actually structurals.

In '16, there are a million tons of what I call straight stick, just basic long, heavy structural beams imported.

But a growing factor is prefabricated beam.

That has grown dramatically over the last 4 years.

And again, it's kind of a whack-a-mole thing, where China and others are sort of going downstream.

But there's about 1.8 million tons of prefabricated structurals that come in to our shores.

If you add the two together, you've got about 2 point -- you've got 2.5 million to 3 million tons of imports, and that market is probably 6 million to 7 million tons in round numbers.

That's a huge, huge percentage of demand being satisfied by those imports.

As we've seen nonresidential construction grow the past 2 or 3 years, I think much of that has been absorbed by the imports and we haven't seen the increase in utilization within our beam heavy structural models.

And that's not just SDI, I believe that's Gerdau and also Nucor.

So that is a conservative focus for us, and I believe that is being addressed or likely to be addressed by the 232.

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

So first, I'd just like to reiterate the first gentleman said about your company having closer to IG metrics than high yield, given your lack of secured debt in terms of interest coverage, it seems a little silly at this point.

But more than that, have you guys actually been in discussion with the ratings agencies about improving your credit rating or your outlook?

So we're always -- we have a very open dialogue with both agencies, and it's a quite constructive dialogue.

And up until this point, Sean, we've really told them what we've told you, as investors as well, that we've been very happy with where we're rated for different reasons because of our growth profile.

But again, as I said earlier on the call, given where we are, we also knew that eventually, we would grow into just naturally being investment grade because of our business model and the strength of the cash flow generation.

And so I would just say that it's something that we're constantly looking at and having dialogues with the agencies about.

Right.

And then just one comment that you made earlier, Theresa, about transactional versus organic growth.

I mean, by any other measure, it would look like you guys could potentially be considering an acquisition.

You guys have been very acquisitive in the past.

You have some latent capacity that you could put to use.

Are you seeing more M&A opportunities kind of arise in the market?

I know we've seen some transactions recently, but has that been something that's been coming more to the forefront recently?

Well, it's always been at the forefront of our focus internally here at Steel Dynamics.

And I think I've said on previous calls, we have had a plethora of opportunities that we've looked at over the last 12 to 18 months of all different sizes, but some very, very meaningful size-type acquisitions, and that pipeline continues to be [thought].

Opportunities continue to present themselves to us.

Okay, that's helpful.

And then quick follow-up.

Should you undertake an acquisition, is there a ceiling above which you would want to take keep leverage below?

And is there a -- would you potentially use equity?

Or would you consider funding it all with debt?

Our preference is still to use...

We have a considerable amount of cash in the balance sheet and on cash revolver.

So with that, it would be our choice to use debt and cash as much as possible and not [dilute the] shareholder base.

It's not necessary or whether it didn't make sense or not.

From a net leverage perspective and where we are today, what we've been saying is that we'd like to keep net leverage at 3x or less.

And obviously, we have a lot of room for an acquisition, given that we're about 1x, I think now.

And given that you generate like $750 million in free cash flow.

That's very helpful.

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

It's Novid.

So with customer inventory levels as low as they are, as you mentioned earlier in the call, Mark, and a potential Section 232 proposal being imminent in a couple weeks out, are you seeing any change in behavior from your customers?

I -- astonishingly, no, to be honest.

I -- and again, we're not in that space.

We're here to sell products to everyone, not control their business.

But it seems amazing that if you look at the probability, and that's all you can do is look at the probability of where markets are going and whether they will or will not be tight, the probability to me is sideways to up.

And you would think there would be some form of restocking or inventory growth, but we've not seen it.

Okay.

And so given these very, very low inventory levels, do you see the potential for some serious pricing dislocations happening on a Section 232 proposal that is materially prohibitive to imports?

I think that there will be a sort of initial emotional response.

It may not be just emotional.

It would be just an incredibly tight supply when everyone rushes back into the marketplace, which will give it a spike.

I do think that with the -- then sort of retract back to a more normalized number, that number is likely to be higher than where it is today.

But I would hope, not extreme, to just sort of dislocate the market yet again and go into a cycle.

Right.

But as you mentioned to Timna's question, it's not really additional volume that you guys will be targeting.

It's just going to be mix.

So there wouldn't be much relief from a volume standpoint for you guys to help the market.

Structures.

Well, Novid, but now you're just talking about flat roll again.

And so when we look at 232, given that we've got over a million tons, and with 1.5 million tons of capacity we're not using today that's on the long product side where there is no, what I would say, [pieces] in place today, that could be quite significant.

So I think you need to look at it -- we look at it more broadly than just flat rolls.

But I think to your point, it's reasonable to think that some capacity might come back to offset the losses because, again, the sheet will -- flat roll utilization in stakes today is probably 90% plus.

And so if you take a few million tons of imports off the table, then you're going to likely see a little addition of mix, new lines like coating lines, like Nucor's announcement and Big River's going to be ramping their production up.

We obviously have got 180,000 tons that we're bringing to the marketplace.

I think that can be absorbed into the market without any sort of downward disruption.

Right.

And then my last question, the -- switching gears, the 70% utilization on Engineered Bar, is that on the, like, 1 to 3 inch diameter?

Or given that you've mentioned energy and general industry, are there some wider diameters that are helping push that utilization rate higher?

Well, I think kind of the end utilization is across...

Across both lines.

The large bar line is running full and then the small bar line is where we're -- where we already have the larger utilization.

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

I just have a question on volume momentum into the third quarter and what's your preliminarily anticipating for volumes in 3Q versus the second quarter?

I think, not to be specific, sort of directionally through the second half, Phil, I would suggest that the volumes should improve over the second quarter.

I think the pricing environment that I kind of try to articulate would suggest positive momentum, certainly price -- support for pricing.

And as we've seen in the past, there'll be some noise on scrap up and down a little bit, but we see that being relatively stable through the second half of the year.

I appreciate that.

And you've made a lot of internal investments and a lot of announcements here in the last several months.

Can you give us an update on your capital expenditures for this year and perhaps next?

For this year total, Phil, we still think it's going to be probably around that $200 million mark.

And I think year-to-date so far, we've spent about $85 million.

Next year, we haven't gone through all the detailed planning yet, but I would suspect you're going to see it probably between the $200 million and $250 million range based on projects we've announced so far.

Okay.

And with these investments or management of your order book right now, you planning on taking any downtime for routine or planned maintenance in the third quarter at any of your facilities?

There's nothing that's of significance that would rise to the occasion to bring it forward, no.

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

The steel industry has been, I guess, very engaged with the Trump administration regarding trade.

Are you engaged with them on other issues around U.S. manufacturing competitiveness, increasing steel demand via upgrading infrastructure and things like that?

And I guess, where is your confidence level that we will see some kind of improved infrastructure spending or infrastructure build compared to where your confidence level was 6 months ago?

On our sort of personal involvement or company involvement, we are a lot -- we work with the -- with our peers.

We also work through the trade group Steel Manufacturers Association on the steel trade issues in particular.

On other issues, we tend just to work through or have the Steel Manufacturers sort of represent us.

Okay.

And you mentioned...

And then on the infrastructure, I guess I'm still positive and optimistic that something is going to come about.

The country certainly needs it.

There's no doubt about it.

And there's -- as we said earlier, general construction continues to be positive.

Anecdotally, as I traveled to New York and to Boston and to Washington and the big cities, the number of cranes in the air and the number of [woodworks] that screws up, traveling from A to B is just incredible.

I mean, there's a lot of activity out there.

The states have already, whatever it's called, the Fast Act or infrastructure spending is kind of in place.

In Indiana, locally, where we've seen a lot of announcements on road improvement and infrastructure improvement.

So even without the federal spend, states are coming in and increasing their construction activity.

And I'm optimistic that the Trump administration is going to follow through on its promises.

Okay, and then just a follow-up.

In the press release, you talk about some hesitancy in customers in terms of order entry, hesitancy driven by volatility in scrap prices.

Do you still that see that hesitancy today as we're entering into the third quarter?

Or are you seeing some behavioral change in the last few weeks?

We're certainly not seeing that hesitancy today.

That hesitancy, I think we were kind of suggesting it was like a 3-week or 4-week period.

And Barry, I can't remember if, when that was, in April?

I think in April and early May, we saw some hesitancy because of the uncertainties.

That's been firmer lately, but not at an unreasonable rate as we addressed earlier with the 232 speculation.

It's just healthy.

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

These are primarily clarification questions from previous questions that were asked.

First of all, on the volume commentary, I was wondering if you could just give us a little more color on the magnitude of the recovery expected.

I think second quarter was down about 2.5% or something like that versus the first quarter.

Should we expect that volume to be above the first quarter number as we get into the third quarter and fourth quarter, above the first quarter number?

I would hope we recover the quarter-over-quarter sort of production there.

Yes, that's helpful.

And then just regarding metal spreads.

Obviously, I appreciate the commentary on the scrap market.

Given the mix changes, given what's happened within Steel Dynamics, should we expect your metal spreads to improve in the third quarter versus the second quarter after adjusting for the lack of a $30 million hit?

Dave, you guys are making me a difficult spot here, Mark's laughing.

And as we typically don't comment on the metal spread direction specifically, I would say that I'm going to point back to what Mark said: the expectations for scrap for the rest of year remain pretty steady and we feel like the pricing increases are very much warranted, and we think that the market demand is there, absent any 232 to support that.

So you can read into that whatever you'd like, but I think the dynamics are positive.

Actually, that's actually helpful.

And then the last question is longer term, but it ties into a lot of the questions that have been asked.

Generating still a lot of cash.

Historically, preference has been buy over build versus return the cash.

Obviously, a lot of moving parts here.

You've got some capacity limitations on the flat roll, but still opportunities on the long side internally.

My question is given all those pieces, are you changing your view in terms of your preference of buy versus build first?

And secondly, where does cash return fit into the mix?

I think we have a strong desire to continue to build where is organic, and we can have that sort of capital effectiveness or efficiency that I suggested earlier.

Those organic projects are just phenomenal from a payback and from a return perspective.

A brand-new greenfield mill is not necessary a focus of ours, given the supply-demand metrics kind of domestically and just globally.

We feel and it's been amazing how many opportunities are out there in the M&A world that seem to come to, and I wouldn't say come to market necessarily broadly.

They're not necessarily processes out there, but we have been approached several times with interesting opportunities, none of which of the larger scale ones have checked all our boxes.

I think you've seen in the past that we've been disciplined.

We're not going to be emotional.

We recognize the cash generation capability of the company and the cash build, understand that fully.

But we see opportunities come before us, and we will continue to assess those.

If one ticks the right boxes, we will move forward.

From a capital allocation perspective, just generally, we're really in the same spot.

And our first and foremost focus is for that growth, both organic and inorganic.

And then in the meanwhile, we increased the dividends the first quarter, and we'll continue to have a positive dividend profile as we see our cash flow structurally continue to be sustainable at a much higher level.

And then we use the lever of the buyback on to give additional value to shareholder as appropriate as we generate free cash flow in front of or behind the acquisitions, and that's what you've seen us doing and that's what we intend to continue to do.

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

I'd like to turn the floor back over to Mr. Millett for any closing comments.

So thank you, Melissa, and thank you for spending your time with us today, those still on the call.

Thank you to all our employees here on the call or not.

You've done a phenomenal job, continue to do a phenomenal job.

Customers, thank you for your support.

And as I said earlier, we're working diligently and hard to create value for all of us, and we're excited, we're excited as to how the company is positioned for the next 2, 3, 4, 5 years.

So thank you, and have a good day and be safe.

Thank you.

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

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