Steel Dynamics Inc (STLD) 2017 Q3 法說會逐字稿

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

(Operator Instructions) Please be advised, this call is being recorded today, October 19, 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'd like to turn the call over to -- turn the conference over to Tricia Meyers, Investor Relations Manager.

Please go ahead.

Thank you, Doug.

Good morning, everyone, and welcome to the Steel Dynamics Third Quarter 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 statements and predictive, typically preceded by believe, expect, anticipate or words of similar meaning.

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

Such statements involve risks and uncertainties related 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 Third Quarter 2017 Results.

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

Well, thank you, Tricia.

Good morning, everyone.

Welcome to our third quarter call.

We appreciate you all sharing time with us today, and I'd like to thank the entire SDI team for maintaining a strong quarter-over-quarter performance in what was a challenging market environment, and also express my sincere appreciation to our customers for their continued loyalty and support.

Also, I'd like to express our sympathy to those impacted by the hurricanes.

Thankfully, our employees and their families remain safe during the storms, but our thoughts and prayers remain with those less fortunate.

And before I pass it over to Theresa to comment on our third quarter financial results, I'd like the team to wish her a happy birthday.

Happy birthday, Theresa.

Theresa, the floor is yours.

Thank you.

Perhaps everyone need know that.

(inaudible)

Good morning.

I also want to recognize the strong performance of the team, really, across the entire company.

All the platforms performed very well.

Our third quarter 2017 net income was $153 million or $0.64 per diluted share, including debt refinancing and repayment charges at $8 million pretax or $0.02 per diluted share.

And for those of you that are wondering, that $8 million is actually included in the other expense on the income statement.

Excluding these items, our third quarter 2017 adjusted net income was $158 million or $0.66, within our adjusted guidance of between $0.63 and $0.67 per share.

Third quarter 2017 revenues were on par with sequential second quarter sales at $2.4 billion, with increased revenues across all 3 platforms, as average quarterly sales prices remain fairly steady and volumes marginally increased.

Our third quarter operating income increased 2% sequentially to $271 million, with improvement realized across all 3 platforms, but primarily a result of higher engineered bar, structural and merchant steel shipment despite continued pressure from excess domestic production capacity and elevated imports for structural merchant steel products.

For the third quarter 2017, total steel shipments increased 2% sequentially to 2.5 million tons.

Flat roll shipments were slightly lower while long product steel volume increased 6%.

And for those of you who are tracking your models, our flat roll shipments, hot-rolled coil and pickled and oil shipments were 863,000 tons in the quarter; cold-rolled, 136,000 tons; and coated, which includes painted and galvanized, 734,000 tons.

For steel, operating income increased $6 million or 2% to $280 million in the quarter, a result of higher long product shipment outpacing marginal metal spread compression.

Our average quarterly external steel selling price decreased $1 per ton to $778 in the third quarter, and our average scrap cost increased $2 per ton to $305.

For metals recycling platform, ferrous metal spread expansion did improve average quarterly scrap sales price and relatively steady shipment, resulting in third quarter 2017 operating income of $21 million.

Additionally, the team has done a great job optimizing cost throughout the business, with year-to-date 2017 operating income of $62 million, more than doubling last year's performance.

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

Metals recycling continued to support our steel mills, and it's 62% of their ferrous shipments internally.

Our fabrication operations achieved record shipments for the third consecutive quarter, a continued indicator that the nonresidential construction market is improving.

Order backlog and order entry also remained robust.

Third quarter 2017 operating income increased sequentially to $22 million, an 8% improvement related to higher shipment and some improvement in average realized sales price.

During the third quarter 2017, we generated cash flow from operations of $226 million.

Year-to-date, we've generated $548 million, with operational working capital growing by $231 million based on overall market improvement.

Year-to-date capital investments totaled $128 million.

We estimate full year 2017 capital expenditures to be about $190 million for the year.

We maintained our cash dividend for the third quarter at $0.155 per common share, and we've repurchased $237 million of our common stock this year, with $99 million repurchased from the third quarter alone.

We have $188 million that remained authorized pursuant to our $450 million program, which we initiated October 2016.

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

In September, we issued $350 million of new 4.125% senior notes due 2025 to repay our existing 6.375% senior notes due 2022.

At September 30, 2017, we repaid $183 million of the existing senior notes, repaid the remaining amount of $167 million on October 13.

As a result, our September balance sheet reflects excess cash and current debt of $167 million each.

As mentioned, third quarter 2017 pretax earnings were reduced by $8 million as a result of refinancing.

Given the October final call date, fourth quarter 2017 pretax earnings will also be reduced by $6.6 million related to the refinancing charges.

After giving effect to the October payment, total debt of $2.4 billion remains consistent and liquidity remains strong at $2.1 billion, with $935 million in adjusted cash and $1.2 billion of available revolver.

These transactions extended our overall debt maturity profile and provided an estimated annual interest savings at $8 million, an incredible outcome.

The team did a great job, and we appreciate the continued support from the capital market.

Third quarter 2017 adjusted EBITDA was $347 million, with trailing 12-month adjusted EBITDA at a near-record $1.4 billion.

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

We're squarely focused and on track with the continuation of sustainable, optimized value-creation.

Mark?

Super.

Thank you, Theresa.

As we sign in best-in-class financial results, the welfare of our employees remains our crucial focus though.

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

Our safety performance continues to improve and remains significantly better than industry averages.

So far this year, we have further reduced our total recordable injury rate, 19%, with 76% of our locations being incident-free.

A sincere thanks go to the entire SDI family for an outstanding job.

I challenge each and every one of us to remain focused and strive toward our ultimate goal: zero-incident environment.

The steel platform performed well in the quarter.

Our production utilization was 92%, once again markedly better than the estimated domestic industry rate of 75%.

This is due in large part to our having one of the most diversified and value-added product portfolios in the industry.

In aggregate, we still have over 1 million tons of unused steel shipping capability, most of which is highly correlated to the construction sector.

Demand from construction sector continues to improve.

Energy still has a long way to go, but we have seen a continued positive demand trend.

We're also seeing improved demand for heavy off-road equipment and more general industrial manufacturing accounts.

Conversely, demand from the domestic automotive sectors turned down from a record [effort], yet steel remains at historically strong levels.

Fortunately, we continue to gain market share, particularly at the Columbus Flat Roll Division as they focus on automotive, direct sales and leverage our cost-effective access to the Mexican market.

But forecast continued to show increased demand.

Aside from market dynamics, we continue to position our company for the future through reinvestment in our operations and to improve and manage our destiny.

Within our flat roll operations, 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 came online this past May and is ramping up quickly.

We also continued to ramp up the production of the new $100 million paint line at our Columbus Flat Roll Division, which initially -- 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.

Complementing the 2 existing Indiana paint lines, this new line is a state-of-the-art facility, producing high-quality HVAC, appliance and double-wide steel.

Its geographic location facilitates the economic access to the Southern U.S. and Mexican markets.

We anticipate the new paint line to be running close to full capacity by midyear 2018.

Columbus continues to be a significant earnings catalyst.

The changes the team has already made are transformational, and there are 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 through-cycle profitability and will continue to benefit the coming years as well.

Despite an improving nonresidential construction trend, long product capacity utilization remains challenged, running on average between 70% and 75%.

Much of the increased demand over the last 18 months has been absorbed by imports of standard beams and shapes, along with a considerable volume of prefabricated structural steel.

Nonetheless, our structural and merchant steel shipments increased in the quarter.

To ensure increased future through-cycle utilization, we are investing in our long product steel mills.

We have 3 specific initiatives to increase the utilization at our Structural and Rail Division, which has been running on average between 70% to 75% capacity of late.

First, we are growing the production of SBQ quality beams to send to our engineered bar division as it has excess rolling capacity.

This should improve through-cycle utilization at both facilities.

Over the next 18 months, we plan to increase this volume to an annualized rate in excess of 150,000 tons.

This past quarter, we transferred about 23,000 tons.

Second, we further diversified our structural division's product offerings and recently began the production of large, unequal length angles and heavy flats.

We plan to enter the market in full, the first of next year, selling as much as 100,000 tons annually.

Third, we recently announced a $75 million expansion to utilize existing access in melting and casting capability there.

The project will further diversify our product portfolio and market sector exposure through the annual production of 240,000 tons of reinforcing bar, coiled custom lengths and smooth bar.

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

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

We expect being in operations by the end of 2018.

Our Vulcan operation will provide a pull-through opportunity for this rebar project as they currently consume between 30,000 to 40,000 tons of smooth bar annually.

In aggregate, these initiatives provide for approximately 500,000 tons or over 25% of potential additional annual utilization of our Structural and Rail Division over the next 24 months.

We believe this will provide a material improvement in future through-cycle utilization and obviously, profitability.

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 to multi-strand slitting and rebar finishing of 200,000 tons per year.

Similar to our Midwest investment, we expect to have strong market penetration as we will be one of the largest independent producers of rebar in the Virginia area as well.

We expect commissioning to begin in the first quarter 2018.

The profitability of our metals recycling platform remained aligned with a strong performance demonstrated in the first half of 2017, with third quarter ferrous metal spread expansion related to higher prices and steady shipments.

Additionally, the team continues to optimize administrative and operating costs.

Year-to-date, operating income more than doubled compared to last year.

We anticipate good scrap close to continue throughout the fall and winter months as the areas devastated by the hurricanes begin to remove debris and rebuild.

We anticipate this added supply to begin impacting the supply chain in the coming months, further stabilizing the scrap price environment.

The fabrication platform also continued its strong performance, achieving the third consecutive quarter of record shipments.

Order backlog remains strong.

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

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

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

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 positive insight into the continued strength of nonresidential construction activity.

On a macro market basis, we continue to have a positive view on domestic steel consumption.

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

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

Additionally, we believe there will be continued growth in construction and the energy sectors.

This will be a solid foundation for a strong pricing environment as the macro market drivers continue to be persuasive.

General global economies are showing some positive momentum.

Strong internal China demand has reduced absolute level of exports and driven strong price appreciation.

And additionally, one-off curtailments will add to pricing pressure -- upward pricing pressure.

European pricing exceeds domestic pricing on a delivered basis.

So the arbitrage of domestic to global pricing has essentially evaporated, with no incentive to apply foreign material.

Imports will continue to decline through the fourth quarter.

The demand trend is positive, and inventories are on the low side, and normal lead times are pretty healthy.

These dynamics could create a tight market and lead to significant price appreciation as we saw at the end of last year.

In fact, this appears to already be happening as recent order input rates have increased considerably as reflected by the recent price increases.

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 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 organic and transactional growth.

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

And I thank each 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, for our customers, for our employees and shareholders alike.

I look forward to creating new opportunities for all of us in the years ahead.

So again, thank you for your time today.

And Doug, please open the call for questions.

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

I'll start with one question on the Flat Roll Division, please.

Can you just give us a better sense of the anticipated impact on flat-rolled volumes in the fourth quarter and anticipated outages that you flagged in the call this morning?

So Seth, the $25 million collectively does include excess expense, but it also includes the impact of those reduced volumes.

We specifically didn't foresee any amount or specific volume reductions in the release itself, but it does include both of those items.

And a significant part of that relates to reduced volume versus the extra expense.

Can you just give us some sense of the tonnage that might be impacted?

And one -- I have a follow-up question to that as well.

You flagged earlier the impact of elevated port inventory, there was an overhang on price in the last quarter.

Can you give us a sense of what the situation is like today, please?

I think, Seth, the impact from both Columbus and Butler is going to be in the vicinity of about 100,000 tons between the 2 facilities.

And about the extra volume that are -- were at the port?

Well, I don't think there's any way of truly getting a sort of a consolidated volume.

I do believe, obviously, people or traders themselves bought ahead of Section 232.

We do believe that, that volume is -- or has been turned down over the last several months.

And we believe that the market will tighten.

That, in conjunction with the decline in imports, reported imports, will tighten the market by the end of fourth quarter.

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

Mark, you just mentioned that you've seen order input rates ticking up recently.

Maybe could you give a little more color there?

Is that in -- is that more in flat products or long products?

And I guess, how recently have you seen that tick up, and what kind of magnitude is it?

On the long product side, things are relatively flat, order input rate-wise.

The increase has been definitely on the flat-rolled sheet side of our business.

It's probably just this last week that we've seen that, but it's considerable.

And it parallels the market that we saw last year.

If you look back to last year, I think it was September, in that case, there was a sort of a lull or hesitation with our customer's sort of input -- order input rate.

It was very short-lived, 4 weeks.

And all of a sudden, things normalized.

And I think we're seeing that same market environment today.

People anticipated, I think, that the stock market was going to come up here in October, held back their orders accordingly.

And now people are getting back in the market.

I think our customers are recognizing that the market has bottomed.

And we're seeing, as I said, a very positive order profile.

That's very clear.

If I could just follow-up with one more.

Let me ask you about something that I'm sure you've been asked about a lot recently.

Maybe comment on graphite electrode prices, your contract situation, inventory and maybe just an overview of your -- of the situation there.

Essentially, it hasn't impacted us in 2017, and we have inventories cleared through the first quarter going into the second quarter of next year at 2017 prices.

I think there's a little bit of a panic in that marketplace.

I think people need to recognize that commodity markets have a natural ability to balance themselves, to reach kind of an equilibrium.

The reason for that, normal market skyrocketing stock prices, I think, has abated a little, and we expect a more normalized pricing environment to prevail in 2018.

I think people are already seeing an expanded needle coat supply availability today.

Given our long-standing relationships, and some of us have been working with these folks 25 to 30 years now, we will be considered a core customer, which ensures the committed supply through 2018.

So supply, for us, I don't think is an issue, whatsoever.

I think though, one can expect the tighter market increased raw material input costs for the electrode producer will support somewhat higher pricing.

Although I'm confident that they recognize they can't put the electric arc furnace producer at a cost disadvantage to the integrated competition as they would lose market share.

So prudence will prevail.

Our expectation is for pricing to be at a more normalized level of 2 to -- in the range of 2 to 3x 2017 pricing.

And I think, as you probably know, that's not a significant impact to SDI as electrodes are currently less than about 0.5% of our costs.

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

On the engineered bar side, the level of shipments, I don't think that we've ever seen these in years.

Maybe this is even potentially a record.

I was just wondering if you can discuss kind of how you're seeing the end market shaping up, and maybe just give a little bit more color on the strength that we've seen this year.

Honestly, we added the 300,000, 350,000 tons of capacity back in -- when was that?

18 months ago, 2 years, and that has been ramping up.

So that's given us -- provided a new capability.

So we still have quite a long ways to go to fill out that utilization, which is good news.

I think in -- almost in every market, we've seen order strength.

We've been picking up automotive.

That's not necessarily because of the automotive strength, but the expansion that we made down there.

If you remember, is on the lower diameter -- smaller diameter size range, which is principally the automotive rank.

So we've been penetrating and picking up market share.

The team has done a very, very good job there.

Off-road equipment, heavy machinery has been up.

The Caterpillars of the world, John Deere, I think, are showing a positive momentum, so that's been good.

And we've also been a beneficiary of the recovery in energy markets.

We put material into stainless tube markets and also into forging for valves and those sorts of things.

So generally, pretty good there.

Industrial, kind of manufacturing is also picking up a little bit.

The only area of weakness and has been weak for more than 2 years now, and that's agriculture.

Novid, and just as a reminder, this $325,000 -- or excuse me, 325,000-ton expansion in the smaller diameter really relates to the engineered bar.

Steel mill itself has extra rolling capacity versus melting capacity.

And that's the reason for one of the initiatives where we'll be spending [build] from the structural mill down to engineered bars so we can fully utilize that 950,000 tons of rolling capacity.

Got it.

Great.

And then the same question is just given the strength that we've seen, I guess, on your long products relative to the flat products recently, do you guys see kind of a path to utilizing this million tons of latent capacity?

I know we've talked about it in the past, and it seems like a great opportunity for you to unlock potential leverage in the model.

And so just wanted to see if you guys had any thoughts about kind of if the path to utilizing that is becoming more clear now versus, say, 6, 12 months ago?

I think the nonresidential construction markets will continue to incrementally increase.

And as such, we will increase with that.

It's a very, very competitive market arena.

If there was an infrastructure build, I mean, it will be momentous for us to utilize that additional capacity.

But we always have focused ourselves on what we can do to control our own destiny.

We don't manage to hope.

We don't hope that markets are going to come back.

We don't hope that we're going to have trade cases to protect ourselves, hence, the diversification projects that we've got in place.

Given another 12 months, the Structural and Rail division will have a total different complexion, and I believe not only like the transformation we've had at Columbus, but we'll see the same at Columbus City.

And in addition to that, you have the 500,000 tons that we're focusing on, which is kind of half of that volume at Structural and Rail division, but you also have the additional 200,000 tons related to rebar at the Roanoke Bar Division.

So there's a lot of things internally that will start to, hopefully, unlock in the next 12 to 24 months.

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

Mark, it was interesting you were talking about some improvement in the last week.

But I guess, I want to ask you why we've seen the slippage in the spot price because in hot roll, right?

As you say, your imports have been flipping, and they haven't been competitive.

We've heard that for the last month or so, and yet we've seen a spot price lift.

We just hear that the mills are going around looking for business.

Is that typical seasonality?

Or is there something more to be concerned about there?

Is that just with scrap prices?

Can you tell us why maybe we've seen the spot market erode a bit?

Well, Timna, I think we are actually a little confused by it as many of our customers are.

And again, it parallels last year.

And if you've asking why we saw 4 weeks of -- the industry, not just as SDI, but the industry saw a 4-week low back then.

I think it's the same this year.

My only explanation will be, again, anticipation of lower scrap pricing in October, just to take the foot off the pedal.

We see underlying demand.

Underlying demand that doesn't change overnight.

I believe underlying demand in October last year continue on its path, and that demand is in place today, this year as well.

Okay.

So some seasonality you're saying is a contributing factor?

Seasonality to me is season which is 2 to 3 months or a quarter.

This literally is 4 weeks.

Okay, fair enough.

And my other question was really about you and several of the other mills have been targeting the Mexican market, new galv lines and so on.

There's been quite a lot of activity in Mexico or near the Mexican border.

I just want to ask, I'm getting this question from clients, but are you hearing any -- are you getting any concern over the NAFTA rework and what that might mean for your business in the region going forward?

I don't see any renegotiation of NAFTA impacting our business.

The U.S. and Mexico are both incredibly dependent on each other.

There's a massive expansion of demand of industrial activity in Mexico that the U.S. is dependent upon.

And so I don't see any inhibition of flow between the 2 countries.

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

I just had a question on the merchant bar and beam markets, obviously, pretty substantial price cuts, at least in terms of the list pricing.

I know part of that was for pricing transparency.

But wondering if we should think about any modest realized pricing pressure for you in Q4, or are you anticipating those prices are going to be reasonably stable versus where they were because pretty draconian kind of cut from our perspective.

I would agree it was draconian, but the impact will be somewhat flattish.

There could be some of the smaller consumers that see that drop, but there will be kind of an averaging out of just the pricing meeting where the actual pricing is planned out.

I appreciate that, Mark.

And a follow-up for me is on the side of rail.

I know that's tucked in the structural division right now, and we don't have as much visibility on it.

But just curious in terms of what you're seeing in that market in terms of demand and pricing dynamics.

Phil, this is Glenn Pushis.

I would tell you that we're seeing this to be solid through the year, but flat through the fourth quarter.

And we anticipate next year that we'll still see the standard stability that we've seen in the last 2 years.

Obviously, rail has its challenges, right, like the railroads platforms have their challenges.

So they look at basically a flat buy through 2018 is what they're telling us.

So those are -- it's actually an interesting point when you look at the Structural and Rail Division shipment.

You would have seen the typical -- there is seasonality within rails.

So the third quarter is always the weakest quarter of rail volume as the railroads determine what they're going to be needing for the coming year.

And so that additional bump in volume is really on the construction side.

It's on the wide flange beam side, which, again, points to the strength of the construction market itself.

So we would expect fourth quarter rail shipments to actually improve.

Over the third quarter.

Got you.

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

I just wanted to ask what your view was on the recent price hike from a competitor, again to beat a dead horse, but do you think that we're just exiting this kind of 1-month air pocket and there is rationale in the market to take pricing higher?

Again, not to be redundant, but the macro environment at least would suggest to me that the pricing should already be higher than where we are today.

We've seen this low.

The aftermarket pricing came up some and softened.

It didn't come to the same sort of depth of softening that we saw last year.

It came up but not as much.

And everything seems to be in place for a stronger market again.

China is reversed.

They've got sort of a better internal demand.

Their absolute exports levels have tripled down, and not just tripled down, or probably, I don't know, 1/2 what we were last year, year-over-year.

And that their pricing is or just Asian pricing in general is appreciated.

We have Europe that's kind of come out of the depths of steel recession that they are seeing some positive movement.

They're pricing on a delivered basis to the U.S. is at par, if not more expensive than the domestic pricing.

And so the arbitrage really is just, as I said earlier, has just evaporated.

And if you look at the historic spread between range of spread between domestic pricing and global pricing, we should be much higher than where we are today.

Given that the demand trend is positive, service centers have come up a little.

They're not at that historic low that they were 2 or 3 months ago, but they're still at a reasonably low level.

And imports should be moderating, continue to moderate and decline through the fourth quarter.

So I just see it setting up a very, very positive pricing environment for the first quarter of '18 and all the way through '18.

Right.

So the global setup is great, but what about domestic recent scrap weakness being down $30, $45 month-on-month.

Do you think that there's a little bit of pause in the market as clients might be waiting to get some of that benefit of the lower raw material cost passed on to them?

I think they have waited, but they are now returning to the marketplace.

Russ, do you want to give some color on scrap?

Oh, yes.

I think, certainly, we saw a pressure in October.

But our outlook is, beginning in the fourth quarter here, is that it's kind of like -- it's going to get marginally stronger on scrap side.

Take a look at a time when the outages are better out in the fourth quarter in steel mills, but I think we'll see a trend upward for the rest of the fourth quarter.

Certainly, we'll add costs to those -- to all steel mills.

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

Secondly, I've noticed that one of your potential suppliers is putting up $700 million towards the plant in Toledo, which is right on the Indiana border, and spending another bit of money to expand the production capacity in Canada.

As you guys looked at SBQ and flat rolls and that sort of thing, and sort of forward towards the future, do you see yourself picking up market share in end products, whether it's flat rolls or SBQ relative to an integrated in the next 5 to 10 years?

Well, I think we've shown that we've been picking up market share already, and that will certainly continue.

Butler, obviously, is getting to the sort of a capped-out position relative to volume.

It's at 31-ish today, and we can still tweak a little.

But those guys have been tweaking for 20 years, amazingly, tweaking for 20 years.

I think we're at a sort of cut capacity there.

The Columbus, with the 3.4 million ton production capability today, that mill really hasn't sort of pressed.

We spent the last 2 years -- well, since we pushed reconfiguring the product portfolio, diversifying the market exposure, and the team has done a phenomenal job there.

They've done a phenomenal job developing new products.

And part of the shutdown here in the fourth quarter is to change our coiling capability so that we can coil thicker, wider, higher strength materials, so that it's going to be expanding our product mix.

But that mill will go into sort of optimization of productivity, so I think there's certainly volume growth there.

And we will continue to penetrate and increase market share.

And Brett, we can't forget the tax as well.

There's another probably 200,000 to 250,000 tons of capacity available to tax as well.

So there's still room on the flat roll side.

All right.

So I mean, to put a final point down, it's really the -- like in the gassing and various things added, perhaps in the future, towards the -- perhaps 10 years in that steel dynamics could make a bit of a curve.

Well, we have that in the gassing capability at the Columbus facility.

Again, we continue, not just as, but this industry continues to work its way up the quality curve, so to speak.

We're able to supply pretty much anything on the car today, with the exception of the exposed skin.

The exposed skin volume actually has kind of deteriorated over the last 5, 6 to 10 years as plastics and other things have become dominant there.

And so the exposed volume total is not a massive part of the automotive segment.

And so we're really not missing out on much.

Most of the car can be supplied by Butler and SDI today.

Our next question comes from the line of Curt Woodworth from Crédit Suisse.

So 2 questions.

Just one on the electrode dynamic, you talked about sort of the normal market price being roughly 2 to 3x above this year, but we're clearly not in a normal market.

So do you think that the contract price for next year would settle something meaningfully above that?

And have you guys thought about implementing electrode surcharge, which I think some of your competitors have?

I think -- we've got someone interfering here.

But I think the -- when I say 2 to 3x, I believe that's probably the pricing range for '18.

And -- but again, there's going to be a bifurcation, I do believe, between core customers and sort of new entrants.

And probably folks in Europe and Turkey, they might see a very, very different price.

But I think 2 or 3x could be an expectation for next year.

Okay.

And then with regards to capital deployment, running pretty low leverage on the balance sheet, generating a lot of cash.

Do you see the potential for something more transformative in terms of the acquisition opportunity for you guys this year?

And what would be your comfort level in terms of, I guess in the short run, how much leverage you would be willing to put on the balance sheet?

Well, you never know when opportunities arise.

So timing-wise, I would say it will happen when it happens.

We, I think, have shown a discipline in the past.

We're not emotional and don't spend the cash that we got on the balance sheet.

So we are going to be prudent.

I would tell you that the last 18 months, the pipeline has been relatively full of opportunities.

And that pipeline remains full.

I mean, we keep assessing different projects in 3 principal areas: one, obviously, steel.

You kind of forget that we are steel producers, and our teams to do a pretty damn good job at that.

They also do a phenomenal job at downstream processing, sort of value-add opportunities.

And then thirdly, there is a focus on manufacturing where we can increase our pull-through volume from our mills.

And Curt, regarding the leverage, I would just add to that.

Yes, our preference is for through-cycle net leverage to be less than 3x.

So obviously, the capacity on the balance sheet with EBITDA at $1.4 billion is significant enough for us to be able to do something transformative and yet still be very strong, I think, from a credit profile.

And in addition to that, as we are looking at all these M&A opportunities, which are several, we also are still redeploying our resources through both the positive dividend profile, which we've capped over the last numerous years, as well as levering the repurchase program, which you saw us utilize that more aggressively in the third quarter.

And then we're thinking that, that could be something that we do on a go-forward basis as well.

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

My question is more about the infrastructure market.

Obviously, the U.S. dollar was very strong, making it attractive for Turkey to export over here on the long product side.

Obviously, with the weakening of the U.S. dollar, it's become less attractive to them.

Have you've seen pricing begin to expand in the infrastructure markets?

And do you think that there's possibly some demand -- some additional demand coming from the rebuilds and even on the auto side with all the cars that were lost in the storms?

I believe, certainly, on the auto front, it -- well different people report such numbers, but anywhere from 500,000 to 800,000 cars are lost.

Those folks will come back to market.

Obviously, there's a certain timing for insurance, so reconciliation on all of that process for them to come back.

So I would say that on the automotive side, the disaster, unfortunately, will bring a little bit of a bright light there.

And the rebuild, I do believe will have an incremental impact on not just construction performance themselves.

I think we are forecasting just incremental growth in our known products for 2018, metal hockey stick.

Unless there were to be an infrastructure build, then it would be quite considerable.

Aside from the things that we're doing internally with the initiatives that we mentioned in Structural and Rail Division.

Yes, that just means the marketplace itself.

Right.

And have you began to see pricing move up in those markets at all?

No, things are still relatively flat there.

Our next question comes from the line of Seth Rosenfeld with Jefferies.

A few more follow-up questions, please.

When it comes to the beam market, given the continued import pressure that you've seen and the recent price cut had to be taken, just wondering if you can comment on why there's been no trade action here to date?

Is it an area that you might be doing some work on, we could expect some progress in 2018?

Or is there a reason why there's going to be less progress in this direction for beams as we've seen on the flat side to date?

On the beam, well, in the beam market, it tends to be a much more complicated process to prove injury.

It's a very diverse, fragmented industry.

We've got hundreds and hundreds of different fabricators over there.

And so just the process to bring a trade case is difficult.

There is work being done on that.

That's where mostly sort of Section 232 could probably get the most benefit, certainly the most benefit to SDI, because I do believe that the prefabricated structurals and just, what I call, state-to-state imports are going to be included, we believe.

That's great.

And just one more, please.

I remember last quarter, you flagged some challenges in the ramp-up of the Butler galv line and also the paint line in Columbus.

Can you just confirm what status of these 2 projects and perhaps expected ramp-up schedule in the 2018?

The galv line at Butler, it was anticipated startup progress.

It's actually moving along very well still.

We expanded the capabilities of the line.

So as we have more experience, we're allowing the sales force to go out and take advantage of that.

That's proceeding exactly as we had hoped.

The paint line at Columbus is also doing very well.

There's a lot of trials and approval processes that are involved as we enter some new markets in the Southern U.S. And those probably are doing very well today as well.

These are very complicated products.

So we've been having our customers in our shops helping us.

And it's really been a great opportunity for the team, and all of our paint line folks have been circling back and forth between the various lines we have.

So it's a great time, and we think we have good progress to earn some awards for next year.

So as more and more of these are approved, we see the ramp-up picking up.

So we kind of set aside space for these as we get products approved, and then we grow into them.

So we don't want to let people down, but we're also pushing the team pretty hard.

Just to add.

When you think about it from a timing perspective, the paint line in Columbus, we believe, will be at basically a full run rate by mid-2018.

And I would expect that market dependent and you can utilize much of that additional 180,000 ton of galvanized capacity in Butler next year as well.

That's the plan.

And the specific startup issue we had on the Galvalume painted product in the second quarter is absolutely totally behind us.

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

Recently, the Chinese have really ballooned their export of steel scrap, sort of 400,000 tons in August, less than 900,000 for the 8 months.

Are you seeing any of that material coming here?

And in the past, there's some quality issues by grade and what have you with Chinese scrap, can you talk about that a bit?

Well, I don't think we've been a major consumer of Chinese scrap.

We certainly have been a consumer importer scrap from other countries at our Columbus, Mississippi mill.

But Russ?

We have not seen any Chinese scrap, at least on -- in our region.

They may have seen some on the West Coast.

But if there's any, I think most of that stuff is going Southeast Asia.

What about the quality?

I guess, if you haven't seen any, you wouldn't -- I know how good they're doing as far as dividing up to different grades and what have you?

Yes, Chuck, we haven't seen it to say one way or the other.

That does conclude our question-and-answer session.

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

Well, thank you, Doug.

And again, once again, thank you for your time today.

Thank you, employees, for doing a phenomenal job in the quarter.

Again, quarter-over-quarter, good performance relative to all our peers was, I think, significant, shows the differentiation in our company.

We are dependent on our loyal customer base, so thank you customers that may be listening.

And to the shareholders, again, thank you for your support.

We endeavor each and every day to make sure that we have a better shareholder appreciation of anyone else in the planet on the steel sector.

So thank you.

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

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