Steel Dynamics Inc (STLD) 2017 Q4 法說會逐字稿

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

(Operator Instructions) Please be advised this call is being recorded today, January 23, 2018, 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, Brenda.

Good morning, everyone, and welcome to Steel Dynamics' Fourth Quarter and Full Year 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 from 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 products steel group; and Barry Schneider, senior vice president, flat roll steel group.

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

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

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

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

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

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

Super.

Thank you, Tricia.

Good morning, and happy 2018.

Welcome to our Fourth Quarter and Full Year 2017 Earnings Conference Call.

We appreciate you sharing your time with us this morning.

I'd like to thank the entire SDI team for their dedication and exceptional performance last year.

Along with the support of our customers, vendors and shareholders, we collectively achieved best-in-class results.

And most importantly, we did it safely, safer than ever before.

On many measures, 2017 was a record year, both operationally and financially: record steel and fabrication shipments, record operating income of $1.1 billion, record EBITDA of $1.4 billion.

And the momentum continues.

The underlying positive market fundamentals, coupled with our own growth initiatives, have us really excited for the coming year.

But to begin this morning, I'll ask Theresa to comment on our results.

Thank you, Mark.

Good morning, everyone.

I add my thanks and congratulations to the entire SDI family.

It really was a tremendous year on many fronts, and numerous milestones, as Mark mentioned, were achieved: Record sales of $9.5 billion, with increased pricing across all platforms, and record steel and fabrication volumes; record pretax earnings of $935 million; and EBITDA of $1.4 billion.

And as Mark said, most importantly, we accomplished all of this with record safety performance.

To recognize and show appreciation for the tremendous performance achieved, in December, we paid a well-deserved $1,000 cash performance bonus to each nonexecutive eligible employee, totaling just over $7 million.

Full year 2017 net income was $813 million or $3.36 per diluted share, which included the following items: third and fourth quarter debt refinancing charges totaling $15 million and a onetime tax benefit of $181 million resulting from the revaluation of our deferred tax assets and liabilities in connection with the recently enacted U.S. federal Tax Cuts and Jobs Act.

Our current estimate for our 2018 effective tax rate, federal and state combined, is between 24% and 25%, which is a meaningful decrease from our recent history where we were closer to 35%.

Excluding these items, we still achieved record annual net income of $641 million or $2.65 per diluted share.

For the fourth quarter, our net income was $305 million or $1.28 per diluted share.

Excluding the onetime tax benefit of $0.76 that was unknown and specifically excluded at the time of our guidance and the fourth quarter refinancing cost of $0.02 per diluted share, our fourth quarter 2017 adjusted net income was $0.54 per diluted share.

Consolidated fourth quarter 2017 revenues were $2.3 billion, 4% lower than the sequential quarter, while operating income was $196 million, representing a 28% sequential decline.

Both declines were a result of lower shipments and metal spread in our steel operations.

Specifically for the fourth quarter, steel shipments decreased 4% sequentially across both the flat roll and long products divisions to 2.4 million tons.

Steel metal spread also compressed, as our average quarterly sales price declined $17 per ton in the fourth quarter and our average scrap costs consumed only decreased $5.

Of note, though, of the $17 decline in average pricing, $9 per ton was actually associated with mix shift, and most of that was within the flat roll group.

Our Columbus and Butler Flat Roll Divisions also successfully completed planned improvement outages, which resulted in less shipments and increased costs in October, reducing fourth quarter earnings by approximately $27 million.

The result was fourth quarter operating income of $270 million -- excuse me, $207 million from our steel operations, about 26% less than sequential third quarter.

For the full year, our steel operations achieved numerous performance milestones, resulting in record volume of 9.7 million tons and operating income of $1.1 billion.

Annual metal spread also improved, as average sales price increased more than our average scrap cost.

For our metals recycling platform, ferrous metal spreads stayed steady in the fourth quarter despite lower average quarterly scrap pricing.

Conversely, nonferrous shipments and metal spread improved, resulting in fourth quarter 2017 operating income of $22 million.

The team has done a great job optimizing costs throughout the business.

They achieved full year operating income of $85 million.

This is more than double last year's recycling performance.

We are effectively levering the strengths of our vertically integrated model, which benefits both the steel mills and the scrap operations.

The mills recycling group shipped 63% of their ferrous scrap to our own steel mills, increasing scrap quality, [build] efficiency and reducing working capital.

In fabrication, our fourth quarter 2017 operating income was $22 million.

For the full year, the team achieved yet another year of record shipments, and order backlog remains very healthy.

2017 fabrication operating income was also strong annually, but it declined slightly to $88 million based on higher-priced steel inputs.

We generated strong cash flow from operations in 2017 of $740 million, and free cash flow, after fixed-asset investment, of $575 million.

Operational working capital also grew $251 million during the year, based on overall market improvement resulting in higher customer accounts and inventory values.

Full year capital investments totaled $165 million.

We maintained our fourth quarter cash dividend at $0.155 per common share, after increasing it 11% in the first quarter of 2017.

We repurchased $252 million of our common stock in the year and have $173 million still available, pursuant to the $450 million board-authorized program which was initiated in October of 2016.

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

Based on our strong cash flow generation, we maintain liquidity of $2.2 billion, with $1 billion in cash and $1.2 billion of available funding under our revolving credit facility.

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

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

Thank you, Mark.

Super, Theresa.

So concerning safety, the team did a phenomenal job last year, achieving the seventh consecutive year of improved safety performance.

Each of the platforms set new records.

We reduced our total recordable injury rate by a further 18%, while 2/3 of our locations were incident free.

Clearly, the safety conversations and actions and programs that have taken place throughout the company are having an impact.

The safety and welfare of our employees will remain our #1 priority for all time.

My sincere thanks go to the entire SDI family for an outstanding job but, as always, challenge each of us to remain focused and to strive toward our ultimate goal: a 0-incident environment everywhere we work.

As Theresa outlined, the steel platform continued to perform at the top of the industry in 2017.

Our production utilization rate was 92% for the full year and 89% in the fourth quarter, once again markedly better than the domestic industry rate of approximately 74%.

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

And with over 11 million tons of annual shipping capability, we still have well over 1 million tons of latent availability as the markets continue to strengthen.

Demand from the construction and energy sectors continues to improve.

We are also seeing better demand for our heavy and off-road equipment, and more general industrial manufacturing accounts.

Demand from the automotive sector is still strong.

Although it's peaked from a historical perspective, it is expected to be incrementally higher than last year.

Fortunately, we continue to gain market share, especially at the Columbus Flat Roll Division, with our focus on automotive direct sales.

We also benefit there from a cost-effective access into Mexico, where forecasts continue to show increasing automotive-grade steel demand.

Domestic steel consumption improved about 5% or 6% for the year, and we believe it will grow further in 2018.

Our steel imports also rose in '17 by over 15%, representing over 30% of domestic consumption.

This just really has to change.

We are considered one of the lowest-cost steel producers in the industry.

We are ready to compete and we want to compete, but we must have a level playing field.

We can't compete with unfair trade practices such as those occurring today.

While I'm pleased with the recent decline in hot-rolled imports related to the successful past trade cases and a DOC affirmative decision on Chinese circumvention through Vietnam, the tremendous Chinese subsidized overcapacity remains a problem.

In particular, there are still massive imports of structural and fabricated structurals coming in from China, and historically high imports of coated flat rolled, along with pipe and tube, from Asian countries using Chinese steel.

I believe that, after an affirmative national security finding under 232 by the DOC, the President will be provided possible ways to reset the game to enforce the rules.

President Trump needs to provide a meaningful remedy that helps maintain and revitalize the U.S. steel industry while the Chinese overcapacity issue is being addressed.

But as usual, we remained focus on things we can control.

For example, we continue to position Steel Dynamics for the future through new investment in our existing operations.

A few that occurred during 2017 include the $16 million investment to the added galvanizing capacity at our Steel of West Virginia plant.

This value-added service is ramping up well beyond expectations and is expected to provide less than a 2-year payback.

$15 million investment that upgraded our Butler Flat Roll Division's galvanizing line, also adding an additional 180,000 tons of value-added coating capacity.

This project will have less than a 1-year payback.

A $100 million investment in a new paint line at the Columbus Flat Roll Division began operating in the first quarter of 2017.

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

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

It is on track to be running close to full capacity by midyear 2018, this year.

Columbus continues to be a significant earnings catalyst.

The changes the team has already made are transformational.

And there are still more to come, including production gains, value-add product mix shifts and additional cost savings.

The successful market and product diversification achieved over the last 3 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 remained challenged at 75%.

Much of the increased demand over the last 3 years has been absorbed by imports of standard beams and shapes, along with a considerable volume of prefabricated structural steel.

Prefabricated steel imports have increased over 80% in the last 5 years alone.

Nonetheless, the team did a good job, and our long products shipments improved 9% year-over-year.

But to ensure higher future through-cycle utilization, we are investing in our long products steel mills.

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

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

This should improve through-cycle utilization of both facilities.

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

And we're well on our way there with 29,000 tons transferred just this past quarter.

Second, we further diversified the mill's product offerings and recently began the production of large unequal leg angles and heavy flats.

We're just entering the market and plan to sell as much as 100,000 tons annually.

Third, we're investing $75 million to utilize existing excess melting and casting capability there.

This expansion will further diversify our product portfolio and market sector exposure through the annual production of 240,000 tons of reinforcing bar, including spooled, custom cut-to-length and smooth bar.

Our intended business model should be -- substantially enhance the current supply chain, providing meaningful logistic yields and working capital benefits for the customer.

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

And we plan to begin operations of that facility by the end of 2018.

In aggregate, these initiatives provide for over 500,000 tons or over 25% of potential additional annual utilization of our Structural and Rail Division over the next 18 months.

We believe this can provide a material improvement in future through-cycle utilization and 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 for multistrand 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 reinforcing bar in the Virginia area as well.

Equipment commissioning just started.

The team plans to begin selling product at the end of the first quarter of 2018.

Our metals recycling platform recorded a tremendous performance in 2017.

Despite selling a few noncore locations during the year, the team was able to maintain value while increasing metal spread and reducing costs throughout the year.

The result: annual earnings that more than doubled.

Prime scrap flow has been steady, and we expect it to stay that way.

The weather did slow the flow of obsolete scrap in December and again in January.

This, coupled with an uptick in export activity, has tightened the market a little, though we expect flows to pick up and the pricing environment to stabilize as the year progresses.

The fabrication platform also delivered an incredibly strong performance with another year of record shipments and strong earnings.

Our order backlog remains strong.

The ongoing strength of this business and continued customer optimism is a solid indicator that the nonresidential construction market is continuing to grow.

As an added benefit, our fabrication platform purchased over 330,000 tons of steel from SDI steel mills in 2017.

The power of this pull-through volume, when we source steel internally from our own mills, is a significant catalyst for higher steel utilization rates.

This pull-through strategy remains one of our focuses for ongoing growth.

We remain confident that the market conditions are in place to benefit steel consumption in 2018.

Domestic steel inventory levels have moderated.

World steel demand and pricing have structurally improved.

Domestic steel demand remains healthy, and we believe consumption will grow in 2018.

Our business model and the execution of our long-term strategy continue 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.

Our phenomenal team provides a foundation for our success.

And I thank each and every one of them for their hard work and commitment and remind them safety is always our first priority.

We continue to focus on providing superior value for our company, customers, employees and shareholders alike.

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

So again, thank you for your time today.

And Brenda, we'll take questions now.

(Operator Instructions) Our first questions come from the line of Brett Levy with Seelaus Capital.

Can you just give a little bit of an update on the Section 232 case?

Well, I think anything we give might be speculation, Brett.

I think we're probably as close as anyone to it, but I wouldn't proffer -- I won't put money on the table, other than I think it's going to be positive.

Just generally in trade, we're very happy.

And as we anticipated in our last call, the anti-circumvention ruling in -- against Vietnam was very, very positive.

And I think that's going to end up flowing into other countries as well.

And Vietnam itself imported about 450,000 tons of coated products, I believe, last year.

So that's generally positive.

More specifically, the past trade cases have eroded import volumes in certain areas, such as hot-rolled coil.

Volumes in general remain incredibly high, as the Chinese subsidized overcapacity just remains in place.

And I think it's in several areas that it's a problem.

That is in -- obviously, in cold-rolled sheet and cold-rolled galvanized on the flat roll side.

Those were at record import levels last year, and also in structural.

We're still seeing about 1 million tons of just straight bar -- straight beams coming in, along with about 1.2 million tons of fabricated -- or prefabricated structurals, so you have about 2.2 million tons of structural imports against a 5-million or 6-million-ton market.

So that is a major issue, along with pipe and tube export -- imports from Korea.

And that's where I think Section 232 can have the greatest impact.

I do believe there'll be a positive remedy.

And if you just look at yesterday's announcement about washing machines and solar panels, I think it just gives you insight as to the climate and the thinking of the administration.

And I am very, very confident that the administration will give a positive ruling for us.

And you addressed most of this, but I mean I'm just going to ask for a little more granularity.

If you look across your product mix, what are the products that are most likely to be as your best guess against the type of investigation and commentary that you've heard from the government on 232?

What are the product areas that are most likely to benefit?

And what are the product areas that are least likely to benefit?

Well, I think I've already enumerated the 3 principal areas, Brett.

Coated, I think, will be a big benefit for us, particularly in, let's just say, galvalume building products.

Galvalume has been coming in at a high rate.

Pipe and tube, although we don't produce pipe and tube directly.

Obviously, the energy market, pipe and tube market is a huge -- the largest consumer, at least historically, of hot-rolled coil.

And if that tightens up, hot-rolled coil, which is already tight today, is going to be a very desired commodity.

And I think just the structural, the prefabricated structural would be huge for us, along with just straight structural.

When you have 2.2 million tons of that product coming in -- and literally it's a, Glenn, 5-million-ton market...

(inaudible)

Yes, I think that would have a tremendous impact because obviously our structural products, the merchant mill and also Columbia City, is running at a low utilization -- or relatively low utilization compared to our flat-mill roll -- flat-roll mills.

Our next questions come from the line of Curt Woodworth with Crédit Suisse.

So first question is on capital allocation.

The strong balance sheet and clearly free cash flow capability this year with a lower tax rate would suggest that, in addition to acquisitions, you have pretty substantial wherewithal to return cash back to the shareholder either through special dividend, or increasing, enhancing the share buyback.

And so outside of the acquisition opportunity set, can you comment on the potential to return capital back to shareholders this year?

Well, I think our general strategy is going to be no different this year than the past years.

Our absolute focus and priority is organic growth because there we have the most effective capital sort of efficiency and return on our money.

Secondly, transactional growth, we continue to see opportunities.

We're being disciplined and careful.

We see a good opportunity there for great returns.

And secondly -- or thirdly, we'd continue our sort of positive dividend profile.

We will remain conservative there.

We recognize, as we've said in the past, dividends are forever.

It's an absolute number.

We don't necessarily look at yield but the absolute number, which is today about $145 million, but I would expect to see a continued positive profile there as our through-cycle cash generation profile continues to improve.

And we will continue to complete the shareholder -- the share repurchase plan we have in place.

Okay.

And then with respect to the acquisition opportunity set, can you comment on a preference for either growing upstream or downstream?

And then there has been obviously more development of HBI capability in the U.S. and discussion of more merchant pig iron development.

Are those -- would becoming backward integrated into raw materials be something that you would entertain or look to partner into?

Well, as you know, we've had a lot of experience in that field.

And I would suggest we don't see a good use of our cash in the HBI arena or in the merchant pig iron facilities, at least as we see it today.

Our focus remains in 3 essential areas: one, steel, obviously.

We are, first and foremost, sort of low-cost, efficient steel producers, so wherever we can infuse our culture and our experience to turn around the existing operations, strengthen the market, that will be a major continued focus.

Our folks are extremely good, obviously, at downstream sort of processing, and so that is a focus.

And thirdly, pull-through opportunities that we can utilize around steel and pull through the supply chain to increase our through-cycle utilization is a focus.

Our next questions come from the line of Novid Rassouli with Cowen.

When -- you have relatively upbeat comments regarding the automotive market both this morning as well as last night in the release.

I was just wondering if you can provide some detail regarding some of the commentary in the release last night.

You mentioned gaining momentum in the automotive sector.

And then any comments on developments or progress on the Columbus automotive direct sales initiative?

Well, specifically to auto, I think we gained incredible traction.

Dick, before he left, put a sort of a direct auto team together of 8, 9, 10 folks, I think, yes.

And this shifted our focus, not away from, but parallel to our primary or original sort of supply chain through processes.

And that direct approach has been very, very, very positive for us.

We, I think, shipped, Barry, about 220,000 tons of automotive from Columbus just last year, which was a massive increase.

And we're on platforms to increase that to about 400,000 tons over the next 18 months as new platforms come into play.

So it's, firstly, the capability of the mill down there, and then we have a great team, I think, is building confidence in the auto producers.

And they're also very, very confident about our balance sheet, and recognize that partnering with us, that partnership is going to last 5, 10, 15, 20 years.

And I think that's strengthened our position in automotive.

I think something else that's unique, Novid, is that some of the European automakers actually really appreciate our sustainability model as well, kind of that full-cycle or full-circle sustainability of our metals recycling.

And so I think that helped us in the relationship perspective.

And the auto mix is still around 15%, is that about right, of shipments?

Yes, that's about right.

Correct.

And the ultimate target for -- do you guys have a target in mind for the percentage of mix of auto shipments?

I think we're pretty well there at Butler.

About 30% of our output is going into automotive, again, principally through processes.

And I'd like to see automotive at Columbus around about 400,000, 420,000 tons and cap it out around about that.

Got it.

And one last question.

If you guys could just help out how you're thinking about metal margins into 1Q and throughout 2018.

It looks like we should see a decent uptick in 1Q, but any thoughts around metal margin would be helpful.

Well, I think, again, looking long term, the scrap environment -- and Russ can comment more, but we look at a relatively steady scrap environment through the year going forward.

Obviously, it got a little tight on the obsolete grades this past month as the weather impacted flow and Turkey came into the market.

But absent any massive impact from Turkey, I think that we are looking at scrap kind of sideways through the year.

And I believe that on the product side things are going to get tighter than they are today.

It's an incredibly good sort of macro environment.

You've got just generally a global environment that's been more positive than we've seen it in many years.

And you've got stronger demand within China.

Their pricing continues to go up, and the Asian arbitrage is not attractive currently.

European pricing is probably higher than -- on a diluted basis today than domestic pricing.

So the global environment is very positive.

You've got positive demand trends domestically.

Service center inventories are relatively low.

Ore is surprisingly buoyant, along with coking coal.

So the raw material push to the integrated producers has increased the global cost curve.

And I believe imports are going to continue to moderate.

So on -- from a pricing perspective, I see pricing to continue an upward trend, so spreads in general, longer term, are going to be positive.

Our next questions come from the line of Matthew Klein with Goldman Sachs.

Let me ask this on recycling.

We've been hearing a lot about issues with transportation and the effects there on the scrap markets, freight rates popping, drivers jumping for better pay.

And you've had the weather in the East and the Southeast apparently wreaking havoc with some equipment in the new year.

I guess, first, what's been the effect on your own recycling ops of these transportation stresses, if any?

And then second, how is -- truck availability, your step changes in freight, or both, how has that affected deliveries or caused any other frictions among the rest of your system, whether internally or among customers?

Russ?

Matt, this is Russ.

Certainly, we experienced the same issues that you've talked about.

We got -- again, part of it stems back to the change in the rail systems and different approaches that the major railroads are taking, the major railways that serve us.

And it's actually pushing some more of that freight onto trucks, which is making it a little bit more demanding and has increased the -- both the costs and the availability.

I think, long term, we do operate some of our own fleet.

We do also operate some of our own railcars.

And I think we're well positioned to be able to take -- to maximize our efforts in it, but I think it is going to be a problem.

We are going to see, continue to see issues with trying to find and retain drivers, both internal to ourselves but also, I think, the trucking companies' costs are going to go up as well.

So I think it's going to be an industry-wide issue that we're all going to have to face, which is higher freight costs going forward.

All right.

Then let me switch over and ask a little bit on fabrication.

You've talked about solid backlog, encouraging customer engagement, et cetera, and saw your volumes up impressively 25% year-over-year.

Clearly, pricing hasn't been able to keep up, though, with the benchmarks in steel.

And so you're down year-over-year in dollar terms on operating margin.

Can you help me square the health of the market with that profitability crunch?

I mean, are your customers undercutting you with cheaper sourced prefab steel?

Are you being more aggressive on price to take the share?

What's the situation as that's unfolding?

Chris?

Well, we have some flexibility in the raw material we use.

And there are times when it's advantageous for us to use more flat roll versus merchant.

And as the spread has increased between merchant and flat roll, some of our advantage has deteriorated a bit.

The market's healthy.

The demand is strong.

It's literally just a matter of merchant not keeping pace with flat roll.

We leverage flat roll more than our competitors, so our competitors have tended to hang down around with the merchant number and not necessarily allowing us to use as much -- increase price as much as we would care to.

So, Matt, I would just add.

If you think about it, so from the fabrication, from order -- or kind of from bidding to order, to delivery, you probably have 8 to 12 weeks in that time frame.

And so with that, the steel prices, as they're marching up consistently, which flat-rolled has really done pretty much this year, it's hard to catch up, but then once you got some stability, that's where the team on the fabrication side really has the opportunity to pass that through.

Got it.

So you think that, that stability, both in raw material costs and also, I guess, what pricing you're able to push through as -- you'll expect that to show up as you move over the next couple quarters?

[I would think that, obviously].

Yes.

And I think to highlight that business, the team's done a phenomenal job leveraging our national footprint there.

And yet, we didn't have record profitability.

We had record shipments.

The team continues to gain market share, and I think 2018 is going to be a very good one for those folks.

And I think it gives also a lot of sort of optimism for us because it gives insight into the nonresidential construction arena.

That continues, in our mind, to be incredibly strong and growing.

Our -- the effect of the national footprint has probably never been as obvious.

As we enter '18, our backlogs in the East are -- the eastern half of the country are flat to slightly down, while our backlogs in the West are up, starting the year well over 30% higher than they started last year.

So we're better positioned to follow the work wherever it may be than ever before.

Okay, our next question comes from the line of David Gagliano with BMO.

Great.

Obviously, forward-looking expectations imply a big rebound in results, which makes sense given everything going on, given your comments on this call, but just to try and make sure we have the timing and the trajectory of that recovery reasonably calibrated.

I have 4 questions.

First, given the insights you have on order books, product mix, can you give us more color on the magnitude of the expected volume recovery in 1Q '18 versus 4Q '17?

Second -- I'm just going to rattle these off, and then you can just answer them.

Second, I think the steel operations segment EBITDA per ton in the first quarter of '17 was $176.

Given the current environment, given the shifts in your product mix, should we expect 1Q '18 EBITDA per ton to be higher than that $176 figure from the prior year?

Third question, can you just remind us again, how much of your volume has some pricing lags?

I think there are some with 2- to 3-month lags.

And then the fourth, what's the total expected capital spending for 2018?

Well, David, I'll try to take these, but I'm afraid we're not going to help build the model out in detail.

But I'll start with the order book and the magnitude of change from a volume perspective.

We don't give specific guidance related to that, and I think that folks understand that.

But what I would say is that we are expecting volume improvement in the first quarter versus the fourth quarter, one, because of seasonality in the fourth quarter, and the second is because we had probably at least about 100,000 tons of less flat roll shipments because of the plant outages, which actually were very successfully completed.

I think some folks, in your writing, mentioned that it was longer than anticipated.

It wasn't.

They were just longer outages because there were some additional work to be done.

So all in all, in the flat roll, we would expect higher volumes.

We think the market is strong.

And we expect to see some higher volumes in the fabrication -- or excuse me, our long products side as well, the magnitude of which we won't provide in the call this morning.

From an EBITDA-per-ton perspective, again we try to give directional guidance.

And so we believe that there is definitely a pricing momentum on the flat roll side.

We hope to see some in the long products side as well.

And SBQ is doing really, really well.

We're seeing a lot of strength in that market.

And so with that, we would expect to see -- it would be anticipated to see higher average pricing again, with flat roll coming back as well.

And on the scrap side, scrap is a little tight right now, so we could see scrap be steady at these higher prices for a bit, but then we see it moderating throughout the rest of the year.

So I would let you all decide what you think will happen in the first quarter.

Related to the lag in orders, for flat roll, we're probably closer to 50% now of the volume that is lagging to a CRU Index.

And so that really lags usually about 2 to 3 months...

Somewhere between 2 to 3 months, Theresa.

So that's the lag on the flat roll side now.

And on SBQ, it's still very small, maybe 15%.

It's tied to some sort of pricing.

So otherwise, we're definitely still a spot-market company.

And then as it relates to 2018 capital expenditures, we would expect to be somewhere around $250 million for the year.

And that includes about $80 million to $85 million remaining from both the Roanoke rebar investment and then the structural rebar investment as well.

And we tend to have about $100 million to $120 million that we would call sustaining.

And then the rest of that are efficiency projects throughout.

Most of it is steel mills.

We have some mill and metal recycling and fabrication as well.

That could change during the year as the teams continue to develop projects, but right now that would be our best estimates.

I hope that helps.

Yes, that's helpful.

Not trying to ask you to build the model out.

Just trying to avoid the risk of irrational exuberance, so any color is helpful.

I appreciate it.

No, I appreciate that, too.

Our next questions come from the line of Seth Rosenfeld with Jefferies.

So I had a question on your outlook for electrode costs, please.

I know you commented on this at the last quarterly call as well, but can you give us a bit more color on where your 2018 contracts settled and both when and by what scale you expect it to hit your P&L?

Just thinking back, over the last quarter, we saw spot prices for electrode pull back quite meaningfully in late autumn and rally once again.

Did that ultimately change your pricing expectations versus when we last spoke?

Well, I think we are still in line with what we said on the last call.

Fortunately, our long-standing relationships with the current electrode producers were positive for us.

And we have committed supply for the year.

About roughly half of our supply is sort of contracted on a fixed price for the year, while the other half is still on a quarter-by-quarter basis.

The impact to us is probably in the region of about $8 per steel ton year-over-year, '18 versus last year.

So it's still well less than 1% of our [commercial cost].

Okay.

And just a separate question, please, going back to the flat steel division.

I know, for a while now, you've been talking about that business basically operating at max utilization.

We continue to see volumes kind of surprise to the upside.

I was wondering if you can comment on what sort of incremental volume growth is realistic in flat.

Or on other side of the coin, with the mix improvement at both Butler and Columbus, might that actually lead to lower yields looking forward?

Well, the team always surprise us to the positive.

The Butler facility, again, record production last year.

That's after 20-plus years of operation.

And every year, they improve and improve and improve.

So Butler, I wouldn't say it's tapped out.

It's still going to eke out a little bit, but it's getting there.

On the Columbus side, our focus the past couple of years has been more product development, product diversification, getting into new markets.

And we're there today, and also on lowering our cost structure.

The shift there will be in productivity across all the different lines.

And they were around about 3.1 million tons last year or so.

Yes, typically we've been able to get 10% more out of our assets.

All right, Barry is smiling at me across the table here.

But again, that's -- it's a phenomenal facility, and I'm sure we can stretch that one yet.

I would just kind of summarize a little bit, Seth, that we actually have over 3 -- probably close to 350,000 tons of extra capacity even today on the flat roll side.

And that's going to improve in value-added mix as we start to ramp up the paint line in Columbus, which is still not being utilized fully.

We hope to get there by the middle of next -- 2018.

So there's both volume and upgraded margins capability, but we also have over 300,000 tons of SBQ, which is our highest -- or our second highest-priced margin product that's available based on 2017 shipments.

Then you have about 700,000 tons in the long products side between structural and Roanoke.

So we've got -- we have close to 1.4 million tons of additional latent capacity that Mark calls it, that's still available to us.

And that's without additional projects that tend to come about from time to time.

Our next questions come from the line of Chris Terry with Deutsche Bank.

A quick question just on the tax rate changes.

You guided to 24% to 25% going forward for the booked rate.

In terms of the CapEx changes on the 100% CapEx expensing and the remeasurement you've done now in deferred tax assets and liabilities, what -- how do we think about the cash tax rate going forward?

Is that going to be pretty close to the booked rate, or is there some deviation over 2018?

It could be slightly less than 2018 with the expensing of the fixed assets, but not appreciably, so I would still stay in that range from a modeling perspective.

I think you'll be closer, but there could be some reduction.

And again, it just depends on the CapEx spend.

So right now we really kind of ignore that, and I would say we're somewhere around 24.5%.

Okay, okay.

Just one other one for me, just in terms of the talk of NAFTA.

And I noticed you were chatting earlier about the plans with the auto exposure at the Columbus mill.

How do you think about any potential renegotiations and how that might end up?

Again, it would be a little speculative, but I believe the negotiations are -- they're kind of ongoing.

I think they met in Montréal just yesterday or today, I do believe.

I think if you look at the trade balance and the importance of Canada and Mexico to the U.S., it is -- it'd be an extreme issue for that agreement to be canceled.

And I'm sure it's going to be negotiated, and I'm sure it's going to be modified to some degree.

It's 25 years old, so it probably needs a little tweaking, but that -- we're quite confident that our interaction with Mexico is going to continue to strengthen.

Our next questions come from the line of Timna Tanners with Bank of America.

I just want to follow up on the capital allocation questions to the extent that you can provide any color there.

I know on the last call, I had in my notes, you were talking about aggressive buybacks while you're waiting to deploy cash.

And this quarter seemed to slow down, so maybe I misinterpreted, but just wanted to ask about that and then see if I can get a little bit more color from you on the types of opportunities you would consider.

From an aggressive buyback perspective, Timna, we do it both opportunistically and systematically.

And so it really has to do more with the program that we have in place, all right?

And so I wouldn't -- as Mark mentioned in the call earlier, we plan to finish the current authorization of $173 million that's left.

And then we'll reevaluate from that point forward, depending upon where we are on a transaction basis.

We feel just the same as we did back in the third quarter call, so I wouldn't read anything into that, the fact that we only bought, I think, $50 million back in the fourth quarter.

Mark, talk about...

Well -- and from a standpoint of transactional growth, Timna, again I'm not going to elaborate any more other than the focus is steel.

It is downstream sort of value-add processing and pull-through sort of volume-type opportunities.

And there are opportunities that are sizable.

And so that's...

And you had said in the past that you could look at several deals adding up to a value that [revamps] kind of the leverage that you've had in the past with your recent debt metrics, kind of at what we calculate to be 11-year lows.

Is that still the case?

Well, I don't know.

I haven't calculated the number of years.

This is our 25th year anniversary, though.

So I would say that, Timna, we're just a completely different company today, both in size and capability.

And so it's natural that our credit metrics have improved because, in the past, [we've not liked to move] shareholders by issuing equity.

We really prefer to use the debt market who, we're very thankful, are very supportive of us.

So I do believe that there are deals that will put additional leverage on the company, but at a very appropriate position.

Your next questions come from the line of Michael Gambardella with JPMorgan.

I have a question on one of your competitors.

Commercial Metals announced the acquisition of Gerdau steel and kind of (inaudible) fabrication business.

I'm just wondering.

What do you -- how do you view the implications for Steel Dynamics, not just on the...

Michael, I -- you're -- I'm sorry.

You're cutting out.

Can you -- we only heard -- I think you want to ask a question about the CMC acquisition, but we couldn't hear anything after that.

Yes, on the CMC acquisition, I was just wondering the implications that you see, if any, on your scrap business, the bar business and the fabrication business going forward.

Well, on the scrap business, Michael, there's no real overlap of import.

Russ?

No.

It's -- I think -- again, it's -- from our perspective, I don't think it changes the landscape to any great degree.

I think, again, they're not necessarily in our footprint, those acquisitions.

And I think, again, as all mills, they'll continue to need scrap.

And if we've got it available at the right price, they'll buy from us.

If we don't, they won't.

Good.

And I think, on the products side, Michael, again, the supply-and-demand balance isn't changing, just the nameplate on the company, so to speak.

It is positive that CMC is starting to get into a little more sort of coiled rebar or spooling.

And again, that actually helps us.

Those customers do like optionality, and I think it's going to improve our profile there.

And on the fabrication?

So the fabrication is a different type of fabrication cycle.

So what we use (inaudible) isn't what CMC does in their fabrication, so I think there'll be no impacts.

Chris, is that fair?

Fair.

Yes.

As we enter the rebar arena, Michael, the -- our push is to supply to independent sort of third-party fabricators.

We're not coupling our output of rebar to actual fabrication itself.

So it really sets us aside from our Nucor and CMC competitors in rebar.

And final question, just going back to the 232.

Mark, what would you think is the best outcome in terms of the format for 232?

Well, I sat in on a conversation with some folks in the industry, and they put a matrix together.

And I think there were, I don't know, a dozen different speculative outcomes.

And as I suggested to the group, I think it's a (inaudible) waste of time because who the hell knows what is going to be presented.

I do believe it's a combination of, or individually, but tariffs and/or quotas perhaps.

But again, it's speculative for us to comment.

I mean, I would think quotas, based on historical patterns, is kind of one of the few ways, if not the only way, to get around the circumvention issue, if you include the existing tariffs that are out there.

Quotas on basically everybody is the only way to address this circumvention, which I think is the heart of the issue.

Barry, do you want to comment?

I would agree.

We were very excited that the circumvention case got traction like it did.

And we're hopeful that further cases help that.

But in a sense, it's much like we mentioned in the past.

It's whack-a-mole, that you got to go and file these cases.

It takes a lot of time and money to research every one of these.

So a 232 would be a broader and swifter action if it were in fact to cover some of these things, but we're going to diligently pursue the remedies we're on and the things that we can control; in the meantime, hoping to see what resolution is brought forth by the administration.

Our next questions come from the line of Phil Gibbs with KeyBanc.

Mark, I had a general question on the energy markets in terms of what your customers are telling you there; and any color you could provide on the SBQ, backlog momentum in that light.

The momentum is, I would say, almost incredible at engineered bar, and across all spheres or all segments, with the exception of agriculture.

I think energy is surprising us.

And we're getting some customers back today, particularly in the heavier diameters, the 3 inch to 6 inch, which is going to the seamless tube, seamless pipe.

So that is a good sort of tailwind for us.

Off-road equipment, our customer base is indicating some pretty massive growth, like 20-plus percent this year, as is the truck industry.

So I think just generally -- and we've always said in the past that engineered bar tends to be, for us, a sort of a bellwether sort of indicator to the steel-consuming economy as a whole.

And when that kicks in, it brings me a lot of confidence, a lot of optimism going forward.

That's great.

And any color on the SBQ backlog, Mark, relative to maybe last quarter?

Backlogs are up.

Glenn?

Yes, they're slightly up.

It's robust.

It's been a good past 6 months, for sure.

Terrific.

And Theresa, any color you could provide on the flat roll mix in Q4?

Yes, on -- yes, I apologize.

So for the fourth quarter, the hot rolled and P&O shipments were 869,000 tons.

So for the total of the year, it was 3,530,000 tons.

For cold rolled, it was 112,000 tons in the quarter, for a total of 527,000 tons for the year.

And for coated, it was 678,000 tons, for a total of 2,808,000 tons for the year.

The next questions come from the line of Charles Bradford with Bradford Research.

Question about the expansion rebar project at [Columbus] City.

The capital costs, I think you mentioned $80 million more to go, but what's the total cost for that capacity?

Yes.

So Chuck, I'm sorry.

I might have confused everyone.

The -- there's 2 rebar projects.

The one at Roanoke, which will be starting here in the first quarter, that was $28 million.

And then the one in Columbia City in total is $75 million.

So it's a total of about $100-and-some million for both rebar projects, and so there's some carryover into next year for that capital.

So the total for Columbia City is $75 million.

Great, but given some of your competitors adding new rebar capacity at substantial higher capital costs than what you seem to have, what kind of an operating cost advantage do you expect?

Significant.

Okay, both Nucor and Commercial Metals...

I think -- again, I think you hit the nail on the head, Chuck.

And that's why organic opportunities, for us, are so effective.

And one has to recognize not only is the installation or the overhead cost low for the installed tons, but to have added utilization, you add 250,000 tons to a mill that's doing 1.2, 1.3 last year, the overhead across all tons comes down dramatically.

So the return is incredibly attractive.

Yes.

For the structural mill, there's the 500,000 tons of additional [full] capacity with the 3 initiatives that Mark mentioned earlier.

One is sending the blooms to the engineered bar division.

The second is the unequaled angles.

And the third component, the most significant in volume, is this rebar project, which should come online at the end of this year.

If we increased capacity at the structural division by about 500,000 tons, that's about $20 to $25 per-ton benefit in cost compression across all of the volumes.

So it is really meaningful to have these initiatives in place.

Great.

Do you have a figure for what your total shipments to what AISI calls military and other ordnance might have amounted to last year?

Chuck, I'm sorry.

I -- with what's in front of me, I would have no idea.

I would have no way of guessing.

I don't think they know either.

On an area that may be a little bit more significant, your focus on the automotive, do you have any information on what the difference might be between the steel content of an electric vehicle made by someone like General Motors versus a more standard vehicle, maybe in percentage terms or whatever measure you might have?

I'm not -- I'm looking around the room.

We're all shaking our heads.

To be specific, I'll not give you a number.

And Mark, I would add it depends on the type of automobile but also the types of steel.

So while flat rolled may decrease slightly, we may see an increase in SBQ in those cars, in the transmissions and the drivetrains.

As far as the flat-rolled steel, we do anticipate some material changes.

So to that effect, it will be smaller content of steel in most cases, but it does change because without the big engine in there, there are some structural members in the cars that are added.

So we're more interested in what the net change is in the type of parts and where our steels can find happy homes in these cars in the future.

So while the content may shrink a little bit, we look at opportunities growing both within SBQ and flat rolled to fill these new needs.

Our next questions come from the line of Sean Wondrack with Deutsche Bank.

Just real quick as I triangulate some of your comments.

When we think about moving forward into the next few months, with scrap looking to be sort of sideways, as you've explained, and your lag to basically realizing the higher steel prices, should we expect kind of that dynamic to move in the right direction where you should have steel prices moving a little higher but scrap being kind of more sideways?

I think we expect that over the longer term through the year, yes.

Okay, great.

I just wanted to clear that up.

And then just quickly, somebody mentioned it earlier, but your debt metrics are really, really strong at this point.

I mean you're at 1 turn net leverage.

You generated a ton of free cash flow even after share buybacks.

Have you guys been discussing with the rating agencies?

You're right on the cusp of investment grade.

Is there anything we should expect there?

Or have you been speaking with them?

Could you give us any more color there, please?

Yes, we have an active dialogue with the agencies.

We have a really transparent relationship with them.

And so wherein, as I agree with you, our credit metrics are incredibly strong, and definitely I would say they're investment grade today.

And frankly, when you look at our issuances on the debt market and the capital markets, we're getting very good pricing there as well, but the idea that we really are positioned right now for transactional growth and transactional growth that we think could be meaningful, we really do want to use our balance sheet versus our equity where possible.

And so I think right now it's more of a unique time frame where we're positioned for growth, we think there's growth opportunity, that we just kind of -- we're having conversations with them but we feel pretty good with where we are at the moment.

Okay, thank you.

That concludes our question-and-answer session.

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

Well, thank you, Brenda.

And thank you for those that may still be on the call.

I think our outlook and our position as a company is phenomenal as we move into and through 2018.

We have a general upward momentum for the markets in general.

SDI, as has been outlined, we have considerable number of sort of internal catalysts, earnings catalysts that differentiate us from our peer group, I do believe.

And then any Section 232 action or infrastructure bill is just going to compound that and be cream on the top.

So we're looking for a phenomenal year, and we want to share that with you all.

And any customers and employees, any community members on the call too, thank you for your support.

We cannot do this without us -- without you all.

And we were honored just recently by Fortune magazine, whatever it was, World's Most Admired - or one of the World's Most Admired Companies.

Again, we have almost 8,000 employees driving us towards that, and thank you all.

Have a good day.

Be safe.

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

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