Steel Dynamics Inc (STLD) 2018 Q1 法說會逐字稿

Good day, and welcome to the Steel Dynamics First Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please be advised this call is being recorded today, April 19, 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, Christine.

Good morning, everyone, and welcome to Steel Dynamics' First Quarter 2018 Earnings Conference Call.

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

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

We also have our leaders for the company's operating platforms, including our metals recycling operations' Russ Rinn, Executive Vice President; our steel fabrication operations' Chris Graham, Senior Vice President, Downstream Manufacturing Group; and our steel operations' Glenn Pushis, Senior Vice President, Long Product Steel Group; and Barry Schneider, Senior Vice President, Flat Roll Steel Group.

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

They are intended to be protected by the Private Securities 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 to 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 reference to non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports First Quarter 2018 Results.

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

Thank you, Tricia.

Good morning, everybody.

Welcome to our First Quarter 2018 Earnings Call.

As always, we truly appreciate your time this morning, and I look forward to sharing our great start to the year.

The entire SDI team drove an exceptional safety and operational performance.

And even after 25 years, our innovative spirit prevails.

Butler, our very first steel facility, is still achieving new record production levels as are the Columbus, Structural and Rail and Engineered Bar divisions.

We also received recognition from the Steel Manufacturers Association for last year's safety performance at our Columbus, Structural and Rail, Roanoke Bar and Techs Steel divisions.

So congratulations to all those folks.

But to begin this morning, Theresa will comment in more detail on our first quarter results.

Thank you, Mark.

Good morning, everyone.

Thank you for your time today.

I also want to thank the team for a safe and incredible first quarter performance.

Our first quarter 2018 net income was $228 million or $0.96 per diluted share.

This compares to net income of $201 million or $0.82 per diluted share in the first quarter of 2017 and $305 million or $1.28 per diluted share in the sequential fourth quarter.

Excluding the onetime tax benefit in the fourth quarter and refinancing costs, the fourth quarter adjusted earnings were $0.54.

Our results were above guidance of between $0.88 and $0.92 per share due to higher-than-expected March flat roll production and shipments.

The Butler and Columbus teams truly executed at an exceptionally high level, each exceeding monthly production records in March.

We achieved record revenues of $2.6 billion in the first quarter driven by our steel operations.

Operating income increased 65% to $323 million compared to the fourth quarter.

A solid performance by everyone, although the steel platform drove the increase.

For the first quarter 2018, steel shipments increased 7% sequentially to a record 2.5 million tons, with growth achieved at each division across the platform.

Steel metal spreads expanded meaningfully as our average quarterly sales price increased $61 to $822 per ton, and our average scrap cost consumed only increased $21 to $321 per ton.

The result was first quarter steel operating income of $338 million, a sequential 65% improvement.

For our metals recycling platform, ferrous metal spread improved in the first quarter with a 7% increase in shipments related to higher domestic steel mill utilization, resulting in operating income of $28 million, a 24% improvement sequentially.

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

The metals recycling group shipped 65% of their ferrous scrap to our own steel mills, increasing scrap quality, mill efficiency and reducing working capital requirement.

First quarter 2018 operating income for our fabrication operations decreased slightly to $20 million, as improved average selling values were more than offset by seasonally lower shipments.

The March order backlog is strong and higher than it was at this time last year.

This, coupled with customer optimism, supports our belief in continued demand strength in 2018.

However, higher raw material steel costs are likely to significantly compress margins in the second quarter of this year.

During the first quarter 2018, we generated cash flow from operations of $178 million.

Operational working capital grew $199 million based on overall market improvement resulting in higher customer account and inventory values.

Additionally, there are several annual payments made in the first quarter of each year such as company-wide profit sharing and annual performance-based incentive compensation which, this year, required cash payments of over $130 million in the quarter.

First quarter capital investments were $51 million.

We currently estimate full year 2018 capital investments to be in the range of $250 million.

We increased cash dividends by 21% in the first quarter.

This follows increases of 11%, 2% and 20% in '17, '16 and '15, respectively, demonstrating our confidence in the strength of our through-cycle cash generation.

We also repurchased $69 million of our common stock during the first quarter and have $103 million still available pursuant to the $450 million board authorized program, which we initiated in October of 2016.

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

We maintained liquidity of $2.2 billion at March 31, 2018, with $1 billion in cash and short-term investments, 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 meaningful opportunity for continued organic and transactional growth.

We are squarely positioned for the continuation of sustainable optimized value-creation.

And for those of you that track our flat roll shipments by type, in the first quarter, we had shipments for hot-rolled and P&O of 875,000 tons; we had cold-rolled shipments of 134,000 tons; and we had coated, which includes both galvanized, Galvalume and painted products, of 734,000 tons.

Thank you.

Mark?

Super.

Thank you, Theresa.

Well, safety is and always will be in the fabric of our company, our #1 priority.

And during the quarter, we reduced the total recordable injury rate a further 14% as compared to full year 2017, with 84% of our locations achieving 0 recordable injuries.

The team really is doing a great job, and you have my sincere appreciation.

But as I do every day, I challenge all of us to remain focused and to keep moving toward our ultimate goal of 0 injuries everywhere.

The steel platform executed extremely well, achieving record quarterly shipments.

As mentioned, several divisions attained record production and shipping records.

We also continued to develop new product capabilities, adding to one of the most diversified and value-added product portfolios in the industry.

As a result, we operated at a utilization rate of 94% during the first quarter.

Once again, markedly better than the domestic industry rate of 76%.

And with 11.4 million tons of annual shipping capability, we still have 1.2 million tons of annual latent capacity to sell as the markets continue to strengthen.

Domestic steel consumption remains strong in the automotive and construction sectors, while energy and general industrial demand continue to grow.

The automotive sector has not turned over as some expected with the current 2018 growth expectations for both the U.S. and Mexico, more than offsetting any possible contraction in Canada.

We continue to gain automotive market share at the Columbus Flat Roll Division, driven by a focus on automotive direct sales and leveraging our cost advantage related to freight cost into Mexico.

As mentioned on the January call, increased demand for special bar quality steel also continues, which supports our belief in the broader industrial sector momentum.

In fact, our Engineered Bar Products division achieved a record quarterly shipment, and we have some 200,000 tons of additional capacity yet to leverage as demand grows.

We continue to position Steel Dynamics for the future through new investment in our existing operations.

A few notable investments occurred in 2017, which will continue to show incremental benefits in the coming year.

An $18 million investment to add [bit] galvanizing capacity in our Steel of West Virginia plant started up in September.

Now this value-added service is ramping up very, very well.

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

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

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

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

This location facilitates lower cost logistics to the southern U.S. and Mexican markets.

Columbus shipped 36,000 tons of painted products in the first quarter 2018, and the team is on track to be running at 90% capacity by midyear 2018.

Columbus continues to be a significant earnings catalyst, and I believe the changes have been transformational and there is still more to come.

We would expect production gains, continued 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.

Relative to long products, the improving construction and industrial markets, coupled with our organic initiatives, resulted in increased capacity utilization of our long product steel mills to 80% for the quarter.

We have 3 specific organic initiatives to increase the through-cycle utilization at our Structural and Rail Division.

First, we are growing the production of SBQ quality blooms to send to our Engineered Bar Division, which currently is still short and needs blooms to fully utilize its rolling capability.

This will improve through-cycle utilization of both facilities.

During the first quarter, the team shipped over 36,000 tons.

An annual run rate of 144,000 tons per year, which is well on our way to the anticipated transfer of over 200,000 tons in a reasonably strong SBQ market environment.

Second, this year, we further diversified the product offerings to include large equal and unequal length angles.

We plan to eventually sell 100,000 tons annually, but we're just entering these markets.

Third, we are investing $75 million to utilize existing access melting and casting capability there.

The expansion will further diversify our product portfolio and market exposure through the annual production of 240,000 tons of reinforcing bar, which will include spooled, custom cut-to-length 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 to the Midwest region.

We're on schedule to begin operations there in the first quarter 2019.

In aggregate, these 3 initiatives provide over 500,000 tons of additional annual shipping capability at the Structural and Rail Division.

It will provide a material improvement in future through-cycle utilization and profitability.

We're also investing $38 million to utilize excess melting and casting capability at our Roanoke Bar Division.

We've added equipment to allow multi-strand slitting and rebar finishing of 200,000 annual tons.

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 mid-Atlantic region.

But atypically, the project was delayed by several months due to some design and equipment issues.

However, equipment commission is now in process and the team plans to begin selling products in June.

Our metals recycling platform also had a strong quarter.

Higher domestic steel mill utilization supported improved ferrous shipments and metal spread expansion.

Prime scrap flows has been steady.

And with a solid automotive build, we don't expect that to change.

With better weather, we also expect obsolete scrap flows to improve.

Good supply, coupled with a weak export environment, should sustain stable pricing as the year progresses and we believe there's more than adequate scrap supply to address the higher domestic steel mill utilization rates.

The fabrication platform also delivered a solid performance, although profitability marginally decreased from seasonally lower shipments.

Our order backlog remains strong heading into the summer construction season.

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

Our fabrication operations continue to purchase steel from our own steel mills, and the power of pull-through volume when we source steel internally from our own mills is a significant catalyst for higher through-cycle steel utilization rates.

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

We remain confident that market conditions are in place to benefit domestic steel consumption throughout the year.

Domestic steel inventory levels remain reasonably balanced.

World steel demand and pricing have improved.

Based on strong domestic steel demand fundamentals and customer optimism, we believe improving steel consumption will continue during the year.

We also believe recent trade actions will result in reduced imports later in coming months despite the first quarter uptick, driven by temporarily exempted countries pushing in material prior to the May 1 deadline.

Additionally, we believe tax reform will provide a stimulus for additional fixed-asset investment and growth.

In combination, with our expansion initiatives, we believe these are firm drivers for our growth in 2018.

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, and has provided an enviable balance sheet.

The company and the team are poised for continued organic and transactional growth.

It is that team, our team, that provides the foundation for our success, and I thank each 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 customers, for our company, employees and shareholders alike, and look forward to creating new opportunities for us all in the years ahead.

So again, thank you for your time today.

And Christine, please open the call for questions.

(Operator Instructions) Our first question comes from the line of Novid Rassouli with Cowen.

I first wanted to touch on Section 232 in imports.

So given that all -- to my understanding, given that all exemptions with respect to 232 expire on May 1, I guess, excluding South Korea given the new agreement there, the market could get extremely tight in the near term.

Can you give us a sense of how this is impacting your customers' order book or the conversations that you're having with customers on this topic?

I think that there's a sense of surprising calmness right this second, I would suggest.

The order book, obviously, and order input rate is strong, but no one is really panicking.

I do believe that you're correct that there will be some tightness, both from restraints on the flat-rolled side and also restraints on imported pipe and tube, which will certainly tighten the hot-rolled coil market substantially.

Got it.

And then just to follow up on engineered bar, we saw a nice uplift, up 12% quarter-over-quarter and year-over-year.

You mentioned in your prepared remarks it was a record quarter there.

Can you speak to the drivers of that move and maybe the diameters where you're seeing the strength utilization rates and maybe your outlook for that business for the remainder of 2018?

Well, Glenn can give you the details on the product ranges and those sorts of things.

I would say, just broadly, the marketplace there is very, very strong in all segments.

Agriculture, perhaps, not so much.

But in manufacturing, general industrial consumption, off-road equipment is strong, tractor trailer build is strong.

Energy, obviously, has returned with surprising speed and continues to strengthen there.

So I think, generally, all the market sectors are showing great promise, continued growth, strength, and you've seen uptick in pricing here recently.

And so it's, for us -- for me, it's kind of a bellwether of the steel-consuming environment, and it's a very healthy one right now.

So Glenn, thoughts on sizes and things?

No, Mark, I think that's well put.

We're driving more into the automotive, which is the new mill that Barry and his team installed years ago.

We're adding some capacity to our bar finishing and inspection arena, and that bodes well for automotive.

And we're seeing those mostly in the smaller sizes 2 5/8 and smaller, which is driven by the automotive.

But you're exactly correct, heavy truck and trailer, mining, construction, they're all strong right now.

As a reminder to everyone, we obviously put in an expansion about 2 years ago now on the smaller diameter bar stock of about 350,000 tons to take that facility up to 950,000 tons of annual capability.

So the present sort of marketing environment is now allowing us to fully capitalize on that.

As I said earlier, we have 200,000 tons of available shipping capacity there.

That's being aided by a great job at the structural mill in improving and getting their blooms into SBQ and engineered bar quality status.

And that will increase to, as we say, by 200,000 tons of annualized rate here in the coming months.

Yes.

Just for clarification, the total capacity of the facility is 950,000 tons per year.

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

Congratulations on the quarter.

So looking back over your historicals, 2011, 2016, you all averaged EBITDA margin, I think, it was just over 9%.

I think that's my calculations.

The last couple of years, you reached 14%, 15%.

Last 12 months, a shade under 14%.

So I think we all, here, expect your profitability to widen nicely as you harvest the price over these next couple of quarters and then you're also getting all the investments you've talked about, the new capabilities you're making.

So Mark, what would make you happy as to -- what type of margin level you think you could achieve over time once you're in place, once the expansions capability and capacity are there?

And barring that, like what metric would you look at?

Is it a per ton operating income?

Where would you be happy that you've achieved what you think the potential of the complex is?

Well, as the team sitting around the table would suggest, I'm never happy.

So -- probably at any level.

But at one time, when we were just a company of steel mills in a very strong market, our margins were mid- to upper 20s.

And I think to get back there would be a good step.

All right.

Fair enough.

Maybe then a question for Russ.

Russ, are you surprised at all that scrap hasn't moved higher than it has given the pricing trends?

I look now in hot-rolled and in shredded, I think it's around 450 a short ton, and you look at recent history of that around 300, 325.

What's the limiting factor there in the upside?

Why wouldn't the strong tags been more of an upward pull?

Is that export weakness or something else going on?

Well, Matthew, I think you've hit it on the head.

I think, predominantly, the export market has waned here in this fall or starting last fall and continuing on into this spring.

That's been the one driver there.

Certainly, there's enough scrap in the U.S. to support the higher levels of production.

But again, without the export draw, it's kind of kept a cap on it.

Our next question comes from the line of Chris Terry with Deutsche Bank.

Just interested in how customers are looking at the pricing dynamics as the prices have moved up.

Are you seeing any reluctance on the buying?

Are they waiting, at all, for potential corrections or are they just accepting of the price at this point based on the order book that you're seeing?

As I said, I think, generally, there really is a calmness and a balance out there.

And there, certainly, is an acceptance at this moment in time.

Now as we mentioned, come May 1 or thereabouts, if the market would to turn dramatically, that could change.

But I think through the year, with the demand growth that we're seeing and just the fundamentals in the marketplace and with the expectation that imports have all received in the summer months, I think there's longevity, for sure, at the pricing levels that we see today.

And I think, more importantly, it's just not a matter of price.

As you recognized, we're a margin business.

And I think with that pricing resilience on the sales side and to Russ' point, we see stability in the raw material side, the scrap market side.

So I think the earnings profile is going to be attractive for the rest of the year.

Okay.

And then on the last quarterly call, you spoke quite a lot about potential M&A opportunities.

Can you just go through the last 3 months and how that's changed and how you're looking at the world from here?

I don't think anything has changed.

I think the pipeline of opportunities are still there.

There are opportunities that the team is working diligently on.

As we've said in the past, we are taking a very disciplined approach.

We're not going to be impatient or impulsive in any way just because we have a very strong balance sheet.

But the expectation would be that we will have transactional growth to complement the organic growth that we've already stated.

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

You're gaining market share in automotive.

Clearly, there's this Cliffs plant coming up in Toledo, which is right on the Indiana border.

Can you kind of talk about the opportunities as you see it and kind of what the discussion level has been between you and obviously, this new plant that is coming up to improve potentially your feedstock in terms of like market opportunities for Steel Dynamics?

Again, our position there, Brett, has not changed.

We're very, very comfortable with the raw material supply profile we have in place today.

OmniSource has approximately 6 million to 7 million tons of sort of collection, processing, distribution and marketing capability.

And that is a reasonable, more than reasonable support for our mill needs.

I think last quarter, we were around about 60%, 63% of our scrap needs were met by OmniSource.

The rest, obviously, coming from other parties in the marketplace.

So strategically, we don't necessarily see an urgent need to get into any alternative (inaudible).

And I think we look at those as a pure -- purely investment return opportunity.

And our belief is that through the cycle, unless you own the iron units all the way back to the mine, that the return profile is not attractive for us.

If that were to change, then we would think differently.

And then the second question is, obviously, you've got a plan to grow.

Right now, you're running at 12-plus times interest coverage.

At some point, is there like an optimal timing to post-232 or something along those lines?

Is there an optimal time, as you guys see it, to go after what you really want to go after?

I assume it's downstream.

Well, we have 3 main areas of focus.

One being sort of steel itself, steel production, whether that be greenfield or whether that be opportunities, acquisitions, whereby we can turn around underperforming asset.

So steel is one focus.

Downstream processing is another.

Our teams seem to have a sort of natural ability there, whether that be on the sheet side, coating, painting, those sorts of things.

And even in the bar side, as Glenn mentioned earlier, sort of value-add inspection, turning, those sorts of things.

So downstream is important to us.

And then thirdly, opportunities where you have sort of intermediate processing-type manufacturing that can provide pull-through volume to our steel mills because we're very cognizant of through-cycle profitability and cash generation, not just looking for stronger peaks, but also stronger troughs.

Great quarter, guys.

Thank you.

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

Let's just start out on the long product side of things, please.

Obviously, you've seen an impressive pickup in utilization rates over the past 2 quarters and we saw from one of your peers today as well very strong growth in their own domestic supply of long products.

Can you just give us a better sense about what your outlook is on the margin side for long steel, which in general has lagged what we've seen on the flat side to date.

Do you envision an environment in which you could see long product margins playing catch up with flat in the months ahead?

Or do you think that we're going to see those 2 kind of moving in lockstep looking forward?

Glenn or Theresa may have more detailed color.

I would suggest we're at a little bit of an inflection point there.

The last 3 years, we've seen kind of an erosion of that spread pretty consistently sort of gradual, consistent erosion.

And I think with slightly higher utilization rates going forward, with a stronger order book, with a positive momentum, we've seen I think, Glenn, price increases across the spectrum of long products over the last few weeks.

Yes, that's true.

And I think that will likely continue.

The only thing that I would add, Seth, is to remember they are very different markets, not just between flat and long, but also within the long products themselves if you look at SBQ versus merchant and structural, and then on the long side as well.

So I agree.

I think we are expecting margin expansion throughout the year in the long products, but I'm not sure I would try to correlate those with flat.

I would just say that we are expecting pricing to be able to outpace any changes in scrap.

Okay.

That's very helpful.

And a second question, if I may, on the fabrication side.

Can you just give us a bit of sense in terms of demand and order trends.

Following tax reform, are you already seeing a real tangible improvement in the orders and where are you seeing that, perhaps, from a product perspective?

Chris?

Yes.

We continue to see expansion in the construction, where all of our indices we follow continue to indicate such.

I would say that, for what it's worth, the Western markets have come to life in the last 6 months.

Midwest, Upper Midwest has been strong.

Not that anybody else has been weak, but those have been areas of the bigger market change.

We just maintain a positive outlook on non-res.

It's a healthy mix of institutional, commercial and big-box continues.

So we -- steady as she goes.

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

Theresa, I just wanted to clarify in your opening remarks.

I saw you mentioned up-front that you expect higher raw material costs to translate to significant margin compression in 2Q versus 1Q.

Did I hear that correctly?

That was in specifically fabrication, Dave.

It's just as -- if you think fabrication uses steel, right, and as we have increasing steel costs, there's probably an 8- to 12-week lag.

And so you're going to start to see higher prices because they benefited from having lower prices where the -- of the steel they purchased kind of late fourth quarter.

Now they're going to have first quarter prices hitting the second quarter.

And that, we likely think, will cause some margin compression in fabrication, but only that segment.

Completely understood.

Okay.

Now back to the steel operations segment.

Obviously, there's a lot of moving parts on prices, mix, scrap, things like that.

I know you're hesitant to -- typically, to provide much sort of short-term specific commentary.

But given the magnitude of the changes we've seen, can you just give us a bit of a sense as to the margin expansion magnitude in metal margin expansion that we should be expecting in 2Q with the order books and the lags -- I mean, effectively, the order books that you have in place at this point?

Well, we're not going to give specifics, Dave, but I appreciate the question.

We do expect it to be meaningful, and we expect it to be kind of across the steel ops.

But more importantly, you're going to see, I think, more of -- well, you're going to see expansion of flat-rolled side as well.

And I think you can probably get to some of that on your own because scrap has a 1 month lag as you know, and you know that we primarily use busheling or prime scrap in the flat roll operations.

And interestingly enough, because of the dynamic with 232, we actually have -- our contracts are such that there's a minimum quantity customers have to take and then there's a maximum available.

And because of the tightness in the flat-rolled market, the customers have been taking the maximum available, which has meant that our contractual business is really closer to 55% of our total mix right now in flat roll.

So you're going to see that lagging CRU price move into the second quarter.

So they're going to get benefit from that as well, as we think will be of moderated scrap platform.

So I think that there's positive drivers in the flat roll side, and then we just spoke to the long product side where we see drivers as well.

Sorry, we're not comfortable being specific.

No, that's helpful.

I appreciate it.

Just a last related question.

Based on what you just said, is it reasonable to expect product mix to be more a little bit heavier on the flat roll than the long product side sequentially?

Well, we would expect that we're going to see incremental flat roll shipments.

But the Butler and Columbus had record production already in the first quarter, so we think there's incremental availability.

But if you think about all the additional capacity that we have, most of that's been long products.

So as we see improvement in mix, I'm not sure that you're going to see it substantially one way or another, but there's more opportunity for volume uplift on the long product side market independent.

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

Just taking a step back philosophically in light of the very strong market conditions we've been talking about and watching this year, what does Steel Dynamics need in order to think about more substantial capacity additions than what you've been planning prior to the big move in prices this year?

What conditions, what visibility?

Can you just give us a sense of how you're looking at those -- the decision on that end?

Well, Timna, and honestly, I don't believe it has changed.

We wouldn't necessarily change our strategy on the Section 232 alone or on tax reform or whatever.

We take a very long-term view and we look at sort of through-cycle metrics.

So that the immediate, incredible optimism out there, it doesn't mean to say that we're going to be shifted in a different (inaudible).

I think we've demonstrated -- the business model that we've set since the very beginning of our company and certainly the position that we've made over the last 7, 8, 9 years has put us in good shape to leverage the current marketplace and also even in better shape to weather any trough going forward.

So I think it's kind of steady as she goes.

We're not changing our strategy materially.

Our anticipation is to put the balance sheet to work, continue to be the most efficient, lowest-cost steel producer out there, not just steel producer but fabricator and metals recycler, and drive superior financial metrics.

Okay.

Fair enough.

Also, you mentioned that May 1, of course, deadline for some of the temporary exemptions.

Do you have any further thoughts on how that can play out?

Because it's also -- it seems that there are some negotiations with other countries that could receive exemptions like Japan and some that may see their exemptions change into quotas.

In your discussions with the extent that you have them at the White House, do you have any sense of how those might play out?

Well, it's certainly a changing environment out there.

But I think we're appreciative and we both -- well, both appreciative and applaud the proactive stance of the Commerce Department and the administration, for sure.

Despite the recent spike in imports, obviously, there are a whole bunch of countries that just took advantage of those exemptions and thrust and pushed material onto our shores, but that will recede in the coming months.

I think it's helpful to maybe step back a little bit and understand what we were looking for as an industry.

And -- but we weren't looking for the elimination of imports but sort of a fair playing field, whereby imports would return to a more normalized level, 20%, 23% of demand and get away from the 30%, 33% of demand that crushed our marketplace.

And in doing so, just allow for a more healthy domestic mill utilization rate that would, in turn, allow the entire industry to have a better profitability profile and exceed the cost of capital so we can reinvest, develop new products and be a better provider for the customer base.

And to be honest, when the first announcement came out, we were a little alarmed to the 25% blanket tariff.

We actually, along with others, supported one of the other options that Secretary Ross presented, and that was to be punitive on the culprits, so to speak, and levy a more normalized quota on the rest of the world.

But I think as time goes on, prudence is prevailing.

And I do believe the -- even though you talk of the negotiations and perhaps a more compromised position, I think that's where we should be.

A 25% straight tariff across the industry, I believe, would have really tightened the industry and perhaps even created a steel shortage.

And again, that's not what we want.

We need a balanced approach so we can have reasonable pricing, reasonable spreads, reasonable profitability, yet still have a good supply for the manufacturing base of the U.S.

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

Mark, you had mentioned that you had shipped 36,000 tons off the paint line at Columbus in the first quarter, and you think you're going to be on track to do 90% by midyear.

Question is, do you have this visibility in your backlog?

Is this business that you've won or you think you can go out and win?

Just some clarity on that would be helpful.

Barry?

We currently are doing lots of trials that, believe it or not, with the paint, there's many parameters that go into it.

So we're securing approvals for various pieces of business that we see ramp-up schedules coming through, especially through July, through the end of second through third quarter.

So we have a confidence that the products we're making are being accepted by our customer base, and we're using this time to develop some longer-term relationships with products that the new line allows us to make that we don't make at other plants.

So we're a little more judicious with what we're making there, but the pipeline looks good and the quality that the team is producing is really doing well.

So we're trying to have a managed entrance to the marketplace.

Okay.

I appreciate that.

And the second question I have is just on the raw materials situation right now and input costs environment.

Mark, if you could maybe give us a little bit of an update on the cadence of consumable cost increases being the electrode and refractory situation, whether or not you're seeing that now or whether or not you expect that to be staged in through the course of the year.

And then, also, is there any potential risk on pig iron imports from Russia, right now, given the geopolitical environment?

Well, on the consumables, I think it's as we've reported in past calls, Phil.

On the electrode side, we picked up a couple of bucks a ton, I think, in the first quarter, and maybe we've got another $1 or $2 coming on through the second quarter.

$4, sorry.

Yes.

No, it's okay.

Actually, it's about -- well, between electrodes and refractories, we were up about $2 per ton in the first quarter, sequentially.

And the expectation, if you'll remember, we still had some old supply versus the new contracts.

So as we run into more of the new contracts for the divisions in the second quarter, we expect that to increase and then another incremental, probably, $4, and then be very stable through the rest of the year.

But you're saying that's electrode and refractory.

That's electrode and refractory.

I was taking them one at a time, but yes.

Okay.

Great.

And then, also, on that other subpart to that question, do you think there's any risk on pig iron imports into the U.S. from Russia given the geopolitical environment we're seeing right now?

Russ?

I think, certainly, there's some risk there.

I think, it looks like Brazil is going -- is ramping up some.

What we're hearing is that some of the producers that had been sitting idly are actually talking about coming back up.

So I think there's a slight risk on the geopolitical side with Russia.

But again, you've got the Ukrainians and the Brazilians, I think, that will fill in part of that deal.

It could result in some price pressure.

But again, that just remains to be seen.

Our next question comes from the line of Chris Olin with Longbow.

Mark, I just wanted to make sure I understand the dynamics of global supply and the exemptions.

It sounds like you do not expect imports to pick up much over the summer months.

But I guess, I'm curious, the countries that are currently exempted, are the mills in those regions not offering a very low-priced product right now?

And then second to that, how do you think about where potentially the price floor is for maybe something like hot-rolled steel going forward?

Well, the exempted countries, if you tick them off, you have Canada and Mexico, our NAFTA trading partners.

The -- I think are -- it's balanced and it's business as usual.

We're not seeing any disruption from a pricing perspective of materials flowing either way.

Europe, the landed price, until recently, has been sort of at par, if not higher than the States, and that's probably changed the last month or 2. But nonetheless, no real massive impact from Europe.

Australia, I think the exemption there was principally due to BlueScope's mills on the West Coast.

So we're not getting impacted there dramatically.

But no, I strongly believe in the coming months through the summer, you'll see imports recede, for sure.

Okay.

And then just second to that, can you talk a little bit about trucking availability as capacity constraints or freight costs change the outlook for, perhaps, the raw materials or maybe steel product segments?

I think there's continual pressure there, but it's not inhibiting us from doing business, right?

No I think certain freight areas, freight lanes continue to be real strong.

But it really requires us, like we always have, to work closely with truck and rail service providers.

And it's just the regulations that came into effect are being adjusted in the system.

And the more -- the better we are a place for the trucks to do business, the better we get service.

So right now, it's daily work, I'm not going to say it's easy, but we're doing good.

We're not having shutouts or too many missed trucks, at least on the flat side.

Glenn?

On the long product side, it's challenging, Mark.

I mean, both rail, our availability in trucking lanes.

To Barry's point, some of the lanes are very open and can get you some good rates too.

Other lanes are a little more challenged.

It's a daily fight.

Daily struggle.

But we're working with our customers and working with the transportation companies and we're continuing to fight through it.

Can I just ask how much of the volume goes through rail right now?

Well, across the company...

It used to be more than 50% by rail.

It's probably closer to 50-50.

If I had to guess right now, I'd say it's probably close to 50-50 across all our steel sector.

On the outbound side.

On the outbound side, right, right.

Our next question comes from the line of Cleveland Rueckert with UBS.

It's actually Andreas Bokkenheuser of UBS.

Can you hear me okay?

Yes.

Yes.

Excellent.

Just a question on growth.

You were obviously talking about capturing market share early in the call.

Do you have a sense of your overall consolidated volume growth at the moment?

How much of that is inorganic growth via market share gains and how much is affected with the end market growing?

And maybe also give us a sense of where do you see the volume growth potential throughout the rest of this year.

Is this mainly in construction?

I think, you mentioned construction earlier or do you see potential better growth elsewhere?

Well, the specific market share growth that we referenced is in automotive at Columbus.

We've gone from next to nothing to about 220,000 tons last year.

And the team is on -- I've been qualified for platforms over the next 18 months to take that up to about 400,000 tons a year.

That will likely be kind of where we'd like to see it going forward, 400,000, maybe 500,000 tons from that facility, and that will be sufficient market exposure from my perspective on automotive.

On the long product side, I think most of the volume expansion is increased overall demand as opposed to very specific -- we are in...

Across all sectors, yes.

We are picking up market share in certain specific pockets.

But generally, it's volume, general volume increase.

Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

Is it reasonable to expect the steel productivity in the mills, the output to rise about 1% per year due to innovation and productivity?

And do you have any specific capital projects that might increase output in any of the product lines significantly more than a trend productivity rate?

Well, John, I'm not so sure we've analyzed it as a percentage growth per year.

As you know, our team seems to continue to be innovative as part of our culture.

And year-over-year as you suggest, we do outperform.

Butler, amazingly, after 23 years continues to do that.

But I think further output there, growth is incremental.

At Columbus, we have, I think, a material opportunity.

Our focus for the team has been market diversification and product development, those arenas, and we haven't necessarily pushed that facility real, real hard.

And it's around about nameplate capacity today.

And so if we're true to form, that mill should be capable of a lot more.

The major growth isn't necessarily incremental of any existing line or mill, but the organic opportunities we outlined already.

And the most specific being the rebar projects that should add about 450,000 tons of shipping capability to our portfolio.

John, just as a quick reminder, we took Butler from 3 million to 3.2 million tons at the beginning of this year.

And for Roanoke Bar, we actually moved from 600,000 tons to 720,000 tons, all related to some incremental initiatives.

And with the Structural and Rail Divisions, beginning 2019, they're likely to be closer to a 2 million tons a year capacity versus a 1.8 million.

So there are specific projects, as Mark said, that's driving that.

Right now, our total capability is 11.4 million tons, but that's likely to be over 11.5 million come 2019.

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

I haven't heard much recently about any problems with energy costs.

Are you seeing anything there?

And also how about for alloys?

No real concern relative to energy costs, either power or natural gas for that matter.

So everything is stable.

On the alloy front, we are seeing an appreciation there.

Again, I don't believe it's material.

So on the SBQ side, we pass it along with a surcharge mechanism so we don't see it on that.

We are seeing it as an [ADM] a little bit on the structural side, sure.

In fact, most of the alloy increase, we haven't seen it sequentially because alloys were higher kind of throughout 2017 beginning in the second and third quarter.

If you look year-over-year, it's pretty substantive, but we really kind of already absorbed that higher alloy cost in the second half of '17.

Our next question is a follow-up question from Phil Gibbs with KeyBanc.

Mark, I just had a question on the rebar investment at Roanoke.

And I know you had touched upon it earlier, but can you just remind us what that change on that investment is relative to your initial time line and maybe a little bit more color on why?

Yes.

Sure, this is Glenn.

We've -- working with our supplier of that equipment we had some engineering issues and some delivery issues on the equipment, so that pushed the project back 4 or 5 months here.

We've got the rebar outlet now.

That has been commissioned and we can successfully run rebar through that.

But you really get the gain in the production with the larger reheat furnace.

We're starting to bake that furnace in here in the next few weeks and we anticipate changing over to that furnace in the month of May, which will then give us a reheat capability of a higher tonnage per hour, which will allow us to run the rebar there.

In the past, we've run 50,000, 60,000 tons a year of rebar at that facility.

We'll be able to push, like Theresa and Mark have said, up to 200,000 tons at that facility of rebar per year.

And at the same time, get some incremental gains on some of our other merchant products because of the larger reheat furnace.

And Phil, we're not expecting that same performance at the structural mill line.

No, the structural mill is actually a different supplier.

And right now, that project seems to be going very smoothly and that's on schedule.

That concludes our question-and-answer session.

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

Well, again, appreciate your time today.

Appreciate your support.

I think we are well positioned to take advantage of a growing marketplace in all sectors.

I think someone said we're about to hit all cylinders and it's going to be a very good 2018 and 2019 for us.

For the customers on the line, I certainly appreciate your support.

And for our employees, guys and girls, you're doing a phenomenal job.

Just keep safe each and every day.

Thanks to everyone.

Bye-bye.

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

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