Steel Dynamics Inc (STLD) 2018 Q2 法說會逐字稿

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

(Operator Instructions) Please be advised this call is being recorded today, July 24, 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, Melissa.

Good morning, everyone, and welcome to Steel Dynamics' Second 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 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 referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Record Second Quarter 2018 Results.

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

Fantastic.

Thanks, Tricia.

Well, good morning, everyone.

Welcome to the second quarter 2018 earnings call.

We value your time and interest.

The entire SDI team delivered, I think, a phenomenal operation -- operational and financial performance this quarter.

The market has certainly helped, but one should not overlook the underlying growth and market positioning the team has achieved in recent years to take advantage of such a market.

Through innovation and teamwork, we're still breaking records and intend to continue to do so, with our second quarter earnings at a record high.

I'd like to offer a heartfelt welcome to our new Heartland family.

They are a great cultural and business fit, and we're excited to drive to new heights with them as well.

We'll share more specific plans for Heartland after Theresa provides insight into our second quarter results.

Theresa?

Thank you.

Good morning, everyone.

Our second quarter 2018 net income was a record $362 million or $1.53 per diluted share.

This compares to net income of $154 million or $0.63 per diluted share in the second quarter of 2017 and $228 million or $0.96 per diluted share in the sequential first quarter.

Our results were above guidance of between $1.46 and $1.50 per share due to higher-than-anticipated average flat roll pricing.

The Butler and Columbus teams continue to execute at exceptionally high levels, continuing to exceed numerous milestones.

We achieved record revenues of $3.1 billion in the second quarter, 19% higher than our previous record reached in the first quarter.

Higher sales reflected improved pricing and volume across the steel platform.

Operating income increased 55% to a record $502 million compared to first quarter, a tremendous performance by everyone with the steel platform driving the improvement.

To note, on June 29, 2018, we completed the acquisition of Heartland, a flat roll steel processing company for $400 million, inclusive of $60 million of normalized working capital.

We funded the transaction with available cash.

The final cash settlement is subject to customary working capital adjustments, which will take place over the next several months.

A preliminary allocation of purchase price has been completed, which resulted in a preliminary step-up of inventory and fixed asset value.

The associated $12 million to $15 million negative impact to earnings will be reflected as an increase to cost of goods sold in our third quarter 2018 financial results.

The current plan is to maximize galvanized steel sales of approximate 360,000 tons annually while building cold rolls and P&O sales during the next 6 to 9 months, reaching an average annualized total run rate of 800,000 to 900,000 tons by midyear 2019.

The through-cycle EBITDA estimates of $50 million to $60 million assume continued sourcing of substrate from third parties for much of the volume.

We're very excited for the addition of Heartland to our Midwest flat roll location.

In a few moments, Mark will show the numerous synergies and optionalities that the assets bring to us.

Back to our results.

For the second quarter of 2018, steel shipments increased 8% sequentially to a record 2.7 million tons.

Even though flat roll volumes continue to improve, long product shipments experienced the most widespread increase, especially at our Structural and Rail division and wide-flange beam sales.

Steel metal spreads also expanded meaningfully across the platform as our average quarterly sales price increased $110 per ton to $932 in the second quarter, and our average scrap cost consumed only increased $27 per ton.

The result was record operating income from our steel operations at $537 million in the second quarter, a 59% sequential improvement.

For our metals recycling platform, improved domestic steel mill utilization resulted in a 7% increase in ferrous shipments.

The team also continues to manage operating costs very well. .

However, based on higher unprocessed scrap procurement costs, their second quarter operating income decreased slightly to $26 million compared to the $28 million achieved in the first quarter.

We continue to effectively leverage the strength of our vertically connected operating 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, melt efficiency and reducing company-wide working capital requirements.

As we suggested on our first quarter call, our fabrication operations experienced slight compression during the quarter, decreasing their operating income $6 million to $14 million as the benefit of higher average selling value and near-record shipments were more than offset by increased steel costs.

However, the June order backlog remained strong and is higher than it was this time last year.

This, coupled with customer optimism, supports our belief in continued demand strength for the second half of 2018.

During the second quarter, the company generated strong cash flow from operations of $326 million.

During the first half of 2018, we generated our second-highest first half cash flow from operations of $504 million.

Operational net working capital grew $354 million due to overall market improvement, which resulted in higher customer account balances and inventory value.

First half 2018 capital investments were $106 million.

We currently estimate second half 2018 capital expenditures to be in the range of $150 million to $160 million.

We also expect to fund our recently announced $140 million galvanizing expansion with free cash flow as follows: in the second half of '18, we're likely to spend about $25 million additional; in fiscal year 2019, we'll spend approximately $95 million; and then the remainder, about $20 million will be spent in early 2020.

We maintained our cash dividend for the second quarter at $0.1875 per common share.

We also repurchased $118 million of our common stock during the first half of the year.

And at the end of the quarter, we had $54 million still available, pursuant to the $450 million board authorized program.

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

We maintained liquidity of $2 billion at June 30, with $810 million in cash and short-term investments and $1.2 billion of available funding under our new revolving credit facility.

During the quarter, we renewed our $1.2 billion credit facility and extended the maturity date an additional 5 years to June 28, 2023.

Subject to certain conditions, we have the ability to increase the facility by a minimum of an additional $750 million, which further supports our growth initiatives.

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

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

Thank you.

Mark?

Super.

Thanks, Theresa.

Well, as we often say, safety is and will always be our #1 priority at SDI because nothing surpasses the importance of creating and maintaining a safe work environment.

And certainly, our performance remains well better than the industry averages, and it's better than virtually all the industry.

And yet our -- 65% of our locations achieve 0 recordable injuries so far this year.

But in aggregate, we saw an uptick in injury rates this quarter.

They were minor, yet very, very avoidable.

And the message to our team, just to say, this is simply unacceptable.

We must continue to be aware, to think and to help each other remain safe at all times.

It's an absolute imperative.

And it's something we should not be celebrating our operational and financial records if we're not able to do it safely.

That being said, steel platform continues to execute exceedingly well.

We achieved record quarterly steel earnings and shipments and hit numerous production milestones.

Underlying domestic steel demand is strong.

Virtually every domestic steel consuming sector is either already good or strengthening.

Our special bar quality division, which we believe is our bellwether to the broader steel market, achieved another shipment record, further supporting our belief in broader industrial sector momentum.

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

We recently announced a new $140 million galvanizing line at our Columbus Flat Roll Division.

This investment is another step of further diversification into higher-margin products.

In recent years, Columbus has transformed its product offerings through the addition of painting and galvannealed coating capability and through the introduction of more complex grades of flat roll steel, some of which serve the automotive sector.

The diversion of product to these value-added outlets has reduced the amount of volume available to our existing galvanized customer base.

So the addition of a third galvanizing facility will allow Columbus to serve these existing customers, along with new customers in the region.

This expansion will also reduce Columbus' exposure to the more cyclical hot roll market, which will result in higher and less volatile through-cycle earnings.

Construction of the line is planned to take place during the next 24 months, with operations beginning midyear 2020.

Additionally, during the next 2 years, we plan to make additional investments at Columbus to upgrade certain lines and hot strip mill capability to further enhance and stabilize profitability with continued product diversification and process efficiency gains.

The investments will increase Columbus' range of complex-grade capabilities and will improve the process control needed to produce the best high-strength steel grades used in the automotive industry and elsewhere.

These new investments extend Columbus' strategies to diversify into value-add capabilities.

The recent 2017 paint line addition provides 250,000 tons of annual coating capability and diversification to some of our highest-margin products.

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

This location also facilitates lower-cost logistics for the Southern U.S. and Mexico markets.

The Columbus paint line has been ramping up nicely and had a 90% run rate this past quarter.

We're also investing in our long product steel operations.

Improving construction and industrial markets, coupled with the execution of some of these initiatives, resulted in increased capacity utilization of our long product steel mills in the second quarter at just over 90%.

As a reminder, we have 3 specific organic initiatives to increase the utilization of our Structural and Rail Division.

First, we are growing the production of SBQ quality blooms to send to our Engineered Bar division, which needs blooms to fully utilize its rolling capability.

This improves through-cycle utilization at both facilities.

With over 43,000 tons of blooms shipped in the second quarter, we are well on our way to the anticipated annual transfer of over 200,000 tons.

Secondly, this year, we further diversified our Structural division's product offerings to include large angles.

The team is just beginning sales with a plan to eventually sell 100,000 tons annually.

Lastly, our $75 million investment to utilize excess melting and casting capability there is on schedule for the first quarter 2019.

Expansion will further diversify our product portfolio and market sector 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 rebar business model should substantially enhance the current supply chain, providing meaningful logistic yield and working capital benefits to the customer.

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

In aggregate, these 3 initiatives provide a material improvement in future through-cycle utilization and profitability at this facility.

We also recently invested $38 million at our Roanoke Bar Division to utilize their excess melting and casting capability.

We added equipment to allow for multi-strand slitting and rebar finishing of 200,000 tons per year.

Similar to our Midwest investment, we expect to have strong market penetration as we will be one of the largest independent producers of rebar in the Mid-Atlantic region.

Commissioning of this equipment is underway.

The plan is to increase rebar sales through the second half of 2018 to an 80% to 90% runoff rate.

The steel platform teams are doing a great job.

And with the completion of the Heartland acquisition a few weeks ago, we now have well over 12 million tons of annual shipping capability.

We believe this acquisition will result in numerous future earnings benefits with the Heartland's current operations into our broader Midwest flat roll group.

Heartland is equipped with a continuous pickle line, a cold mill and a galvanizing line.

The equipment is fully upgraded and is in excellent operating condition.

Historically, Heartland was operated at low utilization rates, focusing on galvanized steel.

We plan to focus on a full breadth of products, including very light gauge sheet.

Our operating expertise, product market familiarity and the geographic proximity of our existing Midwest flat roll operations allows for meaningful value creation.

Consistent with our strategy to differentiate ourselves and grow through product diversification, Heartland provides wider and lighter gauge product capability, diversifying our Midwest products and end markets.

We're familiar with their [market and] customer base.

Through the continued addition of value-add capabilities at our Butler Flat Roll Division, we've displaced some of our customers that can now be supplied by Heartland.

Heartland will also provide pull-through volumes.

We plan to supply some of Heartland's required steel substrate from our Butler Flat Roll Division, increasing through-cycle profitability at both locations.

Heartland will also improve Butler's cold mill productivity.

We plan to have our lighter gauge flat roll orders made at Heartland, which will increase Butler's cold mill productivity.

Lighter gauge products require more time to run, and Heartland is better equipped to make these gauges.

In whole, Heartland provides a unique margin-enhancing opportunity for Steel Dynamics based on our value-added-focused Midwest flat roll locations.

We're excited to begin the integration and value creation and once again welcome the Heartland family to the SDI family.

It's going to be a great time.

Our metals recycling platform also delivered a solid performance.

Higher domestic steel mill utilization supported improved ferrous shipments.

Prime scrap flows have been steady, and we don't expect that to change.

Export of obsolete scrap should remain moderate.

And thus, we also expect obsolete scrap flows to continue to improve, resulting in stable scrap prices for the remainder of the year.

We believe there's more than adequate scrap supply to address higher domestic steel mill utilization rates.

The fabrication platform also delivered a solid performance, with second quarter shipments at near-record levels.

However, higher steel input costs more than offset the improved average sales price and higher shipments.

Our order backlog, though, 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.

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

Domestic steel inventory levels remain reasonably balanced, and imports will be under control.

Based on strong domestic steel demand fundamentals and customer optimism, we believe steel consumption will continue to be strong throughout the year, providing higher levels of mill utilization and extended lead times.

In combination with our expansion initiatives, we believe there are firm drivers for our continued growth through 2018 into 2019.

I'd like to also comment on the actions the U.S. federal government has recently made to restore financial health to the domestic steel industry, thereby providing a sustainable, long-term support to the U.S. manufacturing base.

We support their attempt to create a more level playing field for the domestic steel producers, and we have seen positive change.

The industry continues to invest and create new jobs.

We believe there has been -- also have been a market increase in the utilization of existing steel facilities.

In particular, utilization of U.S. flat roll facilities has risen to way over 85%.

Steel companies are increasing jobs and wages across the country.

Specific to SDI, our business model and execution of our long-term strategy continues to strengthen our financial position through strong cash flow generation, demonstrating our sustainability, 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 continual organic and transactional growth.

Our team provides the foundation for our success, and I thank each and every one of them for their hard work and their commitment.

And remind them again, safety is our first priority.

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

So again, thank you for your time today.

And Melissa, we'd love to open the call up for questions.

(Operator Instructions) Our first question comes from the line of Chris Terry with Deutsche Bank.

A couple for me on Heartland and then one on just capital management as well.

Specifically, on Heartland, the $50 million to $60 million EBITDA guidance, does that include the synergies of the logistical savings and the pull-through volumes that you've talked about?

No, I believe that will be kind of the earnings rate of the facility unto itself.

Time will tell.

I think the number of synergies is quite extensive.

As we looked at the investment premise for Heartland, there are multifaceted synergies and strengths there.

Obviously, we're adding volume and earnings without adding domestic capacity, 350,000 tons of coated capability there.

The nameplate for the cold mill is around about 1 million tons.

We're anticipating somewhere around 800,000 tons, though, because, again, as we said in the prepared notes, our focus is on the lighter gauge products for the mill.

So I think we'll be ramping up to 800,000 tons or more through 2019, into midyear.

So I think it's a great additional volume.

It's diversifying our product mix.

It's a 72-inch wide facility, capable of lighter gauge substrates.

We'll be able to, through purchase of substrate from other producers, get into different grades and to [deep drawing] grades for the auto market, for instance.

There are meaningful operational benefits.

It gives us great sort of flexibility and optionality as we integrate it with Butler's flat roll facility.

And it will give us a substantial pull-through volume.

Our intent is to be drawing about 300,000 tons or thereabouts from Butler into the facility and purchasing the remaining substrate from others.

And that will actually give us sort of leverage on our steel [purchases] we're going to be buying when you consider the New Millennium fabrication side of our business, and The Techs will be buying somewhere between 1.5 million to 2 million tons of substrate a year.

But I don't think you can overlook that pull-through volume, though.

The through-cycle earnings generation will be a huge benefit for us.

Okay.

And just one other one on Heartland.

I think CSN had plans to double the galvanizing capacity for about 80 million.

Given your Columbus third galvanizing line, where does that fit?

Or do you still have plans to do it down the track?

Or is that something you'll just evaluate with time?

Well, as Theresa suggested, we only closed on June 29, the day after my birthday incidentally.

But again, we're still absorbing, starting the integration of that facility.

I think we look at Heartland as certainly being a growth platform, either downstream or back to the hot side or both with time.

Okay.

And then just a final one.

Just on the capital management, you've got about $50 million left of the $450 million buyback program.

Any more guidance on capital allocation or what -- how you're looking at M&A and just the use of cash flow at this point?

Well, as it relates to the buyback program, Chris, it's really been a valuable tool for us.

And so as we get to the point where we've extinguished the remainder of that program, we'll take a look at where we stand both from a transactional perspective and an organic perspective and add that back to the toolbox if it makes sense to utilize that.

And so we'll be addressing that sometime, I'm sure here, in the coming third quarter.

I think, obviously, we're blessed with an incredibly strong balance sheet.

And our through-cycle cash generation profile, I think, will remain incredibly strong, which allows us kind of a very balanced cash allocation approach.

So we will review that at the end of that program.

We obviously will continue to evaluate our dividend profile against the through-cycle cash generation and would hope that we'll continue to look positive profile that we've demonstrated in the past there to return some value to the shareholder.

But we're still squarely focused on growth both organically.

I think we outlined a lot of the opportunities that are in progress today and will give us significant value going forward.

And the team has demonstrated for the last 25 years and will continue to demonstrate an ability to squeak a lot more out of the existing assets.

But then also from a transactional side, it's quite -- well, it's just a crazy world out there.

The pipeline is full.

There are more opportunities than probably we can handle currently, so it's a good issue to have.

And I think those opportunities have significant potential strategic fit, but also they're significant size opportunities.

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

I saw really strong pop in long products in the Structural and Rail.

And Mark, you talked about it a little bit.

Are you ahead of schedule with some of those capacity utilization initiatives there?

And maybe I could apply similar questions over in Engineered Bar Roanoke given the volume performance.

What I'm getting at is, are those sustainable totals, plus or minus some seasonality, provided the underlying markets continue as they are?

Well, I believe so.

You certainly have increased market demand.

You have -- year-over-year, I think structural imports are down 20%, 22% or thereabouts, recognizing that a lot of that is rebar, which obviously plays well into our strategy to get into that marketplace.

But the team, though, has done, I think, a magnificent job diversifying the product mix, getting into new market niche opportunities.

If you look at, I know it's small, but the galvanizing line that was installed at Steel West Virginia, that thing is, Glenn, maxed out?

Yes, it's wide open right now.

It's wide open and gives that mill sort of diversification and the ability to run at higher rates even in this market today.

So no, I do believe that it's sustainable.

Those environments continue to grow from a demand perspective.

We're seeing huge growth at the SBQ mill in Pittsboro.

And as a reminder, we installed additional capability back 3 years, 5 years, on that.

Yes, but it never had a steel-consuming market to really exploit or leverage that additional capacity.

And the team is literally out there and is gaining market share and doing a great job.

So I think long products is in great shape.

It will continue to grow.

And additionally, not only volumes are increasing, but if you look at the spreads in long products, particularly structurals for the last 3 or 4 years, there's been a year-over-year contraction.

Now that's reversed.

It's a positive market environment.

The spreads are expanding, so we're getting the advantage of both volume and spread.

And then I think it's important to add to that, you mentioned the projects.

The projects actually aren't ahead of schedule.

The ones that were expected to be initiated, including the rebar project at Roanoke, have started.

But the one real significant project, which should help increase the volume at the Structural and Rail Division even more, is the additional rebar project, which we've talked about not coming online until kind of beginning of 2019.

And so you still have the volume impact that's coming as well, not just market related but actual volume and diversification.

Got it.

So this is really a matter of capacity utilization as opposed to anything added to the denominator?

At this point, yes.

Okay.

All right.

Let me flip that over.

That's very helpful.

Let me put this over then on the flat side because we've seen spreads over hot-rolled coil for value-added flats compress substantially in recent months as hot-rolled availability has tightened.

And Mark, you pointed out the cyclicality there.

So what's your assumption for long-term price differentials among the value-added sheet products there?

Whether those are the ones you're embedding in your Heartland numbers, or when you're doing your projected return for the new gal line, what's fair do you think through-cycle?

So Matt, we won't get into the details, but what I will tell you is that we're not using the record spreads we've seen in the last, call it, 2016, 2017, 2018.

We're using a longer-term average for that spread.

But from a market perspective, I think we suggested for several calls, when the spread between hot-rolled coil and coated and cold-rolled sheet went up to 200 -- I think it peaked out at 220 that we felt that it was the case of hot-rolled coil lagging.

It wasn't the case of coated being excessive.

Obviously, with the trade constraints, import constraints, hot-rolled coil has come up to coated and surpassed really the sort of historical levels.

We would imagine that over time, again, with some control in imports that the historical spread would be restored.

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

I just wanted to follow up on this discussion of the new galvanizing capacity, cold rolling capacity that you're adding, that others have been adding, also the OCTG restrictions and even some of the dumping cases irrespective of Section 232 are kind of tightening the hot roll market.

What do you think it takes for you to decide to add any flat roll capacity?

And what kind of conditions would you need to see for that investment decision?

Well, I think, obviously, you're right, Timna, the market is very positive.

It's got huge momentum.

Hot-rolled coil, in particular, is very tight and will continue to be for some time.

And I believe that you're going to have some new hot roll capacity come on a little bit at Mingo Junction.

Granite City is going to bring some more capacity on, but that's going to be more than absorbed by just continued growth in demand and the erosion of imports.

I think from a standpoint of greenfield investment, our preference, obviously, is to grow through existing capacity and not add capacity to the marketplace, first and foremost.

That being said, I think it's only prudent for us as we evaluate opportunities, transaction opportunities, we do sort of our due diligence and calibrate that against greenfield and the respective returns that one may get from that.

Okay.

Fair enough.

I wanted to separately ask a little bit about cost pressures.

And although obviously a really strong quarter, just curious about what was embedded in that just for go forward regarding specific cost pressures, I think, from electrodes, freight and labor would be maybe the key incremental costs.

If you wouldn't mind detailing a little bit more what you saw there.

Timna, from the perspective of electrodes, I think we mentioned on the last quarter's call that we expected electrodes to be up in the second quarter an additional $4 per ton, and that would be I think a good range to assume.

On the labor, a reminder is that we're very much variable as a company incentive compensation.

And so labor impact on a percentage increase basis isn't anything that is really of note at this point in time.

And as it relates to freight, a lot of our freight is a pass-through.

And actually, the freight on a per ton basis, I can't tell you if it was meaningfully higher or not.

I don't know, Barry or Glenn or Chris, you have a different perspective?

Well, we're definitely seeing higher freight costs that are passing through the system.

And they seem to be related to various corridors where you ship, but there's definitely pressure across the industry to move things back and forth.

And we've seen it all the way from scrap through finished good shipments.

At this point, it's concerning, but it's manageable at this point.

And really, the freight impact to us is only on the raw material input side.

Obviously, the consuming base takes up the freight on the coil shipping.

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

Just looking at your fabrication business, obviously, your business came under a bit of margin pressure in the course of Q2 given rising input cost.

Can you just comment on the outlook for continued strong demand and order intake?

How long should it take for you to be able to better pass on these raw materials costs to customers and for your margins to recover?

And then on top of that, maybe if you can talk a little about the order backlog, how has that progressed over recent months?

And are you seeing an acceleration or deceleration of demand trends going into H2?

Chris, do you want to handle (inaudible)?

Yes.

We do see that the team is making strides against raw material increases.

We are closing the gap.

But to your point, we've not been able to garner everything that we've been exposed to, particularly since November, that January time period where price has been up literally $200 a ton.

In some of our products, we make with bulk merchant and flat roll, and some of the merchant and flat roll relationships have swung a magnitude of $350 a ton over the last 6 months.

But the team is -- we do have evidence that the team is able to get some pricing.

We expect that if we get out of the volatility of the first half of the year on steel pricing and we see any kind of settling, 3 to 6 months, we're able to start recouping that.

The demand is such that we do believe we'll be able to get the kind of pricing we need to eventually catch up, but it's still a ways off for us.

Theresa, is that a fair statement?

Yes.

No, it's very well put.

We've got increased pricing even in the second quarter on the joist and deck side.

We would expect demand to support that going into the third quarter as well.

So much of it, if you'll remember, Seth, they have 8 to 12 weeks from the time they quote to the time they ship, so that takes some time.

So I would expect to still see some compression in the third quarter as well.

As far as demand, Seth, we continue to see elevated levels of quote activity that support further growth.

Warehouse and industrial sectors remain in a big growth mode and make up the lion's share of the industry shipments these days.

Retail construction continues to lag the other sectors, with the exception of the discount retailers and dollar stores, they're still in a good growth mode.

Again, quote activity remains robust.

The industry is on pace.

If you talk about backlog, the industry is on pace to book around 1.2 million tons this year in the joist industry.

That would represent the highest annual bookings since 2008.

So I think the team is positioned well.

They're executing in a fairly tough environment from a cost standpoint.

And as they make headway against that, we'll see continued and improved results.

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

I just wanted to follow up on the long volume.

You had mentioned they were pretty sharp in the quarter.

Of that roughly 30% year-over-year increase, can you help us bridge how much came from end market growth, how much from M&A and then how much from market share gain?

So from a long side perspective, we didn't have -- year-over-year, we haven't had any significant M&A.

All we did was add maybe 80,000 tons of capability annually on the finishing side of SBQ, so you didn't see really anything from a transactional perspective.

From the perspective of organic growth projects, again, as I mentioned, the rebar project at Roanoke is actually just getting started now, so that year-over-year change also is not really related to any organic type of expansion.

It really is mostly market driven.

And from the perspective of whether that's share or not, Glenn can jump in.

I would suggest that there is market share gain on the beam side and on the SBQ side.

I'm not sure about any other specifics to pull out?

Both of those including rail.

Rail was very strong this year also.

We're getting more rail trains per month on the load line.

So all 3, structural, SBQ and rail have been stronger this year.

To your point, it's all market demand.

So we're feeling pretty optimistic heading into the second half of the year related to construction demand both from the perspective of what we're seeing on the long product side as well as on Chris' commentary on fabrication.

Well, I guess, just maybe to clarify a little bit.

You did mention that structural imports are down about 20% to 22%.

So I mean, do you have any idea how much the market is up versus the share gains you're achieving from lower imports?

Just particularly for clarity, the 20%, 22%, that year-over-year down, is not just structural.

It's long products in general.

Most of that is rebar.

Most of it is rebar.

Yes.

Right.

So I guess, my question is, how much is end market growth versus how much are you taking share from import?

Cleve, I'm not sure that we're able to answer that question specifically right at the moment.

But it's our gut feeling that a lot of the momentum is really happening within the end markets themselves, although imports have obviously been impactful.

And the confusion there really is what's coming in as fabricated steel versus what's coming in as just normal structural.

Structural we see coming into the country is down.

But we're looking at the fabricated structural as increasing or as steady to what it was last year, slightly increasing.

So it's hard to get a handle on both those products.

You have confidence that the end market is growing, which is sort of like you're getting a double benefit?

Yes, absolutely.

And it's been growing for the last 3 years.

Our next question comes from the line of Piyush Sood with Morgan Stanley.

Just a quick one from me.

There was a media report that you'd agreed to acquire Kentucky Electric Steel.

Just wanted to check if they're accurate.

And if so, maybe to understand the rationale, the opportunity and the time line for the restart over there.

Yes.

It's -- I would put it in the classification of planned acquisition right now.

We haven't closed on it, although it's looking favorable.

It's not a massive entity relative to sort of our more global scope.

It will add about 200,000 tons of rolling capability, principally flats and flat bars, so it gives us some product diversification.

Our intent is not currently to start up the hot side.

It's just to better utilize our Steel West Virginia and our Roanoke billet capacity.

So the good thing is that it's going to improve -- again, improve the through-cycle utilization and earnings profile of those 2 facilities down there.

Our next question comes from the line of Michael Gambardella with JPMorgan.

Just wanted to ask you a theoretical question, and see, just if you can give us a rough ballpark answer to this one.

If you look at the current -- today's spot steel prices and scrap prices and there were no lags and they were fully realized in the second quarter results, how much higher would your profits have been in the second quarter?

Mike, well, they would have been meaningfully higher.

And the reason that would be is because if you look at the spot differential it has currently, it would be higher than our average, and this is specific to flat roll.

It has nothing to do with long products.

So it would be higher than the average.

And we have 50% of our book today at Butler and Columbus that's basically tied into contracts.

And so that is lagging anywhere between 2 and 3 months.

And that will have impacted the second quarter regardless of volume and mix.

And so you'll see some of what would be current for what would have been May, June, July spot spreads hitting the third quarter this year as we move forward about 50% of that.

So if there is an impact, I can't -- or won't, I guess, I should say quantify that.

Okay.

And then the second question.

You're expanding into a rebar presence, particularly in the Midwest and the Mid-Atlantic.

Before the tariffs went into effect, I believe Turkey had about 12% market share in the U.S. rebar business.

And what are you seeing from Turkey now that the tariffs are in existence?

It's marginal or negligible, I would suggest.

So it's quite timely that we're bringing the Roanoke facility on.

I wish Columbia City would be coming on tomorrow as well, but that's not the case.

Right.

So were most of the Turkish imports penetrating on the Mid-Atlantic and spreading out to the Midwest?

Or where did you see a lot of the presence of the Turkish exports?

You're exactly right.

It was Mid-Atlantic, going up to Burns Harbor in the Midwest.

And then honestly, Mike, we haven't really been -- we haven't been in the rebar market in the sort of solid Midwest to really get a feel.

Our small amount of rebar production has been at Roanoke, and that's Mid-Atlantic, and that's where we've seen the pressure.

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

Theresa, do you have the sheet mix for the quarter handy?

I do, Phil.

I'm sorry, I made you ask.

I didn't flip to that page.

Hot rolls and P&O for the second quarter, the shipments were 915,000 tons.

For cold rolls, it was 135,000 tons.

And for coated, it was 774,000 tons.

Great.

And any sense just so we can understand where the paint line ramp is within that coated mix?

How much of that was paint?

Any color you all can provide there?

Yes.

So the Indiana lines have been running pretty full, and that's not the differential.

But I think what you're speaking about is the ramp at the Columbus paint line.

And it's actually ramped up quite well.

So shipments in the second quarter were around 90% to 95% of their shipping capacity on painted.

Okay.

So you all are pretty much at your painted capacity at this point?

For the second quarter, yes.

Okay.

Terrific.

And just second question for me is just on SBQ.

Certainly, very strong quarter-over-quarter growth in volumes.

Just trying to understand how much of that is, call it, finished hot-rolled bar versus billet, trying -- seamless billet substrates, just trying to understand how much greater participation the domestics might be having in that supply chain right now given all the trade flow dynamics and the strength in the energy markets.

I would tell you that the billets -- this is Glenn Pushis.

The billets have been stable through the year, so that clearly didn't grow much.

Our growth is in the smaller diameter bars in the cold-finished market, and hence, our expansion into our bar finishing facility.

And we're penetrating automotive with some of these smaller sizes.

And the billets to supply that are coming from our Columbia City plant, which helped the utilization of the melt shop there also.

Now Glenn, are you seeing generally increased market penetration for SBQ within automotive in general, it'd be not just the production rates, but is there more content growth over time?

Yes, that's what we're seeing.

Automotive appears to be strong again next year with a 17 million build rate being projected.

Class A trucks are heavy, heavy, heavy right now, wide open, so we're penetrating those markets very successfully.

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

With Heartland, as you increase the volume, will you continue to source the steel from third-party mills or from your own mills?

I guess, there's a lot of demand for steel.

And as a corollary, would Heartland be a baseload for another Steel Dynamics flat-rolled mill?

You know how one company is talking about Brownsville, Texas and another one about Castrip on the West Coast.

Or is it just fortuitous and convenient that Granite City is reopening 2 blast furnaces and the old Wheeling-Pittsburgh Steubenville has 40,000 tons of scrap all ready to go?

Well, the substrate supply, John, to Heartland from Butler, and that principally will be from Butler, is planned to be somewhere around 300,000 tons.

That will expand and contract depending on the strength of the market elsewhere.

So we will be continuing relationships with third parties.

As I said earlier, we're already buying 1.2 million, 1.3 million tons, so that will take our procurement up to almost 2 million tons.

So it's not something new for us.

And hopefully, it will give us a little bit of leverage in the marketplace.

But we'll still continue to maintain those good relationships we've had.

Relative to hot production, again, as I said, Heartland in our mind is -- provides a growth opportunity, whether that be downstream or upstream, and there's ability to install hot capacity there if we deem that to be a good investment.

If I could ask a follow-up.

With the 2 million tons of purchases, would that make you something like the eighth largest steel buyer in the United States?

I don't know where it puts us, but it's a significant player on the procurement side, yes.

And 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, we'd like to thank you for your time, your support of our company.

I think our future is incredibly rosy.

It's good to be in the steel business today, and it's even better to be in the steel business as SDI.

I think the demand profile, the market profile and momentum is going to continue through the rest of this year into 2019, and I think we're going to have fun.

So thank you all.

To our employees, thanks for all you do.

And remember, be safe each and every day.

Thank you all.

Bye-bye.

Thanks, everyone.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.