Steel Dynamics Inc (STLD) 2019 Q1 法說會逐字稿

Good day, and welcome to the Steel Dynamics First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please advise this call is being recorded today, April 22, 2019, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to Tricia Meyers, Investor Relations manager. Please go ahead.

Thank you, Brenda. Good morning, everyone, and welcome to Steel Dynamics First Quarter 2019 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 leaders from some other operating platforms, including our metals recycling operations, Russ Rinn, Executive Vice President; our steel operations, Chris Graham, Senior Vice President, Long Products Steel Group; and our new flat roll steel mill and Southwest strategy, we have Glenn Pushis, Senior Vice President special projects; and Miguel Alvarez, Senior Vice President, Southwest U.S. and Mexico. Some of today's statements, which speak only as of this date may be forward looking and projective. 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 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-K. You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued this morning entitled Steel Dynamics Reports First Quarter 2019 Results. And now I'm pleased to turn the call over to Mark.

Thanks, Tricia. Good morning, everyone. Welcome to our first quarter 2019 earnings call. We appreciate and value your time with us this morning. At this point, Theresa normally provides performance insights, but I'd like to instead pause for a moment to acknowledge the recent workplace fatality that occurred in our Structural and Rail Division. We are saddened and our thoughts and prayers reside with the family and friends. Although we have some of the best safety specifics in our industry, it brings little comfort at times like this. The reason I always begin our calls with safety is because it simply cannot be stressed enough. It's our #1 value, our first priority. Nothing is more important than sustaining a safe environment. We must all be continuously aware of our surroundings and the team members around us. We must actively think about safety at all times, keeping it an ongoing conversation and top of mind. That being said, Theresa, will you provide us some insights regarding our recent performance?

Thank you. Good morning, everyone. Our first quarter 2019 net income was $204 million or $0.91 per diluted share within our guidance range of $0.88 to $0.92 per share. First quarter 2019 revenues were $2.8 billion, higher than first quarter 2018 sales, but 3% lower than fourth quarter sequential results as average flat-rolled realized steel prices decline. Our first quarter 2019 operating income was $292 million, 20% lower than sequential fourth quarter results driven by flat-rolled steel metals price compression. As we discuss our business this morning, you'll find we are optimistic about 2019 from a macro perspective and even more so because of our unique earnings catalyst.

More specifically, our first quarter steel shipments increased 4% sequentially to 2.7 million tons of growth achieved at each division, excluding our Structural and Engineer Bar division. Steel metals spreads compressed as their average quarterly realized sales price decreased $38 per ton to $902 in the first quarter and average scrap cost consumed only decreased $5 per ton. The sales price decline was driven by lower flat-rolled steel prices. In general, aside from merchants steel, most of our long product steel prices actually increased in the first quarter.

The result was first quarter steel operating income of $312 million and although lower than fourth quarter results, historically, a strong performance.

On March 1, we acquired a 75% controlling interest in United Steel Supply, a leading distributor of painted Galvalume flat-rolled steel used for roofing and siding applications.

We paid cash of $93 million and assumed debt of $41 million. The cash payment is still subject to working capital adjustments later in the year. With the recent flat roll acquisitions, production enhancements and our investments to cost-effectively access the excess melting capacity at our Roanoke constructional steel divisions, we have diversified and increased our product capability. We now have an estimate annual steel shipping capability of over 13 million tons, including over 8.5 million tons of flat-rolled steel and over 4.5 million tons of long products steel. And because of our emphasis on value-added steel, we also have 4.5 million tons of higher-margin annual flat-rolled steel coating capability. And when the third galvanizing line is running at Columbus, mid-2020, we'll have almost 5 million tons of coating capability. For our metals recycling platform, first quarter operating income was 21 -- was $20 million, an 18% sequential improvement based on increased nonferrous shipment, specifically aluminum, and higher realized pricing. We continue to effectively ladder the strength of our vertically connected operating model, which benefits both the steel mills and the scrap operations. Over 65% of our metals recycling platform, their shipments serve our own steel mill, increasing scrap quality, melt efficiency and reducing company-wide working capital requirements. First quarter 2019 operating income for our fabrication improved sequentially to $21 million, representing a 39% increase.

Earnings improved as realized product pricing increased and average steel input cost decreased. We continue to see strong order inquiry and customer optimism. We're entering the tradition of construction fees and with a strong product backlog and the expectation for continued solid nonresidential construction activity. Our March fabrication backlog is as strong as it was this time of last year. During the first quarter of 2019, we generated $182 million of cash flow from operations offset by operating working capital growth of the same amount, but there are several annual payments which are required to be made in the first quarter of this year. For example, our company-wide profit sharing payment to our teams was $140 million in March through our record 2018 earnings. First quarter capital investments were $54 million. We currently estimate 2019 success at capital investments to be in the range of $300 million and $350 million, excluding the new mill, which I'll address later. It's comprised of $100 million to $150 million of sustained capital which includes safety and environmental projects, $100 million relate to Columbus's third galvanizing mine addition and $100 million for other expansionary

efficiency growth projects. Regarding shareholder distributions, we increased our cash dividend in the first quarter of 2019 to $0.24 per common share, a 28% increase. This follows increases of 21% last year and 11% in 2017, demonstrating our confidence in the strength and continued growth of our sustainable through-cycle cash generation. We also repurchased $84 million of our common stock during the first quarter. Approximately, $315 million remain to authorize for repurchase at the end of the quarter. Since 2015, we've repurchased 23.6 million shares, representing to what's 10% of our outstanding shares. We maintain strong liquidity of $2.2 billion at March 31, representing almost $1 billion in cash and short-term investments and $1.2 billion of available funding under our revolving credit facility. Before I hand the call back to Mark, I will share some update regarding additional insights, pertaining to the anticipated cash investment time line for our new Southwestern U.S. flat-rolled steel mill, which is a key part of our growth strategy. The total investment is currently expected to be approximately $1.8 billion, subject to continued refinement as we make final site selection, obtain required permitting and finalize the project time line.

Based on what we know at this point and assuming timely receipt of required environmental and operating permits, we would expect to begin actual facility construction in 2020 followed by starting operations in the second half of 2021.

Based on this time line, we estimate the approximate capital investments to be as follows: approximately $300 million in 2019; $850 million in 2020; and $650 million in 2021.

We'll continue to refine these estimates as we make a final site selection and secure state and local incentive. We've been making very good progress on these fronts. The strength of our through-cash cycle generation coupled with a strong capital foundation, provides meaningful opportunity for growth and continued shareholder distribution through our positive dividend profile and share repurchase program. We're squarely positioned for our continued, optimized, long-term growth creation. And finally for some of those of you that use flat-rolled steel shipments for your model that are broken down, for the first quarter of 2019, our hot rolled and P&O shipments were 854,000 tons; our cold-rolled shipments were 137,000 tons; and finally, our coated shipments were 867,000 tons.

Thank you. Mark?

Thanks, Theresa. Well as Theresa reported, New Millennium Building systems, our fabrication platform, delivered a strong performance with profitability increasing despite lower shipments, resulting from inclement weather. Product pricing has improved while steel input costs have decreased, resulting in metal spread expansion. Our order backlog remained strong heading into the summer construction season, and it's slightly higher than this time last year.

Project backlogs are expanding as contractors struggle with the construction labor shortage, which should prolong this nonresidential construction cycle. The ongoing strength of this business and continued customer optimism bodes well for nonresidential construction demand.

Our metals recycling team also performed well, improving profitability in the quarter as nonferrous volumes and metal spread increased, especially related to aluminum. Conversely, the ferrous lines contracted modestly. Ferrous scrap availability has been steady with strong automotive sectors generating a more than ample supply of prime scrap.

We expect seasonal flows of cut and shredded grades will continue to pick up and outpace demand. We would expect actual volumes to remain constrained through the rest of the year. And this is consistent with our longer-term scrap view that pricing will remain stable and support it with healthy steel sheet margins -- level margins. The steel platform delivered a solid first quarter performance in a somewhat challenging flat-rolled steel pricing environment. Flat-rolled steel prices began a downward trend in the second half of 2018, which continued through mid-first quarter, reaching an inflection point in February.

As prices softened, the buyers remained on the sideline. Yet, our teams were able to increase flat-roll shipments to help offset some of the margin compression. The good news is that underlying demand remains intact. Flat roll pricing increase and order input rates returned thereby, regaining healthy lead times. While industry shipping rates eased in the first quarter 2019 due to the 35-day government shutdown and abnormally cold and wet weather in many parts of the country, long mortgage rates and interest costs should increase construction and higher oil prices could boost energy sector demand in the coming quarters.

We further believe both U.S. and Mexican steel consumption will continue to improve in the coming years. With Mexican growth outpacing now the U.S. based on meaningful increases in their manufacturing base.

We continue to position Steel Dynamics for the future through optimization of existing operations, organic investments and transactional growth. During 2018, we reinvested our existing steel operations and acquired Heartland, a 1 million ton flat roll processing facility for additional value-add product diversification. We also recently acquired a 75% controlling interest in United Steel Supply to further enhance our prepaint supply chain.

We completed a $38 million, 200,000 tons a year rebar expansion at our Roanoke Bar Division in the third quarter, becoming the only independent supplier in that region. In the first quarter of 2019, we also completed a 240,000 ton per year, $82 million rebar expansion at our Structural and Rail Division. This expansion includes cut-to-length and coiled rebar capability.

Our unique rebar supply chain model is expected to meaningfully enhance customer optionality and flexibility, providing significant logistics and yield and working capital benefits.

In addition, we will be the largest independent rebar supplier in the Midwest region also. We shipped our first full rebar in February. We acquired Heartland midyear 2018, increasing our flat roll product diversification through value-added wider and lighter gauge product capabilities.

Its geographic proximity to our existing Midwest flat-roll operations also allows for meaningful value creation. Integration is going well, and the team is setting new production levels of productivity, but the facility (inaudible) with higher cost inventory acquired through an acquisition through much of 2018.

We still plan to reach an annualized run rate of over 80% of capacity by midyear.

The innovating spirit of the whole team throughout the organization remains intact and with other numerous smaller organic projects that were completed in 2018 that will benefit the coming years as well. During 2018, we also announced further growth for our Columbus Flat Roll Division. In the last 2 years, Columbus has transformed its product offering through the addition of the paint line and the introduction of more complex grades of flat-rolled steel. The diversion of products -- these diversified value-added outlets have reduced the volume available to our existing galvanized steel customers. So to address the lack of sufficient galvanizing capacity, we announced the addition of a third galvanizing line in Columbus. The $140 million investment is another step of further value-added diversification for the Columbus mill and less hot-rolled coil exposure. The 400,000-ton line is planned to begin operations midyear 2020. Additionally, during the next 18 months, we plan to invest about $90 million at Columbus to further increase the range and complex grade capabilities, including advanced high-strength steels for both the automotive and energy sectors. In aggregate these upgrades will reduce the availability of about 400,000 tons from SDI Columbus of noncoded flat-rolled steel into the Southern U.S. by the year 2021.

This will coincide with the time frame that we plan to begin our operating -- begin operating our planned new flat roll steel mill in the Southwest. I continue to be increasingly excited by the expansive opportunities and long-term value creation of our Southwest U.S. and Mexico growth strategy will provide Steel Dynamics.

Each of our operating platforms have an existing presence in the region today where we're on the move and planning to meaningfully expand our influence in the region. The planned construction of our new flat-rolled steel mill in the Southwest is a significant piece of that plan. The facility is designed to have an annual production capacity of 3 million tons and will include a 450,000-ton galvanizing line and a 250,000-ton paint line with Galvalume capability. We estimate the investment to be approximately $1.8 billion.

The new mill will have capabilities beyond existing electric-arc-furnace flat-rolled steel produces and competing even more effectively with the integrated steel model and foreign competition.

Having a thicker cast section and a more conventional 2-stage hot-rolling pressing, the mill capability will provide higher strength and tougher materials for the energy and automotive markets. The mill will be capable of 84-inch wide, 1-inch thick, 100 ksi hot-rolled coil. Downstream value-added capabilities will include galvanizing and pre-paint and to be clear, we're not just adding production capacity, we will have a differentiated product portfolio, we'll have a significant geographic freight and lead time advantage and we have targeted markets. The new mill will have, in fact, 3 targeted regional markets, representing over 27 million to 28 million tons of relevant flat-rolled steel consumption. And we believe this demand will continue to increase in the coming years.

Those regions include approximately 8 million tons from the 4-state region of Texas, Oklahoma, Louisiana and Arkansas, which has limited domestic regional supply and relies heavily on imports. Approximately 4 million tons from the underserved West Coast region, which also relies heavily on imports. And finally, about 16 million tons from the growing Northern and Mid-Central Mexican region. Based on their growing manufacturing base, we believe Mexican demand growth will continue to outpace supply, making it an even more attractive underserved market in the coming years.

A significant competitive advantage in lines in the intended location of the facility central to these targeted market regions. We're still actively pursuing sites in both Texas and Louisiana.

The mill will provide a significant freight cost savings and delivery time advantage to many customers in the U.S. and Mexican regions. This will provide a competitive supply chain, allowing the new mill to effectively compete with imports flowing into Houston and the West Coast that inherently have long lead times and expected price risk. Customers are excited and have already expressed interest in possibly locating facilities on or near our site. From a raw materials perspective, our metals recycling operation already controls a significant and growing scrap volume in Mexico due to our scrap management relationships, much of which is prime scrap.

We also plan to cost-effectively source pig iron through the port system.

Based on our current scrap relationships, both in Mexico and the Southern U.S., we are confident in the ability to procure high quality scrap in the region. We've been developing a flat-rolled steel strategy for this region and Mexico for several years. We've been developing both customer and scrap relationships, and we are confident in the long-term strategic value and the investment profile this project provides.

We believe our unique operating culture, coupled with our considerable experience in successfully constructing and operating cost-effective and highly profitable steel mills, positions us well to execute this greenfield opportunity. We're also optimistic about our existing market opportunities for 2019.

We believe North American steel consumption will continue to see a steady increase. Furthermore, the actions taken by the U.S. federal government has developed a healthy domestic steel environment and should provide sustainable long-term support for the U.S. manufacturing base. These actions will continue to erode import volume, while increasing effect of import prices. We anticipate reciprocal 232 tariffs between the U.S., Canada and Mexico will be replaced by alternative, effective quota-based programs among the USMCA countries prior to ratification they will bring us later this year. Specific to Steel Dynamics, our unique culture and the execution of our long-term strategy continues to strengthen our financial position through a strong cash flow generation and long-term value creation, clearly demonstrating our sustainability and differentiating us from our competition.

Customer focus coupled with market diversification and low-cost operating platforms, support our ability to maintain our best-in-class performance and differentiation.

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

Our exceptional team provides the foundation for our success. And I thank each and every one of you for your passion and commitment to excellence and remind you, safety is always the first priority. We are committed to providing exemplary long-term value to our fellow colleagues, to our communities, to our customers and to our shareholders, and look forward to creating new opportunities for you all in the future. So again, thank you for your time, and we'd like to open the call up for questions now.

(Operator Instructions) Our first question comes from the line of Martin Englert with Jefferies.

Your commentary on demand remains generally positive, expecting continued growth in North America this year. Can you discuss how much of that growth is coming from the core end markets versus maybe Steel Dynamics taking market share from either imports or competitors? And then any other additional detail you can provide on potential growth ranges anticipated for steel consumption here?

Well certainly also demand, I think, is a -- has been a big question relatively for all. I think we'll have to reflect back a little bit and understand why the fourth quarter was a little soft. It was a tough quarter from an economic standpoint where you had a 35-day government shutdown, you had inclement weather. Customer's sentiment -- people's sentiment generally was a little bad, you had lingering recessionary concerns overhanging the fourth quarter.

Trade war rhetoric and soft enrollment to our price expectations. So I don't think it was surprising, in all honesty, that you saw a little softness there. That softness reflected in February, and our order input rate picked up dramatically, pricing picked back up. And today, our lead times are very, very healthy for hot-rolled coil through the end of May, which is exactly where we'd like to see them. And we're actually a little long, to be honest, in coated and in pre-paint, we're anywhere from 6 to 8 (inaudible). So we see at least from our outputs a very positive environment.

I think [order backlog] remains strong. I think energy has been very good to us and I think to the industry in general. And as we meet with our energy pipe and tube customers, they seem to be very bullish going forward. The gas oil transportation infrastructure needs to continue to be built-out, particularly with the very large LNG projects that are happening along the coast in the Southwest. So we see energy being a very, very, very strong for the next several years. Manufacturing base is healthy, and we see construction remaining healthy. As we said earlier, our window of interest into nonrisk construction through New Millennium Building Systems is very positive, and our order backlogs are higher this year -- this time this year than they were last time. So I think generally, a very positive environment for the rest of the year.

So Martin, specifically as it relates to other -- as market share or fundamental core sector growth, we expect to see in consumption domestically probably about 2% growth year-over-year based on our own projections.

But then there is some of that specific to Steel Dynamics, where we have continued to take market share, specifically in automotive and some of the energy markets as well. So it's a combination of both.

Okay. And if I could, one quick follow-up. Volumes on SBQ do appear down year-on-year. Can you discuss what you're seeing with demand there? And the end users and why volumes were lower?

Well I guess we permit a little bit of sketchiness in the SBQ market. I think suppliers are getting some push back on current pricing, more so with hot-cold at this point people looking for volume discounts. We think some of it is inventory corrections. Most are still optimistic regarding the second half of '19.

I'd say that's what's driving that.

I spent couple of days at the North American steel alliance, which is a gathering of a lot of the -- the family along the smaller processing steel distributors, and I was speaking to a customer. They were all very positive on the market. I -- look they are a little cautious within inventories. And so they're not speculating in any way, shape or form, but it's a positive environment.

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

First question is just on the profitability of the steel ops segment this quarter. If you look at the ASP increase relative to scrap increase, your metal spread was up about $52 a ton year-on-year, but EBITDA per ton only went up $9. So I'm just curious what were some of the other moving pieces around cost inflation, electrodes, things like that you could identify?

Look, Curt, when you're looking year-over-year, the biggest change that you're seeing is the electrode cost. Our electrodes didn't start increasing in cost until the second half of 2018 because we had different inventories that were layered in. And so it's almost $20 million quarter-over-quarter increase and just electrodes alone, but if you were to do that same comparison on the sequential fourth quarter, it's basically flat.

So you're seeing the higher input costs, and that's basically the change year-over-year.

Okay. That's helpful. And then a follow-up, just on the new 3 million ton mill. Mark, how do you think about sort of the cadence of layering production? I mean, 3 million tons is almost a 50% increase to your current footprint on a productive-capacity basis for sheet, so clearly pretty transformative. Is your sort of strategic imperative is that you'd want to try to quickly gain that market share and maybe be more disruptive? Or what's kind of the strategic philosophy in terms of how quickly you could ramp the 3 million tons? And would you have to stagger it as well?

Well, we have no intention of staggering it. And I think the market will be very, very receptive, and at least from all contrary to date, they're incredibly receptive. I think one has to recognize that this -- in the Southwest region right now, there's a vacuum of domestic supply.

This mill is going to have a sort of a minimum $30-plus trade advantage over any domestic mill. Plus, it's right in the heart of the import conduit (inaudible) reduce them. So we'll have a freight advantage there and probably even more importantly, a lead time advantage.

When the folks are bringing in imports and they've got a 2, 3, 4 month lead time and that price speculation, I think we're going to gain a massive volume or market share of that import stream. And it's going to allow the pipe producers, sheet producers in that region and Louisiana, Oklahoma and Texas competitive scope, but they haven't been able to procure up to this point.

And that's allowed a massive amount of piping tube imports as well. So I think the -- you've got to consider -- again, there's just a void in the supply there today, and I think this mill is going to supply it. It's going to supply that 4-state region. That as I said earlier, it's 7 million , 8 million , 9 million tons unto itself. It's a very competitive frame rate to the West Coast, and that's the 3 million to 4 million ton market, and they are suffering on the supply side dramatically today. Plus, we're within $30 million freight of the Northern and Mexican markets run rate in particular. And that's a growing region. It's 15 million, 16 million tons today, and that's predicted to be 20-plus million tons over the next 3 or 4 years. So I have no doubt of the ability of that mill to penetrate the market and pick up market share very, very quickly.

In addition, Curt, I don't think you can emphasize enough the fact that what Mark said early is that we've got considerable number of customers that actually want to move on campus because that's going to help the ramp-up of that facility as well.

Also, if you look at our -- if you reflect on any market that we've entered in the past, most of those markets actually have been overserved in any event.

And our strategy has always been to differentiate ourselves so to create value for the supply chain, which -- obviously, it creates value for the end user and to the customer. And this mill is very, very different from many other electric-arc-furnace facility today. You can kind of understand it as an electric-arc-furnace mini-mill hot end with an integrated hot strip mill. So the thicker cast slab, the 2-stage rolling, which will allow us to do thermal mechanical rolling as a strengthening capability, adds toughness to our mill offerings, 84 wide, up to 1 inch, 100 ksi material is very, very differentiated and can only be really accessed by the integrated mills today. And they're at least a -- probably a $50 or $60 freight into that region.

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

So I appreciate the new detail on CapEx from the new mill. Questions, given the number of new furnaces announced in the end or near construction, is there any constraint on available engineering talent? I imagine that the population of anybody really experienced in leading in the build-out is fairly small and well bid. And then you also mentioned timeliness in approvals. What is the time line on permitting? What should we be watching for? Is that a second quarter or second half? Where is the calendar there?

Glenn?

Yes, this Glenn Pushis. We're working on that project pretty much full-time now. We've got our environmental permit in place for Texas application. We're being told it's about a 1-year process for that. And we're really not finding any -- to your question on engineering talent, we're really not finding any real challenges there. It seems to be that there's a lot of proposals available engineering time, and are ready to jump on the project pretty quickly.

And to add to that again Glenn, it's because I marvel at his -- I was in the conference room watching the folks leading the -- what we call the war room down in our basement, and there are probably a dozen individuals just walking out at the end of the day.

And I -- it's just amazing the amount of knowledge and talent and experience we have within our organizations, and it's sort of designing, procuring and building construction starting up large capital assets. And so I've got no doubt the team is going to perform sort of (inaudible) review as well. The equipment itself has been spec-ed out and the -- Glenn and team I think expects to have that order placed in the next few weeks.

All right. Excellent. Let me ask then on the scrap market. Week after week, we see domestic steel production up year-over-year, utilization rates are higher. Naturally that would mean that drawing scrap should be higher. You got global steel production that keeps growing, global iron ore prices, they're substantially higher, which all else constant should be a tailwind for scrap prices. So -- and your biased scrap prices remain so moderate. And does it come down to -- we should exceptionally expect finished steel prices to lead scrap moving forward and not the other way around as it's been in the past? I'd love your opinion on that.

Yes Matt, it is Russ. I think the biggest difference in the U.S. market today is the export market. Again, you've got a tepid export market which means scrap is staying on the coast. It's more accessible. They're more -- it's a little bit higher in supply than what we've seen probably in the past decade or so. But obviously, that's been changed in a heartbeat and you can certainly look into -- at the fact that iron ore is rated at $90 per ton range and used the standard 4, 4.5 times. It shouldn't be higher price. But where there's excess scrap hanging around, it's all chasing a smaller market because of the lack of exports.

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

I just had a question on the overall market dynamics. Just wanted to flesh out a little bit. In terms of your comments at those an inflection point around the middle of February. We started to see pricing move up on the back of that. And then I guess, linked to the question before on the scrap environment, we're seeing that easing in the last couple of months. How are you seeing activity at the moment and the pricing environment? It seems like things have eased a little bit, but you're still very positive on the demand story. So just wanted to think about the spreads in the next couple of quarters and overall pricing dynamics for the end products and also scrap?

I think as just said we look at kind of stable scrap prices going forward the rest of the year. It may start from a little bit this coming month, but again [10, 20] they're not massive moves, so stability on the raw materials side. On the pricing side, yes. It inflected, went up and is eased a little. But if you look at the arbitrage to foreign pricing today, it's pretty well evaporated. Imports are still under control on an annual basis and will be under control, and then probably will continue to erode through the year. So I think the market pricing today is going to be relatively stable too. So spreads will remain healthy.

Okay. And then just following up on your comments a bit earlier around section 232 quotas versus tariffs, can you just talk a little bit more about that and the timing you'd expect on that from Steel Dynamics' point of view?

Well I think we would say, and this is absolutely totally speculative, but I would say our intelligence would suggest that progress is being made in China. And progress is -- it's certainly being made in the USMCA, that will likely change to sort of a quota-based agreement. This quota is being based on some level of historic import levels with a tariff for any (inaudible) overlap. And I think that will be a positive outcome for all 3 countries. When the trade movement -- we actually are seeing some pretty positive outcome, it's a 3 of 1 against prefabricated imports then action is underway. It hasn't been concluded yet, but we're already seeing some of the larger projects that were bid out and destined to be Chinese steel -- prefabricated Chinese steel coming into the country. Those are now being rebid. And I think that's a very, very positive sign for our long product metals and market in general.

Our next question is from the line of Brett Levy with Wexford.

It's the recipe question. You guys are adding 3 million tons. You're adding galvanizing, you're adding the width. You're getting potentially from Cliffs and other people. Iron ore feed that would be very pure. Have you guys gone and I'm guessing you have, and just asked to see if you can make the recipe and make a deployable of a Chevy or a Dodge in terms of rolling pattern, alloys, galvanizing, kind of all of the pieces of the puzzle because it just doesn't seem right, you would just build it and expect them to come. I would think that you probably have done some work on this. And can you give any clarity on that?

Well, first and foremost, we're certain of a builder of dreams. As I've said many times before, we don't manage the hub. We can do things that control our own destiny. I think the teams -- obviously, in Butler, they've been supplying roughly 30% of their output to the automotive floor for years and years. And the Columbus team has built a phenomenal following already, particularly with the higher strength of advanced steels and are gaining incredible acceptance particularly with the European automotive producers, BMW, VW for instance. And this -- the new mill just adds to that. The -- as we certainly -- the 2-stage rolling, the thicker cast slab, will allow us to get advanced steels for automotive, much stronger steels, and will give -- allow us to get the tougher, thicker steels for the energy market's API growth. So I think the opportunity for the market is definitely in front of us. We just have to get the thing up and running by 2021.

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

I don't want to be the topic of too much here on the near-term market conditions, and I know we talked a little bit about your demand outlook. But one thing I wanted to ask you about is, why do you think domestic prices have narrowed so much the gap between imports, like a lot of -- on the flat-rolled side, hot-rolled in particular, prices have been below on landed import levels for a while. Do you see like a lot of extra steel competing? Is this a short-term thing? What's your sense on why prices for domestic mills are below import landed levels?

Well, there remains a slight hesitancy. As I said, the customer base is very, very optimistic for the business conditions and the demand for rest of the year. That being said, they're cautious on inventory. And so they're buying sort of steady as she goes. And to that -- again, with the addition of a little bit more capacity maybe stressed the supply/demand a little bit. But from -- all you can see in the market through our own order book, and that remains strong. As we said, we're right through the end of May with hot-band and we're too long in my own opinion on coated and prepaint.

Okay, great. And then -- yes, our channel techs suggest that there's too much supply so that's what I was trying to get at is, there seems to be this spike for market share is what we're hearing, and I was just wondering if you're getting that sense from the field as well? But I can leave it there. And then just on the new mill, I don't understand the Mexico commentary. I just want to understand a little bit better. If I look at the Mexican net imports plus production, I come up with about 30 million ton market and between the 2 new rolling mills, Cunningham and ArcelorMittal that are coming out in next few years. That's what, 5-plus million new tons. And then your mill is also talking about targeting these tons. And I know you said demand is growing, but how are you looking at that equation? Can you talk us through a little bit of that detail please?

Well, I think, again, the market is steel short and so yes, Cunningham is going to add a little bit of capacity we think. You never know until it's actually on board. Arcelor is adding hot-rolled coil capacity. So there's addition there, but that is way down in the Southwest. So they've got a massive freight, they can get it up to the Monterrey. And I think you also need to understand their product capability deficiencies within Mexico, that our mill is going to serve. Miguel, you've got some thoughts?

Yes. I mean I just listened that you mainly spend your last comment on growth capabilities and what's going to happen in the new year compared to what is offered in Mexico. We've been talking to a lot of different consumers in Mexico. We have to confirm that the (inaudible) capabilities that we're going to have [on the mill] are -- we're not going to make the difference in that market. So the capacity that is being added in Mexico is capacity that -- is going to -- mainly going to continue to compete with some of the domestic investors, but what we are going to always (inaudible) them, what the problem with the [replacing] some of the tonnage that is being importing from our advantage. So we feel very confident about quickly gaining market share there with the capabilities that we're going to have.

So those capabilities would be not just galvanize, I'm assuming because there's 3 galv lines coming on in Mexico as well. So you're talking about capabilities aside from finishing. So maybe like, the wider gauges or maybe the thickness, is that what you're talking about?

The combination of width, gauge and strengths.

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

Couple of questions. First one on the fabrication business. If you would have picked up higher price orders throughout last year. So wondering whether you've seen all those higher-priced orders come through the results already? Or is there more to go through the year?

From a fabrication perspective, this was for the backlog. Lastly, we're -- increased prices produce effectively and in the first quarter this year, we were expecting to see that continue honestly through the year and that in combination with the lower field pricing that is now in the inventory for the fabrication business should result in higher spreads than you would have seen in 2018.

Okay, that's helpful. And going back to spreads. Just want to understand that the spread between hot-rolled and cold-rolled has widened closer to about $150. So is the market much more tighter on cold than on -- and cold and coated versus hot-rolled? Also, how sustainable do you think that difference in tightness is?

Well, simply on the coated side, the galvanized side, the prepaint side, the things are very, very healthy. We actually have not necessarily been a major player in [coated sheet], although, that's a marketplace to be venturing through the Heartland acquisition. But I think on the coated, prepaint experiments, those will be maintained.

Our next question comes from the line of Matthew Fields with Bank of America.

Thanks for the detail on the CapEx schedule for the new mill. Is it your intention at this point to fund the construction spending through free cash flow generation and not with any additional debt incurrence?

Right now, Matt, our current inflection is to watch the Capital Market. Throughout the year, with BR capital structure today, you'll see that we have some notes that are actually sucking down on pricing. Maybe encouraging for you to continue to monitor the market. We definitely -- we could do that, but that might limit some optionality to do other things. So I think just on the -- we're going to wait and see what happens in the Capital Market this year.

Okay. And then as you enter this period of elevated CapEx spending over the next few years set against the backdrop that some of the other analysts have mentioned with all this new supply coming on from other producers. Is there kind of a leverage level that you would like to maintain as you're spending all this cash building this mill?

Well, certainly, obviously -- yes, no, today, obviously, Matt, the leverage levels are quite attractive. I think our net leverage is less than 1x at the end of the quarter. But during the cycle, we've consistently added -- we'd really like to maintain that through cycle net leverage somewhere between 2x and 3x. And so with that, we believe that we'll be able to effectively do that even with the elevated levels of CapEx spending. Because I think one needs to keep in mind that we have all these earnings catalysts that are also coming online this year. For example, the rebar project, the constructional rail division. We just started shifting rebar in the first quarter this year. So by the third quarter of this year, we expect to be up to about 90% to 95% capacity. That's quite an additional volume, and that's why I made mention in fact that our shipping capability today is over 13 million tons. So I think one needs to keep in mind that there's earnings catalysts that will be kicking in along with that additional spending over the next 2 to 3 years.

Okay. And then last question for me. How do you balance the $2 billion you intend to spend on the mill? Some acquisitions you're making along the way, share repurchase and dividends with the kind of goal to get investment grade?

Well, right now, I think, we have the ability to have and what we'd like to call, balanced approach to the capital allocation which you've seen us doing. If we are going to see a larger acquisition or a transaction, you'd probably likely see us pull back a little bit on the share repurchases in advance of that or in combination with that because that's a lever that we can use quite effectively. Otherwise, I think you should expect to see a positive dividend profile from us, which you've seen over the last long period of time, actually, along with additional capital that we've been spending with expectation for that continued cash flow generation. So I think you're going to continue to see us do what we've been doing.

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

I get the whole underlying thesis that import quotas have a better long-term impact on the U.S. steel industry. I guess my question is when you start thinking about the new NAFTA agreement, or I guess I should say the USMCA. Once we see a shift from tariffs to quotas, is there going to be potentially a destabilizing effect? Does the market need to, I guess, reset and could that explain some of the slowdown in orders heading into a final decision?

I don't think so. I think the final USMCA agreement will be based on the past levels of trade, and as such, there'll be some kind of stability there more than anything else.

Okay. So the market doesn't have to reset to the lower import prices, especially when you look at some of these long products being underpriced before the tariffs. So I don't need to adjust for that at all?

I don't think so.

And our next question is from Philip Gibbs with KeyBanc.

Mark, in terms of the United Steel Supply deal, is that something we should expect you all to do moving forward in terms of making more of these downstream acquisitions similar to what Mittal does in Europe? Or was this more of a onetime special situation?

Phil, I don't look at U.S Steel Supply as being the European model of steel mills entering the steel distribution processing space. I think this is very unique to our supply chain for prefect. You might see us continue to expand in that very unique, specific area but it's not my intent to become a steel process or a distributor in any way, shape or form.

And is this business going to get tucked into steel or fabrication?

Actually, it's already being reported through steel. So I knew -- air shipments would've been reported in the coated shipments that I gave you earlier on the call.

Okay. And then I just have one follow-up. Typically in the release, you give changes in profits per part of the steel business, whether that's lateral, they're long products I think that's the way you discussed them in the past. Any color you could give us on directional -- on the directional change I think we know, but in terms of the magnitude of the change in each of those divisions would be helpful.

Yes, so typically, it's part of the message we try to give sometimes the difference between flat and long product. I would just say that, flat-rolled profitability was down probably somewhere between 20% and 25% versus long product profitability being down maybe around 10%.

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

Mark, I'm going to ask a deliberately dumb question that I think all of us are probably confused by. There's potentially almost 10 million tons of new electric furnace, SMS tin slab, hot stripped mill capacity. If both you and Big River build new plants in the Texas Gulf Coast vicinity, and Big River doubles in Arkansas, Nucor doubles Gallatin. Maybe delta expanding is a slightly different than SMS design. So on the surface, it might appear to some people in the investment community that they're all identical designs. And am I worried that an SMS coil sells at a $25 or $50 dollar discount because they're all the same? And ArcelorMittal has different designs, different marketing practices and might not, for example, be impacted as much. Now we know that you sell a lot of painted steel. Nucor is putting in a six-high cold mill into Hickman with 4 work rolls. Probably everybody is doing their best to buy clean metallics. How will your design be different so that everybody isn't selling the same SMS coil?

That's not a very fair question. Not that I don't think it's dumb. I maybe (inaudible). I think -- I can't see for any future mills installed by any other future entrants. But as of the projects today, ours will be a very, very, I think, differentiated product in all honesty. Again, the cast section with combination is going to be unique. No one is going to be able to make 84 wide, 1 inch 100 ksi product. They're not going to be able to make a 50 -- 13 50 PIWs, 50-ton coil.

13 50 is [full width], 16 50 is narrow [width]. So it's a very large flow.

So the yield improvement -- the large coil, John, through a piping tubelette is probably in the order of 5% or 6%. So again, my comment earlier is, anytime we have entered the market, no matter what it is, whether that's rail, whether it's prepaint, whether it was rebar, we looked for a differentiating angle from a technology and supply chain sort of value-add. And I think this provides it. Addition to that, the color considering the geographic location, Gallatin is in Kentucky. These other facilities still remain a long distance away from the market. They can't get to the West Coast for $55. They can't get to the market or the regional market they were going to be able to supply anywhere close to the freight cost that we'll be able to avail ourself. So again, I think this probably is very, very SDI specific, it's unique. If people said, well, have you based this decision on trade, absolutely not. This is a market-based expansion for us and I think the investment profile is going to be [absent] going forward.

Mark, I think it may be important to note that my understanding is Glenn's team have not selected a mill supplier yet. And they're -- we're not buying a model number off the shelf that we have certified a mill that's probably known much before, and all the suppliers are looking for a solution to fit your expectations there.

And this is a very good point. You just embrace SMS being the mill provider of choice for everyone. That's not necessarily the case.

So you might go with a different design and a different equipment supplier in your new mill?

Glenn and the team are evaluating 2 -- well, depending on the equipment because hot-stripped mill caster hot side 2 basic vendors.

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

I just have a follow-up from one of your earlier comments. So you had sort of stated you expect through cycle net leverage sort of in the 2x to 3x range. I think your net leverage is somewhere closer to 0.7 turns right now. Even if you were to sort of lump on almost $2 billion project, you're still going to be below 2 turns. So when you talk about 2 to 3 turns, is that somewhere you expect to be? Or do you think that's more of a ceiling sort of to where your leverage would go? And is it better to sort of think about distributable cash flow from your eyes in terms of the leverage you could pull back on or accelerate?

Yes. The 2x, 3x is in the ceiling area. It wouldn't be somewhere around where it would be sustained on a through-cycle basis. That's the correct statement.

Okay. So it's more of a ceiling. You're obviously embarking on these projects, leverage may move up a bit, but you wouldn't expect it to go anywhere higher than 2x to 3x. Is that sort of what you're saying?

That's correct. But remember that when I was answering that question, that wasn't just about our next project, that also included any potential transactions from time to time that may arise.

Great. Totally. I'm just looking at this again and seen several enterprise multiples are trading somewhere in the 4 to 5 turns range for a lot of companies. It seems like 3 turns would be a lot of leverage on the business, kind of, given that backdrop. That makes a lot more sense.

And our next question is from the line of John Tumazos with Very Independent Research.

Mark, today, there are certain, I guess, generally accepted practices in financial analysis, like EBITDA ratios. A defect in EBITDA ratios are the selling price changes or the metal margin changes, it doesn't change? If it does change, it could be -- EBITDA can be illusory at the top of the economy, for example. When I was a little boy 40 years ago, beginning to do financial analysis, debt divided by debt plus equity was calculated. A conservative way to look at equity is to exclude goodwill or tangible net worth. Steel Dynamics isn't as strong a credit using the ancient debt-to-debt plus equity tangible equity ratios. And I just want to remind you, and I might sound like a smart ass, the guy that popularized the EBITDA ratio, Mike Milken went to jail, even though it's generally accepted today. Do you worry that your balance sheet is too levered just in case there's a bump in the road and the world economy changes?

Well, I'm not worried at all. I think the -- that our business model, again, is differentiated in good times, bad times quarter-after-quarter, it's demonstrated the ability to generate cash at a superior rate than our peers. I agree and I'm -- I don't know what the relative ages are. I turned 60, so I've been in the industry for 35 or whatever, too many years. And I remember, people would be focused on net earnings, not necessary so much EBITDA, we still look at that. Things, projects, investments have to make money, not just cash per se. And all I can -- have to tell you, John, it reflects on our past performance. I think it's demonstrated through cycle superiority and we intend to maintain that.

And then, John, I would just add, if you look at the total debt level of just over $2 billion and then you take into consideration the capital structure, which is perfectly laddered out. Where there's not any one more material maturity in any 1 year and the current maturity actually don't even have any maturities in the next 3 to 4 years. And that's purposeful, and that we maintain, what we believe to be a very conservative balance sheet but appropriate for a growth company.

This concludes our question-and-answer session. I'd like to turn the floor back over to management for closing comments.

So thank you. And for those that are on the call, I'd like to thank you for your time today. And those that support us, thank you for your support. To our employees, again, our priority safety, safety, safety. Please be safe with anything that you do, and thank for all you do for our company. And also, thank you, loyal customers, for your support as well. Without you, we won't be who we are. So thank you and have a great day. Bye-bye.

Once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation, and have a great and safe day.