Steel Dynamics, Inc.

Good day and welcome to the Steel Dynamics first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised this call is being recorded today, April 21, 2020, 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 Myers, Investor Relations Manager. Please go ahead.

Thank you, Michelle. Good morning and welcome to Steel Dynamics' first quarter 2020 earnings conference call. As a reminder, today's call is being recorded and will be available on your website for replay later today. Sorry, on our website for replay later today. Leading today's call are Mark Millett, President and Chief Executive Officer of Field Dynamics, and Teresa Wadler, Executive Vice President and Chief Financial Officer. The other members of our senior leadership team are joining us on the call individually as we are following appropriate social distancing guidelines. Some of today's statements, which speak only as of this date, may be forelooking 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, metal recycling, and fabrication businesses, as well as to general business and economic conditions. Examples of these are described in the related press release as well as in our annually filed SEC form signed here under the headings Forward Looking Statements and Risk Factors. found on the internet at www.scc.gov, and if applicable in any later SEC Form 10-Q. You will also find any reference non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Geodynamics Reports First Quarter 2020 Results. And now I'm pleased to turn the call over to Mark.

Thank you, Tricia. Good morning, everybody. Welcome to our First Quarter 2020 Earnings Call. We certainly appreciate and value your time in these unprecedented circumstances. Steelmaking is designated a critical infrastructure industry by the US Department of Homeland Security, deemed essential to the nation's defense, infrastructure, transportation, and overall economy. As such, all our operations have been operating. Protecting the health and wellbeing of our teams is our most critical priority. We are closely monitoring the COVID-19 situation and have implemented numerous additional practices throughout the company to protect each of us. I want to thank our more than 8,400 team members for remaining steadfast and passionate. We continue to operate safely with a spirit of excellence. I'm incredibly proud to work alongside each of them during this unparalleled time. We are committed to the health and safety of our people, the families and our communities, all while supporting our suppliers and meeting the needs of our customers. But before I continue, Teresa, will you please provide insights regarding the team's recent incredible performance during the first quarter that should not go understated despite these present environmental issues, along with our strong financial foundation?

Thank you. Good morning, everyone. Our first quarter 2020 net income was $187 million, or $0.88 per diluted share, above our guidance of $0.83 to $0.87 due to stronger than anticipated March flat-rolled steel shipments. First quarter 2020 revenues were $2.6 billion, somewhat lower than prior year first quarter sales, but 10% higher than fourth quarter sequential results driven by improved steel pricing and shipment. Our first quarter 2020 operating income was $274 million, $18 million lower than prior year first quarter, but notably 50% higher than sequential fourth quarter results due to record steel shipments driven by solid first quarter underlying demands. From a platform perspective, our steel operations first quarter shipments increased 7% sequentially to a record 2.8 million tons, with increased volume extremes across the platform. Our average quarterly relay sales price increased $10 per ton to $774 in the first quarter, and average scrap costs increased $24 per ton, causing steel metal margin compression. The result was first quarter steel operating income of $293 million, 45% higher than a sequential fourth quarter result. For our metals recycling platform, first quarter operating income was $8 million compared to a loss of $5 million sequentially. A result of higher ferrous and non-ferrous selling values and shipments, with prime scrap indices rising at almost $30 for gross time during the first quarter. About 65% of our metals recycling ferrous shipments serve our own steel mills, increasing our scrap quality our melting efficiency, and reducing our company-wide working capital requirements. Our vertically connected operating model benefits both platforms. For our steel fabrication business, first quarter 2020 operating income remained strong at $29 million, compared to near-record sequential results of $33 million, primarily due to seasonally lower first quarter shipments. We experienced record order inquiry and bookings in the first quarter, ending March with a record backlog. We're still experiencing strong order inquiry and are entering the traditional construction season on a good footing. Our cash generation continues to be strong. During the first quarter of 2020, we generated $211 million of cash flow from operations, offset by operational working capital growth related to higher steel selling values and the $74 million distribution of our annual company-wide profit sharing to our teams. We spent $218 million in fixed asset investments during the first quarter, of which $130 million related to our new sent in Texas flat rolled steel mill investment. To date, we have funded $335 million of the $1.9 billion project. Regarding shareholder distributions, we increased our cash dividends 4% in the first quarter of this year to 25 cents per common share. This follows increases of over 20% in both 2018 and 2019. The board also authorized an additional $500 million for stock repurchases in February of this year. We repurchased $170 million of our common stock during the first quarter, and $444 million remains available under the new authorization. Since 2016, we've invested $1.3 billion in our common stock. representing over 15% of our outstanding shares. These actions reflect the strength of our capital foundation, consistent cash flow capability, and strong liquidity profile, demonstrating our confidence in our sustainable through cycle strong cash generation. Part of that confidence is based on the high variability of our cost structure within our operating platforms. During market weakness, working capital becomes a funding source. 2015 is a great example. Working capital provided over $500 million to cash flow that year. For the coming months, we expect working capital to also be a source of cash flow for us. For the remainder of the year, we currently are planning for capital investments to be roughly $1.2 billion, of which the new Sinton, Texas steel mill represents $1 billion. This spending for Sinton is heavily weighted to the second half of 2020. over $700 million of that $1 million spend is actually meant to be in the second half of this year. As we gain more visibility into the extent of the disruption in 2020 related to the coronavirus, we could shift some of the 2020 investment into 2021 if we believed it was necessary. Based on current timelines, we estimate capital investments for 2021 to be in the range of $700 million to $750 million, of which CENT represents $600 million. We entered the coronavirus crisis in a position of strength with a strong cash position and liquidity profile. Entering 2020, we had over $1.6 billion of cash in short-term investments. At the end of the first quarter, we have almost $1.5 billion. Combined with our $1.2 billion undrawn unsecured revolving credit facility, we have available liquidity of over $2.6 billion. One can't look historically at our financial performance to determine either a trough or a peak future performance. We've grown significantly, transformed our Columbus flattable division, further diversified our sealed product offerings, and incorporated even more leverage to increase our through-cycle financial performance. Since 2015, we've increased our total shipping capacity from 11 million tons to over 13 million tons, while increasing our value-added revenues from just over 55% in 2015 to almost 70% last year. Since 2015, we've transformed Columbus's through-cycle earnings capability by reducing their operating costs, dramatically increasing their value-added product capabilities, and diversifying their customer base and end-market factors. We've expanded our structural and rail and Roanoke bar steel divisions to include reinforcing bar production capabilities, further diversifying the location's product offerings in order to sustain higher through cycle utilization. We've also added new manufacturing businesses to our portfolio that use steel as a raw material, providing additional opportunities to sustain our own steel mills utilization throughout market cycles. Since 2015, We've increased the possible internal volume by over 1.5 million tons through acquisitions and growing our steel fabrication platform. This is an incredibly powerful tool during weak demand environments. In addition, collectively, our primary, recent, and planned strategic growth investments provide an estimated incremental annual future EBITDA of over $425 million on a through-cycle historical spread basis. This estimate includes our sentence steel mill and third Columbus galvanizing line, as well as our two operational reinforcing bar expansions. We're simply even more agile today than ever before. We're also dedicated to preserving our investment-grade credit rating. Our capital allocation strategy prioritizes responsible strategic growth with appropriate shareholder distributions comprised of a base positive dividend profile. that is complemented with a variable share or purchase program during periods of excess cash generation. We are squarely positioned for the continuation of sustainable optimized long-term value creation. And on a personal note, I want to take just a moment, I want to wish my dad a very happy birthday. He's not listened to one of these calls in 25 years and he's listening this morning. And I also want to thank our team truly for their passion and generosity and the care that they're showing for each other's health and safety. God bless. Mark.

Well, thank you, Teresa. As I stated, safety is and always will be our number one value and priority. Nothing is more important. During the first quarter of this year, our safety performance improved from the previous quarter's outcomes with meaningful improvement in the severity of incidents. Our safety performance continues to be significantly better than industry average's As I said many times before, it's not enough. It will never be enough until we reach our goal of zero. We all need to be continuously aware of our surroundings and our fellow team members. I challenge all of us to be focused, both as we think traditionally of safety, but even more so now as it relates to keeping each other in good health. The steel fabrication platform delivered a strong first quarter performance. Construction is also deemed an essential business, and as such, almost all the states allow construction projects to remain open. We've had some jobs delayed or postponed, but at this time, it's not been widespread or meaningful. This should perhaps be expected, as in previous market downturns, construction has lagged the rest of the market by four to six months due to pre-funded ongoing projects. We experienced a record number of inquiries and bookings in the first quarter. Our fabrication order backlog remains very strong, over 15% higher than at this time last year. Our metals recycling team performed well in the quarter, returning to profitability. During the first quarter, prime scrap appreciated about $25 or $30 per gross ton. However, with lower domestic steel production, April prime scrap prices retracted about $30 and shredded $45 per gross ton. Lower industrial prime scrap flow related to the temporary idling of the automotive sector in April was offset by reduced demand due to lower steel mill utilization, maintaining sufficient prime scrap availability. As the announced staggered automotive plant restarts beginning later April and throughout May, we expect to see prime scrap flow return to good levels prior to a ramp-up in steel mill utilization, and thus in turn stable scrap prices. In general, the steel teams had a phenomenal performance in the quarter, hitting record volumes in a tough environment, We saw underlying steel demand strength and increased steel selling values in both flat roll and long steel products through substantially all the first quarter. Before the Russia Saudi Arabia oil price war, gas state COVID-19 stay at home direct this. Since mid-March, the landscape has shifted rapidly. A severe decline in energy prices related to oversupply has significantly reduced steel demand from the pipe and tube manufacturers. and the temporary closure of automotive production and the related supply chain closures will meaningfully impact flat-roll steel demand for this upcoming second quarter. Since mid-March, hot-roll coil index pricing has declined over $100 to about $485 per ton, according to PLAS. As a result of reduced flat-roll demand and reduced pricing, a considerable number of higher-cost flat-roll steel operations have been indefinitely idled. Since the end of 2019, we believe it represents a reduction of between 12 to 14 million tons of annual flat roll sheet steel capacity, approaching some 20%, 30% of total domestic capability. In contrast, the construction sector continues to be steady, which as mentioned is a critical steel consuming, representing 40 to 45% of total domestic consumption in normal markets. The order activity from our construction related customers in addition to current strength in our steel fabrication order backlog, supports this sentiment. We believe the coming months will be difficult, yet in these environments, the strength of our people and our differentiated business model becomes even more evident and more impactful. As demonstrated historically during times of market inflection, we will likely gain market share based on our uninterrupted low-cost operations, providing the greatest customer optionality. product end market diversification with value-added market niches and the additional internal steel sourcing from our captive manufacturing businesses. To put that in perspective, our steel fabrication platform, the TEX, Heartland and Vulcan purchased 2.3 million tonnes of steel in 2019 and only sourced about half that from SDI-owned steel mills. This provides additional opportunity for internal purchasing to keep our steel mills running at higher utilization rates, even in a weaker demand environment. The US administration's recent guidance for states to begin a staged reopening is positive. As they begin this critical process, improved steel demand will follow from pent-up demand and already low steel inventories. We've provided a summary of our recent growth investments on a slide in our investor deck posted on the website. In the last 12 to 18 months, we've executed several strategic investments that will benefit our through-cycle earnings and cash flow positions. We've expanded two steel mills by the combined addition of 440,000 tons of steel rebar production capability, providing product diversification and a differentiated supply chain for the customer. Our model provides meaningful customer optionality and flexibility with significant logistics, yield, and working capital benefits. Its end-market diversification provides for higher through-cycle utilization for our structural and roanoke steel divisions. Heartland Steel, an 800,000 ton value-add flat-roll steel processor that sells primarily cold-roll and galvanized products, has been ramping up nicely, providing additional order support and operational flexibility for our bubbler flat-roll divisions. It has increased the through-cycle utilization of our steel assets and broadened our value-added product mix. The acquisition of 75% of United Steel's supply has been another excellent investment. This flat-roll, galvanized, pre-painted steel distribution company has provided a meaningful distribution channel to new customers. As a consumer of our internal steel products, they also increase the power of our through-cycle steel utilization. Since our acquisition of Columbus Flat Roll Division, the transformation of its product portfolio through the expansion of its value-added steel capability, diversification of its custom base, and the addition of a paint line has meaningfully increased its recycle and its capability, which will be clearly demonstrated through this loan term. We're now close to completing a $140 million, 400,000 ton value-added fluid galvanizing line, which we expect to begin operating mid-2020. The value-added product increase will decrease Columbus' hot-rule coil exposure and provide a ready-and-waiting hot-band customer base in the south for our new Texas steel mill. As Linton, we continue to be excited by the material growth the construction of our new next-generation flat-rule steel mill will deliver. As Teresa explained, our financial strategy focused on entering 2020 and providing for the required investment associated with this transformational project. Our team has an incredible depth of experience in the construction, startup, and operation of large steel manufacturing assets. Collectively, we believe they have more experience than exists in any company in the industry, and their performance and momentum has been remarkable. In January, we received the required environmental permitting to allow for full construction efforts, and we currently anticipate a mid-2021 startup. That said, as Teresa mentioned, we will be reassessing our timeline throughout the second quarter as we gain more visibility into the impact of COVID-19. Additionally, even though we intentionally did not purchase equipment from China, some of our equipment is being manufactured in other countries where the coronavirus is also active. We're having weekly conversations with these manufacturers, and we currently do not believe our planned schedule has been meaningfully impacted. The new state-of-the-art 3 million ton steel mill will include a value-added coating line comprised of 550,000 ton galvanizing line and a 250,000 ton paint line with galvalume capability. It will follow the same stringent sustainability model as other steelmaking facilities with state-of-the-art environmental processes. Our existing steel mills have a fraction of the greenhouse gas emission intensity, actually like 12% of average world steelmaking technology. With an 84-inch coil width, 1-inch thick, 100 KSI product capability, the Texas mill will have capabilities beyond existing electric arc furnace flat-row steel producers, competing even more effectively with the integrated steel model for foreign competition. As you know, the steel mill is strategically located in Stanton, Texas, near Corpus Christi. We have targeted three regional sales markets for the mill, representing over 27 million tons of relevant flat-row steel consumption. in the southern and west coast United States and Mexico. We also plan to effectively compete with heavy imports in Houston and the west coast. Our customers are excited to have a regional flat roll steel supplier. We have several customers in discussions with one already committed to locate on site with us and a second close behind. These two customers alone will represent over 800,000 tons of local steel processing and consumption capabilities. The sit-in location provides a significant freight benefit to most of our intended customers relative to their current supply chain options. We believe that potential customer savings related to freight alone are a minimum of $20 to $30 per ton, and for some, much higher. This freight advantage, along with much shorter lead times, provides a differentiated supply chain solution, allowing us to not only be the preferred domestic fuel supplier in the southern and western U.S., but also to effectively compete with imports, which inherently have long lead times and speculative pricing risks. From a raw material perspective, our metals recycling operations already control significant and growing scrap volume in Mexico through scrap management agreements, much of which is prime. As announced in March, we are also planning to acquire a Mexican scrap company as part of our raw material strategy for Sintons. Their primary operations are strategically located near high-volume industrial scrap sources throughout central and northern Mexico. The company currently ships approximately 500,000 gross tons of scrap annually, but has an estimated annual processing capability of about 2 million tons. After closing, we plan to ramp up volume fairly quickly. We are currently waiting for Mexican regulatory approval, as well as other closing requirements to expect to close in the coming months. We believe our unique operating culture, coupled with our considerable experience in successfully constructing and operating cost-effective and highly profitable EAS steel mills, positions us incredibly well to successfully execute the Simpson project. As I've said before, we're not simply adding flat-road production capability. We have a differentiated product offering, a significant geographic freight and lead time advantage, and an import alternative to a region in need of options. Our unique culture and the execution of a long-term strategy continues to strengthen our financial position through consistent, strong cash flow generation and long-term value creation, differentiating us from our competition and demonstrating our sustainability. Again, our commitment is to the health and safety of our people, our families, and our communities, all while supporting our vendors, serving our customers, and sustaining our value creation journey. Our team is simply incredible. I'd like to thank each of them for their patience, resilience, and commitment during these tough times. They have an indomitable spirit that drives us to excellence. And also, a very special thank you to the healthcare providers and their families within skilled dynamics and those serving individuals across the globe. Thank you. Be safe. Be well. For Michelle, please open the call for questions. Thank you.

Thank you. If you would like to ask a question, please signal by pressing the star key followed by the digit 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you pressed star 1 earlier during today's call, please press star 1 again to ensure our equipment has captured your signal. Also, we ask that you please limit yourself to one question to facilitate time for everyone. Any additional questions can be addressed upon reentering the queue. Our first question comes from the line of Chris Terry with Deutsche Bank. Please proceed with your question.

Hi, Mark and Teresa, and thanks for the comments. Just interested in the outlook, what you've seen so far in April. Obviously, the chart you provided in your presentation had utilizations in the 80% mark. You're above the average. That's fallen to the mid-50s in the last couple of weeks. Just wondering if you could comment on how Steel D is going so far in April and maybe based on your order book, what you might expect that to be during 2Q. I know it's a difficult question, but just wondering if you can provide some colour on the ground.

Well, certainly. I think, as you said, it's an incredibly difficult question. I'm not so sure our crystal ball is clearer than others, but I will say that It's positive looking through the lens of our order book and our order input rate. And I read this morning in American Metal Mart an individual saying, well, nobody's buying out there. I guess perhaps they're not buying from other people, but they are buying from us. I believe that obviously energy is going to be very stagnant for the rest of this year into next year. Automotive is going to come back again. One doesn't necessarily know exactly when, but the expectation is late this month and through May. But the bright spot certainly is construction. As I mentioned earlier, construction tends to lag a market downturn. We saw it in 2015, we saw it in 2008, 2009. It tends to lag the downturn in the market by about four to six months. because operations or projects tend to be pre-funded. And we're seeing that in our new millennium building fabrication business in our structural model. As I said, new millennium, extremely strong backlog, despite some project pushbacks. But there's nothing real meaningful change yet. And we are very, very strong, have a large market share in the distribution warehouse market. That obviously, given people staying at home and the expansion of Amazons and the like, that remains a growth area, in all honesty. Structural rail division backlog is currently solid, certainly through May. It did see a $25 price decrease here just recently, but I do believe that people will recognize that we're trotting out of the bottom of the market The scrap is going to be somewhat stable here in the next month or two. So those that have been hanging in the sidelines not buying will likely come to market. In that arena, in the beam arena, heavy structural distribution is certainly slow. As they whittle down their inventories, they're now pretty damn tight, and it's time to see them come back and buy as they need. But the fabricators, that business is still as strong as they supply the ongoing construction projects. The rail is actually very, very strong for us at the structural rail division. And rebar is an addition for us. And compared to past band turns, the product portfolio of structural rail division is much more diverse today. And we won't see the depth of lower utilization rate. And if you remember back in 2009, 2010, that business went to 30%, 35% utilization, still remaining somewhat profitable. But that's not going to happen this time. There's a much more diversified product mix than market mix. And so that should weather this along very, very well. Engineered bar that is seeing a little softness right now, obviously automotive is down, energy, seamless tube is down there, so that is one arena that is probably as soft as anything in our product portfolio. Flat roll remains Relatively robust is probably too strong a word, but we're targeting those operations to run at around about 80% utilization. That for us seems to be a good balance between fixed cost absorption and pricing. And it appears that we should be able to sustain that targeted output certainly for April, certainly for May. and we're confident that we can do that in June as well. So generally, I think it's obviously quarter of a quarter. It's going to be a tough couple of months for us, but we're positive.

Okay, thanks for the call, Mark. I'll leave it there.

Thank you. Our next question comes from the line of David Gagliano with CMO Capital Markets. Please proceed with your question.

Hi. Thanks for taking my questions, and congrats on a solid start to, obviously, a channeling year. I just wanted to follow up on the prior question. If we look at slide 11, 94% utilization rates in the first quarter, what's that number today?

Dave, I think that's what Mark just really tried to address. So we've not – there's a couple of things that I think differentiates us. One is that we continue to operate 24-7. And so with that, we get the orders and we gain market share during environments like this, especially as other higher-cost production is being shut down. Right now, we're still operating at a very good utilization rate across the platform. The most challenged division, frankly, is our engineer bar division, and that's because they're tied to both the energy market and to just general and industrial. Once automotive comes back, and more specifically for engineer bar, then Caterpillar, John Deere, et cetera, start to operate again, and I think that schedule, the last chart that I've seen was toward the mid and the May. You should start to see that correct. But that being said, it is a very difficult environment. It's just we're able to gain market share, and we're very nimble in the order entry and working with the customers, and that tends to make so that in very difficult environments our utilization stays higher. The other point is the internal volume. That is not to be overlooked. So if fabrication is still incredibly strong with a record backlog, they need steel. They'll be buying that steel from our own steel mills. The same thing regarding to our internal processing division. So Heartland United Steel Supply, et cetera, they need steel. They'll be buying that from our internal steel mills. So that helps our utilization profile and not most of our, if any of our competitors, have that same lever to pull. So we can't give you an exact number. percentage number today. Frankly, I don't know what the exact percentage would be overall. But I know that we feel good about where we are and that the teams are doing a great job.

Okay. Thanks for the additional color. The commentary was, you know, targeting 80% on the flat side. How about maybe is there a target for the, you know, the remainder of the product mix?

But I think structural should remain in that sort of 75 to 80% range. Again, the merchant shapes, probably less than that. Again, merchant shapes, you know, round of 10 tends not to be a massive part of our earnings profile anyway. But our three out of four of our principal mills, Butler, Columbus, and the structural rail division are targeting that 75% to 80% utilized agent rate. As Teresa said, engineering the bar right now looks to be softer than that.

So, Dave, just as an example, if you go back to 2015, which I would suggest is a last week steel environment that we've seen overall, generally our operations, even at that time, were operating at over 70%. On the flat wall side, they were actually operating closer to 90%. It's always more challenging on the long product side because there's just extra capacity out in the system as it relates to long products and because they're all electric arc furnace-based. But today we would suggest that we just have more internal levers to pull, and so we wouldn't think that necessarily overall when you include both flat and long has as much impact as it might have at one point in time.

I think I'll leave it at that. Thanks very much.

Thank you. Our next question comes from the line of Seth Rosenfeld with Xsane BMD Paribas. Please proceed with your question.

Good morning, Mark and Teresa. Thank you for taking my question. With regards to the cost performance that we've seen from the business, as you've continued to grow your processing volumes, utilizing some internal and third-party substrate, can you give us a sense of how that's impacting your overall fixed cost base for the business? Again, if we think about how your position in 2020 compared to past downturns, should we consider the growth in processing as essentially more variabilizing your cost base versus history, or should we think about this in a different way perhaps? And then secondly, just one more follow-up with regards to Simpton. I wanted to please give a little bit of color with regards to the decision to continue with the same 3 million ton target. Given the weakness in oil and gas, you yourself highlighted that being weak through 2021. and plan for 1 million tons going into energy. How do we think about that 3 million ton target in the current market environment for steel dynamics? Thank you.

Okay. Seth, I think I – good morning. I think I have all the questions written down. So from the first questions about the adding of the manufacturing businesses or the processing businesses, there's two points that you should keep in mind. One is you're correct. It is increasing the variability of our cost structures. But again, as a reminder, each of our operating platforms is already over 85% variable cost. But this helps that as well. The other component to recognize is that because they're buying steel and using steel as a substrate, that is impacting our cost of goods sold by having steel run through cost of goods sold, which is higher priced. And so just Anecdotally, in the first quarter, we had about 15% of our cost of goods sold was associated with those steel purchases from the converting companies. From a Sinton perspective, Mark, I'll let you handle the energy question.

Yeah, for sure. I think that's the... The mill is structured or designed for 3 million tons. It's not like a conventional Finslab-based EEF where you have two casters. This has one caster with a 3 million ton capability. And as such, it's not a matter of building half the plant or anything like that. Nor do we anticipate doing so. Obviously, the output would be adjusted somewhat to demand, but again, yep, the energy markets are pretty tough right this second. But as one, for those that have been in the industry for a significant amount of time, things do cycle, that down market will come back. But the advantage of the Sinan facility is its geographic location. We're not dependent on one single market or product. We've got around 27 million tons of market capability. When you look at the Southwest, you look at the West Coast, and you look at Mexico, and we can shift that product between energy and automotive and construction, and we feel But the investment premise remains totally, totally intact.

Just as a quick point on that, from an energy perspective, last year I think of our shipments, about 7% was related to energy. But that was primarily at our Engineer Bar Division and at Columbus. But within that number, we also shipped quite a bit of volume from our SEAL West Virginia shipments. facility into solar. So our energy number also includes solar, and solar is still something that's actually increasing in demand during this time as well.

Great. Thank you very much.

Thank you. Our next question comes from the line of Timna Tanner with Bank of America, Mara Lynch. Please proceed with your question.

Hey, good morning, and hope everyone's healthy and safe.

Likewise, Timna.

Thank you. Thank you. I wanted to just drill down a little bit into your cash flow philosophy. So I heard you – maybe, Teresa, I misheard. Can you clarify? You said for the remainder of the year, CapEx is $1.2 billion, which sounds like your CapEx forecast is intact at $1.4 billion, or did I hear that wrong? And you also went on to say that you could adjust it if needed, but you're not adjusting it. And you also said that you could – you know, you just authorized further buybacks and just completed, what is it, 170 million buybacks in the quarter. So I kind of get the impression that for now, Freelynamics is operating as if, you know, the impact of reduced demand and COVID-19 impact is a shorter-term phenomenon and kind of getting back to normal later in the year. That's what I'm piecing together from your comments on the CapEx and the buybacks. But I just wanted a little bit more thought on how you're thinking philosophically about the rest of the year and capex and buybacks. Thanks.

Great. So let me clarify. You're right concerning the capital expenditures currently for 2020. We started the year saying we expected to spend about 1.4. We spent a little over $200 million in the first quarter. So for the remainder of the year, there's $1.2 billion left. Of that $1.2 billion... Over 700 million of that is actually late in the second half of the year, and it's related to Sinton. As we progress, Timna, through the second quarter, we believe we're going to gain a lot of visibility as the state, for lack of a better word, reopened on what that means for steel consumption and on our own operations for the remainder of 2020. As we progress through the second quarter, should we think that we want to potentially take some of that capital and push it into 2021, we can make that decision to do that at that time. But right now, from what we're seeing, as Mark mentioned, how the mills are operating and the market share and the activity that we're seeing, we don't believe that that decision is something that we're making today. As it relates to our share purchases, we repurchased $107 million in the first quarter. Most of that was purchased within January and February time frame. But you should expect to see from us in the second quarter is that we will be watching the markets, watching the impact of the coronavirus, and you won't see us heavily into the share buyback market at that point in time, and then we'll reassess for the second half of the year. The reason the board authorized an additional $500 million to in February of this year is simply because we think share of purchases during periods of excess cash flow is an important tool to have. And so we wanted to have that tool because we actually only had, I think, about $40 to $50 million left on the previous program. Does that help clarify how we're thinking about things?

Yeah, absolutely, because I was having a difficult time squaring some of those comments with the market environment. Okay, so I guess just as a follow-up, if I could, can you just talk a little bit about when you think you'll have more visibility on construction. So like you said, construction is a late cycle. You wouldn't see cancellations yet. But it sounds like that could start to flow through later in the year. And I just wanted to get a little bit more thought on when you would start to see any impact on your backlog or any commentary from what you're seeing on the ground level, because we're hearing that private sector activity is kind of drying up. So I'm just wondering if that's in line with what you're hearing as well. Thanks.

Well, I've seen the same commentary out there, and it seems to be a little disconnected to our actual order book and what we've seen. And as I've said quite consistently, our real lens for SDI is through that order book and through the inquiry rate. And all that remains quite strong. The analogy, if you look at the 2008, 2009 downturn, which was pretty significant unto itself, we saw the structural rail division operating pretty consistently into the summer of 2009. There's a good four, five, six months of strong sort of continuation from pre-funded And we're seeing, as I said, a large part of our business is in the distribution warehouse arena. And that is, I would say, it's expanding more than contracting. So I think we see things optimistically. We're also very, very realistic. And I just want to go back to what you're saying about, you know, is there a... the dichotomy between the markets and what we're saying relative to our strategy. And I'm going to ramble a little bit, I think. But, you know, I'm probably, you know, some of the members of the SAI team have been in the business probably longer than anyone on the call and probably most leadership in any of the steel companies. And we've seen the, you know, 80-81. We lived through and managed through 2001, 2002, when 45% of the industry was in insolvency. We lived through 2008, 2009. We lived through 2015. So we were very realistic and recognized the impact and the market change and managed to do that. And I think we've demonstrated through our 25, 26-year history that we're very intentional We're very disciplined and we're actually conservative. At that same time, in periods like this, leaders, and you've got one of the best leadership teams in the world here, they need to lead. They shouldn't be seeking cover. We need to be seeking opportunities. And that's where we think Sentinel is a very, very good investment, a very good opportunity, and we'll continue to go down that path. That being said, just to re-emphasize what Teresa said, we'll continue to reassess our order books, the market, our cash flow generation, and we'll adjust as we see fit. But I think it's very, very important to recognize that Again, a lot of the capex for symptom is sort of back-ended toward the end of the year here. And it's a huge lever that we can pull if necessary.

Okay. And by lever, you mean to delay, right? I don't envision you're talking about, like, pulling it per se, right?

No, we're just talking about delaying it somehow. Right. And just one other point, and I don't want to belabor it, You really can't forget the strength of the working capital for us and the funding source it can be if necessary.

Okay. Really helpful, guys. Thank you.

Thank you.

Thank you. Our next question comes from the line of Phil Kidd with KeyBank Capital Markets. Please proceed with your question.

Hey, good morning.

Good morning. Good morning.

Mark, can you talk a little bit about the – on-site customers that you're going to have on sitting. I think it was part of your script on sitting, but I just wanted to be sure because I think you'd said over 800,000 tons of local or on-site processing. And obviously that's a big chunk of the 3 million tons that you're looking to get. So one, I just want to make sure I heard that correctly. And two, where do you think that that can go? as this project evolves?

I think we've got one signed and a second very, very, very close to signing. There's a preference on their part not to submit names at this moment in time. But you are right, the two of them would connect to about 800,000 tons of consumption and processing capability. We probably have another, not probably we do, have four other interested customers that have been given full packages, lease packages and those sorts of things. They just slowed a little bit because of the situation we're in, but we're confident that we're going to get those folks to us. But it is a a very, I think, important part of the overall strategy of that mill.

Collectively, it's likely to be somewhere over a million tons of on-site capability.

Okay. Well, that's helpful. So talking basically a third kind of built in on-site there. I think that their tax benefits... or deferrals and accelerated depreciation on years where new assets go into service, and let's just say 2021 is intact for Sinton, at least as it is today, what should we be thinking about the size of just the accelerated depreciation benefits in terms of tax avoidance in the years it goes into service? Because obviously with $2 billion of spending, it could be pretty meaningful.

Yeah, so we don't have exact numbers, but I would estimate that of the $1.9 billion, you're likely to have accelerated depreciation on at least 80% to 85% of that number.

Okay. Would you take that all in year one, given, I guess, all the assets go into service in 2021?

Yes, Phil, that would all be recorded in 2021, the year of service.

Thanks very much.

Thank you. Our next question comes from the line of Andres Bockenhauser with UBS. Please proceed with your question.

Well, thank you very much, and good morning. I hope you guys are all well. Just two quick questions from me. First of all, on oil, obviously this week's oil volatility, How do you guys think about that? You know, just aside from, you know, what it could do to, you know, investment in the energy sector and tubular steel and so on and so forth, you know, when you kind of saw what happened yesterday to prices, what kind of went through your minds in terms of are there any opportunities for steel dynamics that we should be thinking about and what are the, so, you know, less obvious challenges as well? So maybe just give a little bit of framework, if you will, around how you're kind of thinking about the oil price move yesterday. And I guess the second question is more on construction. Can you give a little bit more granularity there? When we look at the, you know, residential and non-residential construction numbers, there seems to be as much weakness as there is strength and has been for the last year or so. You guys seem to be exposed to the strength of it. So could you give a little bit more granularity as where you're seeing that strength in any particular areas? Is it res or non-res? more South than North and so on, that would be very helpful. Thank you very much.

Well, certainly. Well, regarding the energy markets, I think yesterday was quite incredible and I'm not so sure we've had time to digest, but just in general, obviously the immediate impact is on the energy markets pipe and tube and that was a that's not just been a COVID thing that obviously is Russia and Saudi Arabia doing their thing and the low energy prices will just extend the downturn there that is you know eight to ten percent I guess of the steel market in normal times But we look at that as a pretty stagnant market the rest of this year going into this year and next year, first half of next year anyway. I guess the positives, well, one is scrap tends to move down with oil. I'm not so sure that the physical market would allow that to happen. to occur in May. We're looking, perhaps shouldn't move down in May, but we think given the physical market, it's probably a sideways market moving forward, but that may change here in the next week or two. What I do think is that the pressure on the energy market is going to, in turn, put pressure on the integrated mills. And I think that You know, you've seen a pretty dramatic idling of integrated capacity, blast furnace capacity here over the last four, five, six weeks. And if you look back over a longer period, you know, the last couple years, there's been a much more frequent turn on, turn off of some of that capacity as the suffer a pretty strong economic pressure. And I think a sustained downturn in the energy markets will make certain of those assets, it's going to be a tough decision to ever bring them back. But I think it may, as a positive, may help rationalize the industry to some small degree.

Thank you.

Sorry, and then you had a second question on construction granularity. Again, there certainly has been weakness in the northeast, but that's tended to be more projects or construction locations actually being shut down by the states. We certainly see strength. And in fact, we certainly, as I said, see strength in that distribution warehouse arena.

Thank you. Our next question comes from the line of Gordon Johnson with CLJ Research. Please proceed with your question.

Hey, guys. Thanks for taking the questions. This question may have been asked, but I was wondering if I could get a little bit more color on your shipments expected across some of the different lines. I know you said your utilization is going to drop to 75, 80%. But can we get maybe a little more color on kind of what you're seeing in Q2 and maybe some of the green shoots you see in the second half?

Yeah, we're not going to get too specific for two different reasons. One is that we generally don't give that type of guidance. And the second reason is especially going into the environment that we're in right now, there's not a lot of visibility. And so We want to make sure that we're being appropriate. But I think what Mark was suggesting is that we intend to see utilization, or at least we're planning for utilization, at our flat role operations somewhere in that, you know, 75% to 80% range. And traditionally, even in 2015, we were actually operating at about 90%. So we generally gain market share in flat roles during periods of weakness, And we're seeing that today as well. And we don't see a driver for that to change throughout the quarter. The long product side is more difficult. So in the structural and rail arena, we expect to maintain higher utilization in that 75% to 80% range because of the order backlog as it sets today and because construction is continuing for us in that arena. And with the addition of rail and rebar, that product diversification helps that facility significantly. Across the other long product mills, it's more difficult. So they're going to see the most weakness in our mind in the special bar quality or the SPQ arena. And then, you know, that's distributed throughout. So that's probably about as much clarity or granularity as we can provide on volumes at this point.

Okay, that's helpful. And then one last one. In the checks we've done, it seems like you guys are doing quite well in the construction space, particularly against the integrated mills. Is there any, I guess, approach you guys have or color you can provide on, you know, I guess, incremental attempts to take share in that space? And is that accurate that you guys are doing quite well in the construction space against your integrated peers? And thanks for the question.

Yeah, no, that's absolutely correct, and especially – I don't know if it wasn't just in periods like this. In the first quarter, our structural rail team did a fantastic job on the construction side and pulling in volume. And if you were speaking more specifically about our fabrication business, we have been gaining market share in that arena as well, and the team's doing incredibly well. And Mark pointed out it's more specifically in that warehouse arena. But we have been taking market share, and we would expect to continue to do that.

Thanks again.

Thank you.

Thank you. Our next question comes from the line of Sean Wondrock with Deutsche Bank. Please proceed with your question.

Hi, Mark and Theresa, and thank you very much for all of the information today. Just to look at the auto market, you know, I think you had mentioned that some of the auto manufacturers are looking to come back online in the next few weeks. Can you talk about, like, are you starting to hear from them more, like more order inquiry? And also, sort of for the industry, I realize you guys are a great operator and you're going to have the ability to potentially take share this year. What is sort of your baseline, if you have one yet, baseline forecast for auto production? Do you assume it's down 10% this year? Curious about that. Thank you.

I didn't hear that question.

Thank you. Our next question relates to automotive. And it relates to the perspective of as they start to roll on, we've been taking market share, specifically with the European automakers, et cetera. Would we expect to continue to take that market share? And what are we thinking about from a volume perspective? So how much will fuel consumption volumes or auto builds be another perspective? How much will that be down? I think it's a million to a million and a half units is what I'm seeing. And then the perspective just around, you know, what do we feel about continuing to take that market share related to automotive?

Got it. Okay. I would suggest that, as I said earlier, my crystal ball is probably no better than anyone else's on the call. And the whole recovery is subject to when folks get back into the marketplace and at what speed. Do they ramp up? From present information, it appears that the automotive will start rolling back starting the end of midday in the next week and all the way through May, depending on which company. There's a backlog of vehicles right this second. So how quick the recovery is difficult to gauge. You look at past troughs, it tends to replenish. They've been in a position to replenish inventory and pent-up demand. I'm not so sure we will see that this time around. To quantify our gain in market share relative to times, it's a tough thing. All I can say is our abilities are sort of armed and ready to go, and it's our flexibility across all markets. It's not just the auto, but all markets that allows us to take up opportunistic gains. It's going to be a while before the integrated mills just start turning on all their idle capacity. one would imagine that they need to see some visibility and transparency for a market that is on the positive momentum and that pricing also has positive momentum. And that's not going to happen just because the automotive and the tier one and tier two stampers start up. So there's that time period and it It's a matter of months, maybe longer at this time around, who knows. But it's a matter of months where the flexibility of electric arc furnace operations can take advantage of the marketplace.

Thank you. Our next question comes from the line of John Tomazos with John Tomazos Bury Independent Research. Please proceed with your question.

Thank you very much. How much of the Butler and Columbus mill tonnage used to be scalped for a welded tube for energy exploration and in the plan for Sinton? And should we just assume that those volumes become construction steels given the short-term crude oil outlook?

Well, for...

John, I would say Butler, the energy scalp is not a massive part of their portfolio. And so we tend to see a hot-wheel coil dependence from the facility is not really related to oil and gas. And given the The value-add diversification there, we don't really have a massive amount of hot band to sell, to be honest. Columbus certainly has greater exposure. And if you remember when we purchased the mill in 2014, that was dominantly an energy pipe supplier. And I think back then it was 30%. maybe 40% of its output.

It was over 40% with Elliot's energy.

Since then, the team really sort of catalyzed by the downturn in energy in 2015. The team has done a phenomenal job diversifying that asset, adding greater coding capabilities, adding a paint line, adding a variety of high-strength type grade steels there, getting into automotive, getting into Mexico. So the product and the market diversification there has totally transformed that energy. And so it's true cycle earnings today is nothing like 2015. It's much higher. That being said, it's probably 10%. maybe 15% energy related?

John, just overall, to put a point on it, last year our shipments, we only had 7% that were related across the company that were related to energy, and some of that included solar, so that was a high premium grade OCTC, that sort of thing. So it's not that much of our business either last year or today at this point. And then as it relates to Sitton, we will also be – competing, we think, very effectively with imports, and I think that's something that people should recognize as well.

Thank you, and congratulations on being the old man of the call, Mark. I turned 65 in 1941.

I'll be respectful, but you and I both, mate.

Thank you. Our next question comes from the line of Phil Gibbs with KeyBank Capital Markets. Please proceed with your question.

Hey, Teresa. Did you provide the mix of sheet products as typical?

I apologize, Phil. I didn't. I have it here, though. So for a flat-wool shipment, I know a lot of you use it for your models. Our hot-wool coil and our pickles and oil shipments, were 891,000 tons. Our cold rolled shipments were 151,000 tons. And our coded shipments were 948,000 tons, for a total of 1,990,000 tons. Apologies.

No, no worries. That's all. Thanks very much.

Thank you. Thank you. Our next question comes from the line of Charles Bradford with Bradford Research. Please proceed with your question.

Good morning, and I've got both of you guys beat on age, but the question goes down to a little bit something maybe out of your bailiwick, but apparently U.S. Steel has dropped out of membership of the AISI. That's it may impact the quality of the industry data that we get. Have you seen any change in the quality? I'm thinking especially of the usually pretty bad operating rate figure.

Chuck, I would say we've not seen any change, but nor have we analyzed it, to be honest. Thank you.

Thank you. Our next question comes from the line of Tyler Kenyon with Cowan. Please proceed with your question.

Hey, good morning, Mark and Teresa. I hope you're both doing well. Teresa, just a quick one for me. Do you anticipate any relief in 2020 from the recently passed CARES Act, payroll tax deferrals, enhanced deductibility of interest expense, et cetera, in any way to bracket, you know, what kind of cash relief they could provide in 2020?

Yeah, given the analysis that we've done, I really can't put a great bracket around it, but at this point in time, Tyler, it's not something that we're viewing as will be significant for us. There's definitely the payroll tax relief would have an impact, but apart from that, given our expectations on operating in the different areas where they're helping either smaller companies or companies that are not doing as well as we are, I don't think it's going to be something that's meaningful at this point. If that changes, we'll be sure to let you know.

Thank you.

Thank you. That concludes our question and answer session. I'd like to turn the call back over to Mr. Miller for any closing remarks.

Thank you, Michelle, and thank you, everyone, on the call. I just would like to emphasize, you know, I'm – pretty optimistic guy and if you were surrounded by the team we have at SDI, you would have that same optimism. And it's really based on SDI's position and I suggest even in these tough times and the SDI team shines in moments of challenge and we are in a position of strength. Our business model is built to be resilient in trough markets and tough markets. We have a high variable cost structure. 85% of our cost structure is variable. We've got a broad value-added product portfolio, and we have a strong pull-through volume, as we've suggested from our internal downstream operations. All that builds a high utilization rate, and we've demonstrated in every trough higher utilization rates than our competition. And when you have capital intense deal assets, volume is absolutely critical. And that translates into better financial metrics to recycle. So we're still confident in our cash generation capability. We're still confident in our financial foundation. battling each and every day, but our orders continue to flow in. So we do remain positive. That being said, we're incredibly intentional and we recognize that we need to be assessing markets and our position almost each and every day. We've demonstrated that in the past and we will demonstrate that going forward. So for all of you, thank you for being on the call. customers and employees, seriously, thank you. You make SDI who we are today. And everyone be healthy and be safe. Bye-bye.

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