Steel Dynamics, Inc.

Good day and welcome to the Steel Dynamics second quarter 2021 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 that this call is being recorded today, July 20th, 2021, 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 David Lipschitz, Director of Investor Relations. Please go ahead.

Thank you, Daryl. Good morning, and welcome to Steel Dynamics' second quarter 2021 earnings conference call. As a reminder, today's call is being recorded and will be available on our website for replay later today. Leading today's call are Mark Millett, Chairman, President, and Chief Executive Officer of Steel Dynamics, and Teresa Wagler, Executive Vice President and Chief Financial Officer. The other members of our senior leadership team are joining us on the call individually. Some of today's statements, which speak only as of this date, may be forward-looking and predictive, typically preceded by believe, expect, anticipate, or words of similar meaning. They are intended to be protected by the Private Securities Litigation Reform Act of 1995 should actual results turn out differently. Such statements involve risks and uncertainties related to our steel, metals recycling, and fabrication businesses, as well as to general business and economic conditions. Examples of these are described in the related press release, as well as in our annually filed SEC Form 10-K under the headings Forward-Looking Statements and Risk Factors, found on the Internet at www.sec.gov, and if applicable, in later SEC Form 10-Q. You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Record Second Quarter 2021 Results. And now I am pleased to turn the call over to Mark.

Thank you, David, and good morning.

Welcome to our second quarter 21 earnings call. We appreciate your time and thank you for joining us today. The entire Steel Dynamics team delivered yet another phenomenal performance. It was filled with operating and financial records, including record sales, operating income, cash flow, and adjusted EBITDA. A tremendous performance driven by the dedication and passion of our teams, executing on long-term strategies that will continue to drive higher through-cycle earnings. The team is delivering exceptional results, and I'm very proud to be among them. Due to the continued commitment of our teams to one another, our families, and our customers, we continue to operate safely amidst COVID. The health and welfare of our teams is paramount, and I thank each of them for their continued commitment to safety. Record financial results are of little import unless everyone goes home safely at the end of each day. The number of injuries and associated severity improved in the first half of 21 compared to last year. The teams have focused on reducing hazards and practices that could result in significant injury. Nothing is more important than the health and safety of our people. It is our number one value. Our safety performance continues to be significantly better than industry averages, but our intent will always be to have zero incidents. To achieve this, We must all be continuously aware of our surroundings and our fellow team members, keeping safety top of mind in order to take control of safety. Our commitment to all aspects of sustainability is embedded in our founding principles, woven into the fabric of our company, valuing the health and safety of our teams, partnering with our customers, supporting our communities, and minimizing our environmental footprint. An extension of this commitment is evidenced in our recent announcement concerning goals for greenhouse gas emissions reduction and renewable energy milestones, including a goal for our steel mills to be carbon neutral by 2050. We have been a leader in the area of sustainability for more than 25 years, and we plan to stay right in that position. We are starting from a place of strength with already industry-low scope one and two carbon emissions, yet we plan to do more. As we progress on this strategic path, we will plan to share our outcomes with you. But now, Teresa will now share insights into our recent performance.

Good morning, everyone. I'd like to add my sincere appreciation and congratulations to our entire steel dynamics team. As Mark said, we achieved numerous milestones, attaining record second quarter performance with record revenues of $4.5 billion derived from record quarterly steel shipments record fabrication shipments, and strong product pricing across all of our operating platforms. We achieved record quarterly operating income of $956 million and net income of $702 million, or $3.32 per diluted share, and record cash flow from operations of $587 million with record quarterly adjusted EBITDA of over $1 billion, a truly extraordinary performance. Our second quarter 2021 results included costs of approximately $23 million or $0.08 per diluted share associated with the construction of our Sitton, Texas, flat-rolled steel mill. Excluding these costs, second quarter 2021 adjusted net income was $719 million or $3.40 per diluted share. Our second quarter revenues of $4.5 billion were 26% higher than sequential first quarter results, with growth from all of our operating platforms, but most significantly from our steel operations based on record shipments and continued strong flat-rolled steel selling values. Our second quarter 2021 operating income was $956 million, 61% higher than the first quarter results, also driven by strong flat-rolled steel pricing and robust demand more than offsetting increased scrap costs. As we discuss our business this morning, we continue to see positive industry fundamentals for 2021 and 2022, and we're confident in our forthcoming unique earnings catalyst. Our steel operations generated over $1 billion of operating income in the second quarter, 59% greater than first quarter sequential earnings, as flat-roll steel selling values continued to strengthen. We also saw expanded margins throughout our long product steel operations due to improved pricing and volume. We achieved record quarterly steel shipments of 2.9 million tons and our steel mills operate at 91% of their capability. We still have additional steel market opportunity based on our existing annual steel shipping capability of over 13 million tons. And when our new Texas steel mill is fully online, we'll have over 6 million tons of availability. Operating income from our metals recycling operations was $51 million, aligned with strong first quarter performance as domestic steel production improved, further supporting Ferris scrap demand and pricing. The team continues to effectively lever the strength of our circular manufacturing operating model, benefiting both our steel and metals recycling operations by providing higher quality scrap, which improves furnace efficiency, and by reducing company-wide working capital requirements. Our fabrication operations once again achieved record shipments and expanded margins in the quarter as realized selling values more than offset continued higher steel input costs. Operating income was $28 million versus first quarter earnings of $10 million. Steel joists and deck demand remains very strong as evidenced by our record customer order backlog and continued robust order activity. We expect steel fabrication earnings to continue to increase through the remainder of the year. Our cash generation continues to be strong based on our differentiated business model and highly variable cost structure. At the end of the second quarter, we had liquidity of $2.3 billion comprised of cash of $1.1 billion and our fully available unsecured revolver of $1.2 billion. During the second quarter of 2021, We generated record cash flow from operations of $587 million and $849 million during the first six months of the year, also a record. Working capital grew over $700 million in the first half of 2021 due to higher prices resulting in increased customer account and inventory values. During the first half of 2021, we've invested $587 million in capital investments, of which $489 million was invested in our new Texas flat-rolled steel mill. For the second half of 2021, we estimate capital investments will be roughly between $350 million and $400 million, of which the Texas steel mill represents an estimated $300 million. Regarding shareholder distributions, we maintained our quarterly cash dividend at $0.26 per common share after increasing at 4% in the first quarter of this year. We also repurchased $393 million of our common stock, representing 3% of outstanding shares. In July, we announced the Board's approval of an additional $1 billion share repurchase authorization, demonstrating our confidence in Steel Dynamics' future cash flow generation. Since 2016, we've increased our cash dividend per share over 85%, and we've repurchased over $1.6 billion of common stock, representing 19% of our outstanding shares. While during the same time frame, we achieved an investment-grade credit rating and maintained our growth company profile by investing $2.8 billion in organic capital investments and funding $720 million in acquisitions. These actions reflect the strength of our capital foundation and consistently strong cash flow generation capability and the continued optimism and confidence in our future. Our capital allocation strategy prioritizes strategic growth. with shareholder distributions comprised of a base positive dividend that's complemented with a variable share repurchase program. We are squarely positioned for the continuation of sustainable, optimized long-term value creation. Sustainability is a part of our long-term value creation strategy, and we are dedicated to our people, our communities, and our environment. We are committed to operating our business with the highest integrity and have been since our founding. Further committing to this path We recently announced greenhouse gas reduction and renewable energy goals, including a goal for our steel mills to be carbon neutral by 2050. To increase transparency, we have set interim milestones for 2025 and 2030. As Mark said, we've led the steel industry with our exclusive use of EAF technology, circular manufacturing model, and innovative solutions to increase efficiencies, reduce raw material usage, reuse secondary materials, and promote material conservation and recycling. We plan to sustain our leadership position by executing our sustainability goals through, among other avenues, implementing emission reduction projects, improving energy management, increasing the use of renewable energy, and developing and supporting new innovative technologies. We have an actionable path that is more manageable and we believe considerably less expensive than what may lay ahead for the traditional blast furnace industry. Our sustainability and environmental impact strategy is an ongoing journey, and we are moving forward with the intention to make a positive difference. We plan to continue to address these matters and to play a leadership role in developing innovative ways to reduce our impact on the environment. Additionally, for those that track our individual flat-rolled steel shipments, In the second quarter, our hot roll and our P&O sales or shipments, excuse me, were 719,000 tons. Our cold rolled shipments were 150,000 tons, and our coated shipments were 1,055,000 tons. With that, Mark?

Super. Thanks, Teresa. I'll just add a little more color to each operating platform. fabrication platform delivered a strong performance again, achieving record quarterly shipments and almost tripling sequential operating income. Based on the strength of steel joist and deck in demand, increased product pricing is more than offsetting the continued rise in steel input costs. Order activity continues to be extremely strong. We again ended the quarter with a record fabrication order backlog at levels considerably higher than historical peaks. The non-residential construction market is strong, especially in areas that support online, retail, computing activities, and pharmaceuticals, specifically represented by construction of distribution and warehouse facilities. We believe this dynamic will continue for the next several years as we see long-lasting changes in consumer behavior. As we mentioned last quarter, we've hired additional people and expanding operating hours at several steel fabrication locations in order to meet increased customer demand. These changes should increase annual production capability by well over 100,000 tons. Our metals recycling operations had an extremely strong quarter with quarterly operating income of $51 million. Strong first demand and increased pricing related to higher domestic steel production drove strong performance. Prime scrap index pricing averaged increased $60 to $70 per gross ton during the quarter. Prime scrap generation has been solid based on strong North American manufacturing. We expect U.S. scrap generation and alternative iron unit production to keep pace with the increased demand from steelmaking in the coming years. Additionally, we believe China's scrap reservoir will grow considerably over the next three to five years, offsetting their expanding EAF capability while providing additional global raw material supply. We believe metallics pricing in general has peaked and scrap will remain flat in the coming quarter. The steel team had an outstanding quarter, continuing to achieve numerous operating and financial records, including record shipments of 2.9 million tons and record operating income of over a billion dollars. While the domestic steel industry operated at a utilization rate of 81%, our steel mills operated 91% during the second quarter, slightly lower than our first quarter rate of 93%. In June, we experienced the burn through in one of our furnaces at our Columbus flat row steel mill. Importantly, no one on the team was injured. The resulting outage, though, lasted about 10 days, impacting second quarter production and shipments by about 60,000 tons and 30,000 tons respectively. Columbus is now again fully operational. Steel demand is strong across our entire steel platform. Our long product steel operations achieved increased shipments at all of their locations, with the structural and rail division achieving record quarterly volume. The flat-row steel markets remain especially tight. Strong demand, coupled with extremely low customer inventory levels across the supply chain, continue to support flat-row steel prices above historical peaks. Customers are placing orders for immediate demand requirements and have not had the ability to rebuild inventory. Additionally, the speculative risk associated with the accumulation of higher-priced inventory is also a significant deterrent to procuring imports. We believe current legislative steel trade policies, such as the Section 2 of 1 cases imposed in 2015-2016 and subsequent anti-circumvention restrictions, will continue to keep steel imports at moderated levels. The current U.S. Administration has also commented constructively concerning trade parameters and the issues created by China's steelmaking overcapacity. Regarding the ongoing negotiations between the US and the EU on revoking 232 tariffs, we expect the final agreement will include import sewage protections to protect US national security goals. Aside from Turkey, Europe has never been a significant import source, and we have long thought collaborating with them against China and other Asian export-based economies that are the greatest contributors to global overcapacity, is the most effective path to fair trade. From an end-market perspective, the automotive sector is operating at solid production levels due to low inventories coupled with strong consumer demand. Current build rate forecasts for 2022 and 2023 are at 17 million units, representing a very strong outlook. Auto inventories are 55% below the five-year average and at the lowest supply level in over 35 years. And additionally, at this point, we've been fortunate that our automotive order book has not seen any significant impact from the ongoing electronic chip shortage. The non-residential construction sector remains strong, as evidenced by our record structural and rail division shipments, record steel fabrication shipments, and strong, long product steel order backlogs. We expect this strength to continue through the rest of this year and into next. Residential construction has always been strong, resulting in high demand for HVAC, appliances, and other related products. We're also seeing healthy demand for mining and yellow goods customers at our engineered bar products division. And more recently, we're finally seeing some indications of an improved energy sector as global energy prices have improved. We've executed numerous strategic investments across the company the last several years, and we continue to position Steel Dynamics for the future. We and our customers continue to be extremely excited about our Sinton, Texas, electric arc furnace flat-row steel mill investment. It represents transformational, competitively-advantaged strategic growth with associated long-term value creation for all of our static builders. It provides lower carbon-emitting, next-generation EAF steel production capabilities new products, and new customers. The 3 million ton state-of-the-art facility is designed to have product capabilities beyond that of existing electric arc furnace flat-row steel producers, competing even more effectively with higher carbon-emitting integrated steel facilities and high carbon farm competition. It provides us with broader steel portfolio while providing our customers with an even larger climate-conscious supply option. The electric arc furnace production route is by far the most sustainable, environmentally friendly supply chain, having the lowest carbon footprint. We are currently hot commissioning the 250,000 ton paint line, and we expect the 550,000 ton galvanizing line with galvalume coating capability to be operational next month. The entire Sinton team is doing a tremendous job. But due to excessive heavy rains experienced in Texas over the last several months, Actual steel production at Sinton is not likely to begin until mid-fourth quarter of this year. Teresa shared our views concerning shipments and through cycle earnings capability of this new steel mill. It's truly a transformational project, and we are just at the edge of seeing the tremendous benefits it will bring to us, our teams, our customers, and our stakeholders. The town of Sinton provides a strategic location near Corpus Christi with regional commercial markets representing over 27 million tons of relevant flat-row steel consumption in the U.S. and Mexico. Our customers are excited to have Freight Advantage regional flat-row steel supplier. We currently have five customers committed to locate onsite, representing over 1.5 million tons of annual processing and consumption capability. Based on our location, with much shorter lead times, we can provide a superior customer supply chain solution. It also allows us to effectively compete with imports coming into Houston, in the West Coast, which inherently have long lead times and speculative price risk. We have also made considerable progress concerning our raw material procurement strategy for Centum. We completed the acquisition of a Mexican scrap company last August, a critical step. The operations are strategically located near high-volume industrial scrap sources throughout central and northern Mexico. They have an estimated annual scrap processing capability of almost 2 million gross tons. And we also have acquired three smaller scrap locations in the Houston and Corvus Christi area, which we did last quarter. Our performance-based operating culture, coupled with our considerable experience in successfully constructing and operating highly profitable steel mills, positions us incredibly well to successfully execute this transformational growth. We're not simply adding flat-row steel production capacity. We have a differentiated product offering, a unique regional supply chain solution, a significant geographic freight and lead time advantage, and offering an import alternative to a region in need of options. We also recently announced plans to add four additional value-add flat-row coating lines comprised of two new paint lines and two new galvanizing lines with galvanized loom coating capability. A preferred supply chain has resulted in our existing lines consistently running at full capacity through both increased consumption, and market share gain. Two of the new lines will be in the southern U.S. region to support Sinton. The other two lines will be in the Midwest and will also be comprised of a new paint line and galvanizing line with a combined annual capacity of 540,000 tons. These lines will support our regional flat-roll steel operations, providing them with more value-add product diversification to serve our customer needs. We currently believe these lines will begin operations the second half of 2022. Our strategy consistently places value-added products and supply chain differentiation at the fore and its benefit as well. In closing, our business model and execution of our long-term strategy continues to strengthen our financial position through strong cash flow generation, demonstrating our sustainability and differentiating us from our competition. Additionally, Our customer focus, coupled with market diversification and low-cost operating platforms, support our ability to maintain our best-in-class financial performance. Our amazing teams and the spirit of excellence are the foundation of that success. I thank each of them for their passion and dedication to one another. And remember that your health and safety are always the most important issue at hand. So thanks to all for you being on the call today. I appreciate you listening. And now, Darrell, please open the line for questions.

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 are 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 yourselves to one question to facilitate time for everyone. Any additional questions can be addressed upon reentering the queue. Our first questions come from the line of Emily Chiang with Goldman Sachs. Please proceed with your questions.

Good morning, Mark and Theresa, and thanks for the update here. My first question is around the four value-add coding lines. I had thought last quarter that the expected capex for these value-add lines ranged between $400 million and $425 million, but I think you've outlined a budget of $450 million to $500 million today. So I would be curious as to what has changed around the scope of the project or the timeline that has maybe driven this increase here.

Well, I think two things as we delved into it. We've got a clearer picture, firstly, of the cost structure. But I think more importantly, it's just the expansion of line capability added a little bit more cost.

It also is being priced on current steel values. And so that appreciated the total project cost as well.

That's clear. And maybe just to further this sort of line of questioning around growth, it sounds like you've got a pretty constructive view of the U.S. steel industry, clearly providing some further opportunities for growth in the coming years. What else do you think that could be planned for steel dynamics longer term beyond these four coding lines as it relates to growth within your capital allocation budget? Further organic growth in the downstream, additional capacity. How else should we think about how you could be allocating capital here?

Sure.

I think you will see going forward a continued sort of plan to invest downstream in value-added downstream processing. That has been a key part of our strategy to date and will continue to do so. And as one looks across our operating platform on the steel side, we see continual growth capability there. I do believe also we have an incredibly strong balance sheet, strong liquidity, cash flow generation capability continues to improve through cycle. And there will be, I think, a good balanced sort of cash allocation strategy. Transactional growth will certainly be part of that. There appears to be a strong pipeline of opportunity in both sort of pull-through manufacturing type operations on the market today, along with steel assets.

Great. That's helpful, Kala. Thank you.

Thank you. Our next question comes from the line of Carlos de Ava with Morgan Stanley. Please proceed with your question.

Thank you very much, everyone. Mark, perhaps for you, you mentioned that you expect the metallics prices to have peaked already. Any views on the prices, given what you said about metallics?

I think we remain incredibly bullish of the market for the rest of this year and into next year. On the demand side, it's just incredibly strong. You have a tight supply side right now. Inventories are at record low levels. I think MSCI data is 1.8 months, incredibly, incredibly low. And there's no restocking capability there currently because there's just lack of availability to meet present demand. Mail-to-lead times are stretched. Imports have ticked up a little, but they're still moderated. And in all honesty, despite the large arbitrage, availability, near-term availability for imports is still very, very, very tight. So I don't see there being any ability for a surge there to take things over the top. And if you look at the second half of this year, there are a myriad of mill outages, both for just regular maintenance outages, but also for installation of new equipment. and those mills as they plan on their future expansion. So there's going to be a lot of steel actually coming offline in the second half, which is going to just tighten the supply-demand balance even more. So I think for the rest of this year, it's a bullish market for us.

All right. Thanks for that. So basically, you expect increasing margins perhaps as scrap prices go down. and still prices remain high. What are the implications, maybe, Teresa, for working capital, given that it was, I mean, cash regeneration was very solid, but working capital, obviously, for obvious reasons, consumed cash during the first half. Do you continue to see that basically at the same level in terms of days of working capital, maybe account receivables and inventories in terms of days? of sales and cost at similar levels than what we experienced in the second quarter?

You know, I think we should see that moderating because from the perspective of pricing, Mark's correct. You know, we've had very strong steel pricing and volumes have increased, but now that we're at this level, I don't see there being significant draws for the second half of the year, although we will be increasing working capital as sitting ramps up. So Sinton could be as much as $150 to $200 million of working capital in the next, call it, six to nine months. But I don't think that you're going to see as significant of a draw in working capital the second half of the year as we experienced in the first half of the year.

All right.

Excellent. Thank you very much.

Thank you.

Our next questions come from the line of Satish Kazanathan with Deutsche Bank. Please proceed with your questions.

Hi, good morning, Mark and Trace. Thanks for taking my questions. My first question is on the steel fabrication segment. The second quarter, 21 shipments were at record levels. But if you look at on a quarter-on-quarter basis, the shipments were only up 3% despite the record backlogs and your guidance in April on adding more crews. So just wanted to get a sense of was there any weather-related impact in 2Q and how should we look at the shipment progression for the rest of the year?

Well, as you point out, it did increase, albeit incrementally, quarter over quarter. But the additional folks that we've brought on board, obviously, they have been ramping up and they need to be trained. And you won't see... or wouldn't have seen a massive increase second quarter, but you will see that ramping up third and fourth quarter.

Okay, thank you for that. And you mentioned about planned outages at some of your peers. I just wanted to get a sense of if you have any outages planned within your system for the second half of 2021.

Both, I believe, Columbus and Butler will take the normal kind of four-day outages in the third, fourth quarter.

Third and fourth quarter. Okay. Thank you for that, and good luck for the next quarter.

Thank you. Thank you. Our next questions come from the line of David Gagliano with BMO Capital Markets. Please proceed with your questions.

Great. Thanks for taking my questions. Just on the capital allocation side of it, first of all, historically, you know, the mix over the last five years have been kind of 65-35 between growth versus shareholder returns. Should we expect that mix to change meaningfully in the out years? And a related question, I noticed long product utilization rates are now creeping up close to 90%, which is pretty amazing. And I'm just wondering if you can speak to, you know, as you think about capital allocation plans, Are you interested in expanding your long product capacity given the utilization rates at this point and the positive outlook? And if so, would that more likely be organic or inorganic opportunities? That's my first question. Thanks.

Good morning, Dave. distributions and capital allocation. So, you know, first and foremost, we definitely are a growth-oriented company. We intend to stay that way. But we believe it's important during these periods of excess cash flow generation to provide increased distributions to the shareholders. And as we've said in the past, we like to keep our dividend in a very manageable level. When Sitton is up and operational, you will see a significant increase in the dividend at that point because we're going to have significantly higher through cycle cash flow. But until that time and as we're generating excess cash, we will be utilizing the share buyback program as well. We think that's an important tool. However, we are very much focused on growth. As Mark mentioned, there are transaction opportunities today. There's quite an extensive pipeline. The teams are very busy. Again, focused on manufacturing businesses as well as potentially steel production assets as well. You're correct. The long products utilization has improved nicely, and we're seeing a lot of both good demand, and then we've also, the commercial teams have been doing a good job of cross-selling those products, and we've gotten some market share gains out of that as well. Mark, would you like to address the question whether or not we want to grow in long products?

Yeah, but just to touch on David, you're right. The long products markets have got incredibly hot here of late. Certainly, you're seeing that in the margin expansion. There's been a change there whereby pricing tended to be adjusted in lockstep with any change in scrap. But as you've seen over the last few months, it's become a market-based, demand-based sort of pricing scenario. And margins have increased 150, sometimes 200 on certain products so it is a it is a very very strong market for for us today for sure across the space merchants beams rail is stellar and engineered bar in all honesty I think we're pretty well closed down from an order book perspective for the rest of the year and going into next year so so a great great market that said if you if you look at the kind of the capacity in merchant shapes and beams in particular relative to through cycle consumption. That's one area that is kind of an overcapacity situation through the cycle. And therefore, I wouldn't envision us having any meaningful increase in sort of hot side production of shapes. I think you'll see us utilize excess hot metal capability that we've got in a couple of our mills on the long product side. But again, it won't be a massive increase in capacity.

Okay. That's helpful. Thanks. And then just my second question on switching gears a little bit. On the cost side, if we kind of try to back into conversion costs and Obviously, there's different moving parts there, but it does look like they've crept fairly meaningfully higher. I was wondering if you could just speak to the cost creep there. Was that mixed-driven, or are there underlying cost pressures, and how should we be modeling conversion costs relative to what we just saw this quarter on a forward-looking basis? Thanks.

So David, I know how you try to back into conversion costs and in the world where now we have a lot more processing versus just steel production, it's going to be harder and harder for you to back into that number that way. So we had a considerable amount of more substrate coming into the system and having it coated versus directly from the steel production itself. Whereas that makes it look like there's increased conversion costs, there's actually not. It's just that we are processing more outside tons because there's such strong demand. And we can maybe try to unpack that a little bit better from quarter to quarter, but there were no significant increases in conversion costs.

Okay, that's helpful. Thank you.

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

Hey, guys. Thanks for taking the question.

I just wanted to get your thoughts on comments made by the president yesterday that the economy is booming. And looking at some of the survey data that came out of Michigan last week with respect to home buying trends and car buying trends. Home buying trends being the worst based on the survey since the 90s saying for cars. Clearly things are great right now, but do you guys see any potential for some pullback in the second half? And then I have a follow-up.

Well, the simple answer to that is no. The demand is incredibly strong across all our sectors. We can't make enough steel. There's massive pent-up demand, particularly on the automotive side. And as I said earlier, if you look at inventories right now, they're at very, very, very low levels on a historic basis. And there's a pent-up demand. And if you talk to the large dealers out there, they just cannot get enough product. And they would suggest it's going to be a couple of years before they actually catch up. So... We remain incredibly bullish for the rest of this year going into next year. There's absolutely no doubt about it. There seems to be this cloud over people's minds or heads, but we're in the trenches. We're talking to customers each and every day. I'm talking to customers each and every day. I think we have a good finger on the pulse, and it's got legs. There's no doubt about it.

Okay, that's helpful. And then on the flip side, you know, there's been fears around, and this isn't my turn, but I think we all know it well, Stillmageddon and a lot of the incremental capacity that a lot of people expect to come online. But based on our estimates, a lot of that capacity is either redundant or has been pushed out. Do you guys share that view? And on the positive side, do you see the potential for, you know, maintenance? You know, Cliffs has taken a mill down here pretty soon. It's going to be down for a while. There's some other mills coming down. Do you think I see the potential for prices to move even higher from here? Thank you for the question.

Well, we've had, as many of you on the call know, I've had a very longstanding contrasting view to the overcapacity issue or situation. And what people have not been able to figure out or understand is that the U.S. is one of the few, if not the only, countries that is still short. Additional capacity is not our problem. In fact, our industry is doing the right thing. It needs to reinvest. It needs to get state-of-the-art equipment on board, both from a global competitive perspective, because if you look at China, 85% of Chinese capacity today is less than 15 years old. It's modern. So our industry needs to invest. And it needs to continue to invest in electric arc furnace type production routes from a sustainability standpoint. So in my humble opinion, when you have an industry that arguably has somewhere 95 to 100 million tons of production capability and a need in a normal market of at least 120 million tons, production capability is not the issue. imports of the issue and controlling them. And I think, as I said earlier, we do believe the tools are in place. Section 201 will maintain a sort of a barrier, even if the 232 tariffs get eroded. So I am not concerned about overcapacity one little bit. Some of the older, antiquated, high-cost products integrated capability will remain offline and I think will offset the somewhat 6 million tons or so of new flat road coming into our marketplace.

Thanks again for the questions.

Thank you. Our next questions come from the line of Phil Gibbs with KeyBank Capital Markets.

Please proceed with your questions. Hey, good morning. Congrats on all the progress.

Thanks, Bill.

Mark, I just have a first question just on the demand side with automotive and oil and gas. I know auto's been strong, kind of the first to lead us out of the hole last year. But recently, IHS has kind of taken down their forecasts on demand and the semi-chip issues, kind of wondering just what you're seeing there in terms of pull from your customers. And then secondarily, you did mention oil and gas getting better at the margin, you know, maybe just expound upon what you're seeing there and if your customers are trying to prepare you for, you know, a strong bounce back in 22.

Well, again, Phil, you know, from our intelligence, people are looking at a 17 million ton build rate this year, next year. Next year, sorry. Yeah. That's an incredibly strong number. And I think, as I suggested, when we talk to the dealers out there, when we look at the inventories, that is going to be the demand, or it's a pent-up demand out there that's going to sustain things. The chip shortage for some may... the sort of hindering shipping capability. As I said earlier, very few of our auto platforms have been affected to date. So we've been fortunate. But if you think about it, okay, so chip shortages slow things down a little bit. The demand is still pent up. It's still there. And it's just going to help extend this incredible cycle that we're on or in.

And then on the oil and gas side, Mark?

Yeah, Teresa whispered that across. Sorry, Phil.

No worries. Not in a hurry.

On the energy side, it's a little bit of a mixed bag. Obviously, global pricing, energy prices have come up a little. Rig counts are coming up a little. We're seeing improved kind of downhole OCTG requirements. So engineered bar, for instance, you know, we supply road bar into the Seamless II market. That has been picking up. A little slower, though, on the kind of the infrastructure, the distribution pipeline is still very soft. And the cancellation of a couple of the pipelines here the last few months have left inventory in the supply chain that's trying to get sort of reallocated across the country. So OCTG, downhill, strengthening, infrastructure, distribution, mine pipe is going to be a little soft for probably at least another 12 months.

Okay. Appreciate that. And then just to follow up here on the CapEx side, I think, Teresa, you said CapEx of 350 to 400 million in the second half. Was there something pushed out into next year? Because I thought last time you had talked about making some pre-stage investments for your tandem lines.

Yeah, based on engineering and some of the more detailed plans that we've received on the four lines, some of that's likely to be pushed from the fourth quarter into the first quarter. So next year, without doing our detailed planning yet, you're likely to see capital expenditures of probably somewhere between $550 and $600 million.

Terrific. Thanks so much. Appreciate it.

Thank you. Our next questions come from the line of Tristan Gresser with Exane BNP. Please proceed with your questions.

Yes. Hi. Good morning, and thank you for taking my question. Regarding the new environmental targets, is there any capex associated to those targets, and what's the timeline? If you have already identified new initiatives to cut emissions by 2025 and 2030, and if you can, what is roughly the contribution from each focus area? I mean, I think you talked about new technology, efficiency, but also renewable. If you have that split, that would be helpful as well. Thank you.

Good morning. Thanks for the question. That was a very detailed question. I'm not sure I'm going to be able to go into all of it at this point in time. We do have some things that we can't discuss yet. They're very exciting on the renewable energy side of the equation. There will be some capital dollars obviously spent as we look at efficiency projects and as we move toward more renewable energy and the carbon reduction itself. We really don't have estimates to be able to discuss this morning because there's still a lot of projects that are being vetted. We will be disclosing those items as we move forward. But we have a very, and this is the thing that we want everybody to understand how we're trying to differentiate ourselves in our carbon goals and in our renewable energy goals is that we're being very transparent. There is a clear path on how we're going to achieve 2025 and 2030. And as we're able to disclose some of these projects, we absolutely, Tristan, will be sharing these projects. But at this point in time, it's just too early to do so.

All right. No problem. And maybe a follow-up on raw material. Can you talk a bit about how your raw material strategy will evolve in both the context of capacity expansion, but also decarbonization as it has an impact on, for instance, scope three. How do you think your raw material mix will evolve in coming years? Thank you.

Well, the raw material strategy really is consistent from the perspective, at least of what we're looking at today. And that's, we use really only about 20% to 25% pig iron in our flat roll mills. And so it's not as much as being advertised by maybe some of our peers today. And that is being sourced obviously internationally. So today we use a mix of HBI as well, and we'll continue to do that moving forward. But I don't see the strategy at this point in time, at least over the next near term, changing dramatically. Mark?

No, I think we are, again, we're executing on our plan that we've had in place for some time. Fortunately, we have a very, very good sort of foundation through our OmniSource recycling platform that has the capability of some six, seven million tons of capability. So supply of scrap is not going to be an issue for us for sure. And we're adding to that capability, as I said, you know, in Mexico, in some of those tons that flow up to Sinton and to our Columbus mill. So I think we're in good shape on the scrap side of things. We, as Theresa suggested, we are using HBI and have been using a little bit more of that of late. We have IDI that people seem to forget. That's a very, very effective use for our butler mill in particular. It's making about 260,000 tons of liquid iron that we put into our electric arc furnace each year. And just to emphasize, if you look across our steel platform, in total, pig iron is only, I think it's less than 8% of the total input. So yes, it's an impact, but not a massive one.

Thank you.

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

Congratulations on $0.7 billion and a quarter. Looking at your CapEx strategy for the next two years, it looks like the focus is to maximize sentence complete the painting lines, the galvanizing, get all the squeal out of the pig. Is it fair for us to expect your next big capital expenditure initiatives to be 2024, 2025 completion? Maybe the outlays begin a little sooner, but where your focus right now is making hay while the sun shines and getting everything out of the 3 million ton new mill.

Thank you, John. It's good to hear from you. There's absolutely no doubt that the team's focus has been the execution of Sinton, and it's a very large-scale facility. You can actually, if you jump on our website, we have a a drone video that gets updated, I think, once a month. It's a colossal, phenomenal facility that's being built by the team down there. And so the focus for sure has been execution, execution, execution. Nonetheless, we have other folks on our team that continue to look at transactional activity. and also the individual mills we have very talented teams that continue to look at areas of organic growth. So I think you'll certainly see just a continuation of that organic growth that you've seen in the last 25 years or so. From a sentence standpoint, the new lines that you mentioned, that sort of parallels or just supports our long-term strategy of fully utilizing or building high levels of through-cycle utilization. And so not only are those four new lines very effective uses of CapEx with very, very, very good returns, it allows those capital-intense steel mill assets to run at a higher utilization, as I said, through the cycle. And I think we've demonstrated clearly but that strategy allows us to have superior shipments, production capabilities in any market environment.

So there could be a big project before 24, 25, or a transaction?

We would imagine, and I think I've stated it in the past, We don't see a Sinton-esque greenfield project on our horizon. Transactional activity, there could be something meaningful there.

Thank you very much, and congratulations. Three billion annual rates, amazing for profits.

Thank you, John. We've got a great team. A little bit of a market tailwind is not hurting either.

Thank you. Our next question has come from the line of Michael Glick with JP Morgan. Please proceed with your questions.

Thanks for sneaking me in. You mentioned talking to customers and auto customers in particular, but inventories across or beyond auto are also pretty low. Any sense as to what the game plan is for your non-auto customers in terms of rebuilding those inventories once they have access to more supply?

Well, I don't think there's really any desire right now to rebuild. Firstly, people just can't get enough steel to satisfy their immediate needs, number one, domestically, and number two, the the speculative risk associated with the accumulating inventory in, in, in today's sort of market environment is, is, uh, every, a pretty gutsy call, um, you know, imports, as I said, despite the, the, the high arbitrage, um, there's, there's very little available currently, you know, the, uh, uh, the global markets are very strong and, and most of the material is being consumed within those markets. Um, So there's not much available even if they wanted to. That said, the speculative risk of material flowing in and import delivery times are November, December, January today. People don't want to take that risk. So I don't see any rebuild in the near term. And again, that's just another factor that's going to extend the cycle.

Understood. And then I think you noted $475 to $500 million of incremental through-cycle EBITDA once the value outlines are complete. Could you walk us through some of the spread assumptions there so we can understand the moving parts a bit better?

Michael, we won't go through the detailed spreads themselves. We will tell you that the spreads are based on mid-cycle spreads, so definitely not what we're experiencing today. And we're starting with a base hot roll to prime scrap kind of mix spread, and then we build the value-added product mix off of that. And we are using what we've experienced historically, and then also looking forward at what the expectations are in those individual markets on a mid-cycle basis. So I'm sorry we can't give you specific spreads, but it is showing that sitting – Our expectations are that the volume operates very much like our Columbus and Butler facilities operate. That means that production and shipments tend to be at or near capacity on a mid-cycle basis.

Thank you. Thank you.

Our next questions come from the line of Sean Wondrak with Deutsche Bank. Please proceed with your questions.

Hi, I'm Mark and Teresa. Congratulations on another great quarter here. Just a couple of housekeeping items. I apologize if you've mentioned these, but taxes. I recognize you had a shield related to Sinton. I think it's supposed to continue to work in your favor. Can you maybe touch on that and sort of expectations for working capital for the year, please?

Yeah, absolutely. So, yes, Fenton will still be expected to provide a tax shield this year as we're able to, the year of operations, be able to expense that fixed asset investment. It likely will shield upwards of, you know, $350-plus million. However, our earnings are so strong that, you know, we're still having tax payments that are required this year. And I think we're estimating our effective tax rate to be about 15%. From the perspective of working capital, Sinton's likely to build working capital as it starts operations in the next six to nine months of somewhere between $150 and $200 million. Outside of that, I would expect the rest of our operations working capital to remain fairly steady, just given that our volumes have already picked up and pricing has been really strong as well. So I don't see a lot of additional movement in working capital.

Great. Thank you. That's helpful. And then just in terms of opportunistic use of cash flow, you have a billion cash on the balance sheet. You're going to continue to generate cash going forward. You've obviously done a nice job outlining the various ways you can use that cash. But I guess my question is, do you think it's prudent to keep a solid cash balance there should an opportunity arise? Or should the market turn at some point so that you have the ability to go out and make these transactions?

It's a good question. Our balance sheet is extraordinarily strong. So even if you look at our net leverage or our gross leverage, either metric, it's solidly in the investment grade arena. We have significant additional debt capacity in the capital structure. And so we're in as, yes, it makes sense to keep some cash on the balance sheet. We also have, you know, things that we can spend that money on, whether it's additional share repurchases as we expect to make to the second half of the year, and it still won't hinder all the growth expectations or projects that we think are available to us on the transaction side. So, yes, we do keep dry powder at the same token, and there's still debt capacity as well.

And I guess I would just add, if you look, hopefully, when you look at our experience of growth over the years, it's always been very, very intentional, I would say. I would also say it's also very disciplined. And we won't do a transaction at ludicrous numbers. We always look at through cycle. So if we were to do a transaction today, it'll be a good investment through the cycle, not just based on today's crazy probability that someone might have.

Right, no, that makes sense. I feel like you've demonstrated that over time as you've scaled this business up. It's not always easy to do that. I guess just my last question, just touching on something you said earlier, Mark, when you think about you know, the U.S. market sort of being in a deficit. It's been in a deficit for years. I guess philosophically, do you believe that eventually domestic producers will evolve to fill that demand gap? Or do you think we'll always have a component of imports coming into this country?

I think there will always be some element of imports for sure. It's been a long, long, long, long time. I think, I don't know, mid-70s or 80s or whatever. when imports were de minimis. We're not going to be a country that self-satisfies its demand in total. So imports are always going to be there. You know, today we typically need, you know, 20 percent of demand is an import need. We just don't need 30 million tons or 30 percent imports. But I think if you, You know, all the discussion has been relatively near term. You know, when I say near term, you know, six, nine months into next year. But people are not, I don't believe anyway, recognizing that the industry is in transition. And I think there's some paradigm shifts occurring that are gonna retain a lot higher sort of health, market health in our industry. and much higher margins going forward. You look at the leadership mindset today and the current consolidation, the integrated industry is really focused on returning shareholder value. They are totally focused on sort of consolidating and rationalizing their assets to make good business sense. And that's going to bring, I think, market health and market strength long term. USMCA has, I think, certainly for us, been a market change in dynamic where you see, particularly the European automakers, a shift in their supply chain from imports to domestic sourcing. Again, we've been a very, very large beneficiary beneficiary of that. So the market is changing for sure in this country. And as I said earlier, it needs more capacity. It needs state-of-the-art technological capability, low-cost, sustainable, low-carbon footprint production routes. And so I am not fearful for a second at the capacity coming online. It's needed, and it will benefit the North American manufacturer base in spades going forward.

I appreciate that. It's a very thoughtful answer to a pretty difficult question. But thank you very much, and good luck going forward.

Thank you.

Thank you.

That does conclude our question and answer session. I'd like to turn the call back over to Mr. Millett for any closing remarks.

Well, thank you, Darrell. I would just emphasize, well, firstly, thank you for those that are still on the call. Thank you for listening today to our thoughts and opinions anyway. It was an incredible quarter. We believe next quarter is going to be better, even so. And that has driven us certainly by the market tailwinds that we're experiencing, but it's also, more importantly, driven by the most phenomenal steel metals team in the world. They're an incredible bunch of individuals. We number 10,000 now. If you include their wives and partners and kids, we've got, I don't know, 25,000 people in the SDI family today. They all contribute to our success. So thank you to each and every one of them. Thank you to our customers. We can't do what we do without you. We've had some incredibly loyal support, and I wish we could support them even more today because we're struggling to meet all their needs. So thank you, everyone. Make it a great day and be safe. Take care.

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