Steel Dynamics, Inc.

Good day and welcome to the Steel Dynamics first quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After management's remarks, we'll be conducting a question and answer session and instructions will follow at that time. Please be advised this call is being recorded today, April 20th, 2023, and your participation implies consent to our recording of this call. If you do not agree to these terms, please disconnect. At this time, I'd like to turn the conference over to David Lipschitz, Director, Investor Relations. Please go ahead.

Thank you, Matthew. Good morning, and welcome to Steel Dynamics' first quarter 2023 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 and Chief Executive Officer of Steel Dynamics, Teresa Wagler, Executive Vice President and Chief Financial Officer, and and Barry Schneider, President and Chief Operating 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, accept, 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 risk and uncertainties related to integrating or starting up new assets, the aluminum industry, the use of estimates and assumptions in connection with anticipated project returns, and 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 annual 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 any later SEC Form 10-Q. You'll also find any reference non-GAAP financial measures reconciled to the most directly compared GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports First Quarter 2023 Results. And now I'm pleased to turn the call over to Mark.

Thank you, David. Good morning, everybody. We certainly appreciate you all joining us for our first quarter earnings call today. As you read, once again, our team's achieved a solid financial and operational quarter. is highlighted by, most importantly, a consecutive quarter of significant safety improvement. 82% of our facilities were incident-free, and most importantly, our piece of focus appears to be minimizing severity rate. We had record steel shipments of 3.3 million tons and adjusted EBITDA generation of a strong $950 million. Incident's performance is showing improvement with a clear path to profitability in the second quarter of 23, given the expectation of increased volumes, and we are also making great progress on our aluminum flat-rolled investment. There's great excitement within the prospective customer base for a new and innovative supply chain solution. As always, I'm incredibly proud of our teams. They are the foundation of our company, and they drive our success. It is their culture of excellence and the intentional diversification of our product portfolio that allows us to maintain higher utilization rate and maximize opportunities, resulting in higher lows and higher highs through all market cycles and producing superior financial metrics. However, for safety, great financial performance is of no import without having our team safe. Often employees are described as a company's most important resource, but for us, for Steel Dynamics, they're more than that. They're family, and they're a number over 12,000 strong. We're focused to provide the very best for their health, safety, and welfare. We're actively engaged in safety at all times, keeping it top of mind and an active conversation at every level of the organization. With that focus, as I mentioned, the team's safety performance further improved in the first quarter of 23, but there's more to do, and we will not rest until we consistently achieve our goal of zero injuries throughout our organization. So with that said, and before I pursue the quarter. Theresa?

Good morning, everyone. It's great to join you. I add my sincere appreciation and congratulations to the entire team for another strong operational and financial performance this quarter. Our first quarter 2023 net income was $637 million, or $3.70 per diluted share, which includes costs of about $77 million or $0.31 per diluted share associated with the startup of our Sinton, Texas, flat-rolled steel mill. Excluding those costs, first quarter 2023 adjusted net income was $691 million or $4.01 per diluted share. First quarter 2023 revenues of $4.9 billion were slightly higher than sequential fourth quarter results driven by record steel volume and increased metals recycling prices. Our first quarter operating income of $835 million was 10% higher than fourth quarter results driven by record steel volume. As we discussed our business this morning, we see positive industry fundamentals for 2023 and beyond, and we're focused toward a continued transformational growth initiative. Our steel operations generated strong operating income of $345 million in the first quarter, as record shipments of 3.3 million tons were partially offset by lower realized selling values. I also want to say congratulations to our structural and rail division as they had another record earnings quarter supported by a strong construction market. Our flat rolled steel mills were negatively impacted during the quarter with high cost pig iron that was purchased in early 2022 during the early stages of Russia's invasion of Ukraine. Based on current pig iron prices, earnings were impacted by approximately $50 million in the first quarter, but we have worked through that higher-priced inventory now. Operating income from our metals recycling operations was $43 million, over three-fold fourth quarter results due to increased demand driving higher prices and volume. Our Mexican recycling operations have proven to be a strategic key for both sourcing scrap for our southern steel mills and driving profitability. thanks to the Zimmer and Rocha teams. We appreciate you. 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 steel fabrication operations achieve strong operating income in the quarter of $551 million, but lower than record fourth quarter results due primarily to seasonally lower shipment. Steel joist endectomy end remains very strong as evidenced by continued robust order activity. Specifically, our March order activity was extraordinarily strong. This is resulting in a strong order backlog extending into October and November of 2023. Based on our backlog, customer sentiment, and manufacturing momentum, we expect steel fabrication earnings to remain strong throughout the year, including the second half. Our cash generation continues to be strong based on our differentiated circular business model and highly variable cost structure. At March 31st, we had record liquidity of $3.5 billion, comprised of cash and short-term investments of $2.3 billion, and our fully available and secured revolver of $1.2 billion. During the first quarter of 2023, We generated cash from operations of $734 million. We spent approximately $226 million on capital expenditures. We believe for the full year of 2023, capital investments will be in the range of $1.5 billion, the majority of which relates to our aluminum flat roll mill investments. In February, we increased our cash dividend 25%. to 42.5 cents per common share, based on our ability to consistently generate strong cash flow and aligned with our growth strategy. We also purchased $354 million of our common stock, representing approximately 2% of our outstanding shares. At March 31st, $980 million remained authorized for repurchase under our new plan. Since 2017, we've increased our cash dividend per share by 174%, and we've repurchased $4.5 billion of our common stock, representing over 30% of our outstanding shares. These actions reflect the strength of our capital foundation and the consistently strong cash flow generation capability. We continue to be optimistic and confident in our future. Our capital allocation strategy prioritizes high return strategic growth with shareholder distributions comprised of a base positive dividend profile that's complemented with a variable share repurchase program, while we remain dedicated to preserving our investment grade credit designation. We've strategically placed ourselves in a position of strength to have a sustainable capital foundation that provides the opportunity for meaningful strategic growth and strong shareholder returns while maintaining investment grade metrics. Our free cash flow profile has fundamentally changed over the last five years, from an annual average of $580 million to today's average of $2.6 billion. Our aluminum growth strategy is consistent with our unchanged capital allocation philosophy. We will readily fund our flat rolled aluminum investments with available cash and cash flow from operations. We also plan to continue strong and responsible shareholder distribution as we have clearly demonstrated. We're squarely positioned for the continuation of sustainable, optimized, long-term value creation. Sustainability is also a significant part of our long-term value creation strategy, and we're dedicated to our people, our communities, and our environment. We are committed to operating our business with the highest integrity. In that regard, we will remain excited about our joint venture with Amium, a leading producer of renewable biocarbon products. We believe our first joint facility could decrease our steel Scope 1 greenhouse gas emissions by as much as 35%. And I want to specifically thank the biocarbon solutions team in Columbus, Mississippi. They're doing a fantastic job and we still hope to start operating this facility in early 2024. We have an actionable path toward carbon neutrality that is more manageable and we believe considerably less expensive. than what may lay ahead for many of our industry peers. Our sustainability and carbon reduction strategy is an ongoing journey and we're moving forward with the intention to make a positive difference. We plan to continue to address these matters and to play a leadership role moving forward. Before I hand the call back to Mark, for those of you that keep specific track of our flat rolled shipments, in the first quarter We had hot rolled and P&O shipments of 1,006,000. We had cold rolled shipments of 132,000 and coated shipments of 1,192,000 tons. Mark? Thank you, Teresa. Although there was some seasonality in shipping volume for fabrication, we saw yet another strong quarter.

driven by the sustained market strength and an absolutely extraordinary execution by our team. Productivity of our operations is incredible, so thank you for the great job you all are doing up there. We continue to have high expectations for the fabrication business. We believe non-residential construction markets will continue to be robust in the coming years. Non-residential starts and build rates are forecast to remain strong throughout 2023. and related spending has been significantly higher so far in 23 compared to last year at this time. To be continued onshoring of manufacturing businesses and infrastructure spending programs should provide momentum for additional incremental construction spending. Excuse me. More real time, our customers tell us demand remains solid as confirmed by strong order entry rates, especially the most recent March order activity. Steel fabrication order backlog, as Teresa suggested, extends seven to eight months into October, November, with strong pricing dynamics. Not only a significant contributor unto itself, our fabrication platform provides meaningful pull-through volume for our steel mills, particularly important in softer markets, allowing for higher through-cycle utilization rates. It also provides an effective natural hedge to lower steel prices. Our metals recycling platform achieved a strong first quarter. Congratulations to them. They are on a path to higher volumes and increased metal margins. After seven consecutive months of declining pricing in 22, Ferris scrap prices improved in December and throughout the first quarter, increasing well over $100 per gross ton. We expect scrap pricing to remain fairly steady at these higher levels based on increased seasonal North American steel mill demand in Q2 and Q3. Our metals recycling geographic footprint provides a strategic competitive advantage for our steel mills and our scrap generating customers. In particular, our growing Mexican volumes enhance our Columbus and Sinton raw material positions. They will also strategically support aluminum scrap procurement for our future flat road aluminum investments. Our metals recycling team is working closely with both our steel and aluminum teams, to expand scrap separation capabilities through process and technology solutions. Our low residual shred one is just one example of that. The impact of these efforts, along with others in the industry, has demonstrated that innovation will provide ample ferrous and non-ferrous scrap supply in the years ahead. Our steel operations achieved record quarterly shipments of 3.3 million tons and solid financial results in the first quarter. Steel production utilization rate, excluding Sinan, was 94% compared to a domestic industry rate of 75%. Our higher utilization rates are clearly demonstrated throughout all market cycles. Value-added, diversified product offerings provide broad optionality across all market segments. Enhanced supply chain solutions is driving customer preference and was supported by the internal pull-through manufacturing volume. Our higher through-cycle utilization rate is a key differentiator and supports our strong and growing through-cycle cash generation capability and best-in-class financial metrics. Looking forward, customer order entry is good and backlogs are solid. March in particular was a very strong booking month for the steel platform. Order is solid, order production is expected to increase in 23 over 22 rates, and dealer inventories have improved but still remain below historical norms. Build rate in 22 was some 14.3 million units and we expect 23 to show 15.1 and a little higher in 24. Non-residential construction remains strong as evidenced by strong fabrication backlog and long product steel volumes. Long products are seasonally solid from a backlogs perspective and onshore and infrastructure spending should provide further meaningful support in the coming years. Residential construction has softened to some degree, but that erosion appears to be easing a little, but that segment tends to be a small part of our overall portfolio. Oil and gas activity is very strong, driving improved orders for OCTG and line pipe, and solar continues to grow appreciably. At Sinton, we produced 420,000 tons of hot band in the quarter, which is 56% of eventual capacity. Shift in daily records were achieved in March, clearly demonstrating the mill's ability to reach the 3 million tons. As we discussed in our first quarter call, production through the quarter was impacted by certain supply chain issues related to bearings and rolls needed for the caster. This issue has now been resolved, and we expect a significant advance in productivity and earnings in Q2, and we should see the mill being EBITDA positive in Q2 for sure. We believe full-year capacity utilization could be in the range of 80% of rated capacity. The team has demonstrated, clearly demonstrated, the key competitive advantages of the Texas steel mill. Full product dimensional capability has been proven. We have gone down to 0.5%. 50-ish and all the way up to 1 inch and all the way out to 84 inch width. The customers are reporting that the surface quality is absolutely exceptional. The hot strip mill design is allowed for thermal mechanical rolling, which allows the production of higher strength grades with lower alloy content with a significant reduction in production costs. Grade 80, grade 100 has been achieved, and we've already been approved and shipped some API grades. In my mind, this affirms our technical and process choices, and there's no doubt that this is the next generation electric arc furnace flat-row steel technology of choice. We certainly have gained strong market acceptance. Commercially, we can sell everything we make and then some. With a cast of segment issue resolved, we're able now to fully lever our heavy gauge wide capability. Our on-site customers are busy, with two of them already expanding their capabilities. Our exceptional through-cycle operating and financial performance continues to support our cash generation and growth investment strategies. Relative to our expansion into aluminum, the market response from both current and new customers across our targeted market segments has been incredible. So to recap, The project, it's a 650,000 metric ton aluminum flat roll facility that will be located in Columbus, Mississippi. State-of-the-art facility serving the sustainable beverage and packaging, automotive, and industrial sectors, where it produces roughly 300,000 metric tons of can sheet, 200,000 metric tons of auto, and 150,000 metric tons of industrial alloy. On-site melt cast slab capacity will be 600,000 metric tons, and that will be supported by two satellite recycled aluminum slab casting centers, one in central Mexico. We've already purchased the property there, and we're pursuing a southwest U.S. site as we speak. Technology will include two cash lines, coating lines, and downstream processing and packaging. We've expanded the project. scope to include additional scrap processing and treatment to maximize aluminum recycled content. All the principal equipment is already on order, and we expect the roller mill to start up mid-25, the Mexico slab center the second half of 24, and the Southwest slab center probably the first quarter of 25. Total project cost, including the recycled slab centers, is expected to be $2.5 billion. 100% to be funded with available cash and cash flow from operations. As we've said in the past, the expectation is that somewhere between $650 to $700 million of through-cycle annual EBITDA for the aluminum project, plus likely $40 to $50 million for Omni. I think it's a very, very compelling investment premise. We see a market environment not unlike that in the steel industry when we started SDI 30 years ago. It's predominantly old assets, little reinvestment, heavy legacy cost, it's inefficient with high cost operations. A significant aluminum flat row supply deficit exists in North America and is expected to grow in the coming years. There is business alignment. We can leverage our core competencies of our construction strength and operational know-how and also level Omni's recycling footprint, as Omni is the largest North American aluminum scrap recycler today. SDI culture will drive high efficiency and low cost, and throughout the industry, there's a very steep cost curve which is gonna support margin. It's a very, very cost-effective, high-return growth initiative. We're excited and impassioned by our future growth opportunities as they will continue the high returning growth momentum we have consistently demonstrated over the years. We were added to the S&P 500 index in 22. We are arguably one of the top five steel producers in the world as measured by market cap and the third largest in North America relative to capacity. All these achievements in a relatively short timeframe. We celebrate our 30th year in a business in 23 and there are only better things to come. Our teams are our foundation, and I thank each of them for their passion and their dedication. And we are committed to them. And I remind those listening today that safety for yourselves, your families, and each other is our highest priority. Our culture and business model continue to positively differentiate our performance, leading to best-in-class financial metrics. We're no longer a pure steel company, but an integrated metals business providing enhanced supply chain solutions to the industry. In turn, mitigating volatility and cash flow generation through all market cycles. We're competitively positioned and continue to focus on providing superior value for our company, customers, team members, and shareholders alike. And we look forward to creating new opportunities for all of us today and in the many years ahead. So with that all said, I'd like to open the floor up for questions.

Thank you. If you'd 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. Your first question is coming from Emily Chang from Goldman Sachs. Your line is live.

Good morning, Mark and Teresa. Thank you for taking my questions this morning. I wanted to ask a bit about the fabrication volume expectation there and just trying to take a look at the one queue number. It certainly was a little weak in that anticipated. You mentioned that there was some seasonality and some customer supply chain constraints there. Can you provide some colors to what they were and have we moved past this? And anything you'd highlight as we look forward to the rest of the year as to what that volume trajectory could look like?

Thanks, Emily. It's a great question. And there was seasonality in the first quarter, but there was also – some movement because some of the customers are experiencing supply chain constraints as it relates to construction labor and as it relates to materials. And so it's just simply pushing out orders. It's not changing the entirety of the volume itself. So the order backlog with some of these projects has actually pushed out even further than into that October, November timeframe. So it's a shifting of volume, I guess is how I would phrase it. As Mark mentioned, and I mentioned in my notes as well, March was an extraordinary order entry for our steel and joist stack business. And that really is a I think a testament to the strength of that market today. And if you think about the benefits that are kind of outside of just normal construction arena, if you think about manufacturing that has momentum behind it because of the Inflation Reduction Act, because the infrastructure program, manufacturing, onshoring, et cetera, we really expect our fabrication business to experience very strong volumes this year as it's supported by those extraneous additional tailwinds, if you will.

Great. Thank you. Thank you.

Your next question is coming from Kurt Woodworth from Credit Suisse. Your line is live.

Thank you. Good morning, Mark and Theresa. A follow-up question on fabrication as well for me. You know, in the past you've talked about backlog pricing in the $5,000 per ton level. You know, we've been hearing that prices definitely come in a lot from kind of peak levels last year. So I just wanted to get a sense for if you could comment on, you know, pricing you're seeing in the market. And then you talked about the March order entry being very good. Can you give us a sense of what the makeup of that backlog or that order entry is? And then if you give any comments on EBITDA per ton expectations.

Well, Kurt, you're trying to be tricky. You know we won't give EBITDA for a ton, but I appreciate you trying. As it relates to the order activity, to give you a sense of it, it was well more than double the order activity that we've seen kind of in the more recent timeframe, January, February, December timeframe. So it was incredibly robust, and most of that activity came from what I'm going to call industrial and manufacturing-related business. So I think one needs to keep in mind when people talk about non-residential construction, I think they like to hone in on office space. And there's many other categories as it relates to what would impact steel joists and duct demand. And that's where we're seeing a lot of momentum. So that order activity for us is very much focused on those larger projects. And I think that's where the funding from those projects a lot of the times are actually already funded, they're not bank funded but they're project oriented funding from large corporations themselves or Now there's public funding support as it relates to decarbonization efforts and the Department of Energy and the excess funds that will be coming in those arenas as well. So there's a lot of extra things, I think, that will support the volume going forward. But for us, it's primarily in that industrial manufacturing base at this point in time. As it relates to pricing, the commercial teams would be very upset with me. Barry's laughing if I were to try to give many commercial guidance at this point. I would tell you that, as we've said in the past, the average price in the entirety of the order backlog is still very high from a historic perspective. It's not at the peak pricing that we saw, but it's very much aligned with what we have seen for the entirety of last year as an average.

Okay, that's helpful. And just for clarity, when we say that the backlog isn't peak pricing, The sustained backlog that's kind of extending out is at very, very, very good past pricing. The new pricing coming in, as you mentioned, is off a little from that for sure. But relative to a historic basis, it is way, way higher than historic norm.

Okay. And then just a quick follow-up on Sinton. As we think about that asset running 56% utilization, but having a net loss of $70 million. We would think that given where metal spreads are today, if that asset could be 70% utilized in the second quarter, it theoretically should make a lot of money. But it seems like there's still some kind of lingering startup issues. And you talked about some of the supply chain constraints. So can you help us understand a little bit about maybe the earnings power of that asset later this year or any frame of reference in terms of 2Q, in terms of what you think utilization rates could look like? Thank you.

Great question. I'd say if you look at the first quarter and certainly the fourth quarter, you've had, you might say, a couple of extraneous impacts from a cost perspective. We obviously have higher-priced pig iron coming through given our order early last year, second quarter of last year, with the Russia-Ukraine sort of crisis. So that is peeling out now through the first quarter and a little bit in April. In anticipation of early startup of the downstream lines, we bought Substrate. And again, that was at higher pricing, and that had to come through the system, and that is essentially sort of out of the system today. So we were carrying that sort of burden in the fourth quarter and in the first quarter, and some of it will come into the second, but it's substantially reduced. Obviously, the main principal driver is volume. Volume, volume, volume drives the... successful performance of any major capital asset, and certainly a startup asset such as this. We were at 56%, and our confidence in the technology, I think, at least for me, is driven by windows of absolute amazing performance. We've had shifts, we've had weeks, we're at 75, 80% of capability already. If you look at sequence lengths, which we in our industry for sure is an indication of the effectiveness of the teams and the equipment. We're averaging, I think, a little over 13 heats a sequence. We've been as high as 22 heats, 23 heats, and each heat is whatever, 200, 210 tons per heat. in my mind, amplifies the capability of the asset. We just have to get the reliability of all the equipment. And again, as you know, Kurt, it's in line. So the melt shop, the ladle furnace, the caster, the roughing mill, the finishing mill, everything has to be running in unison. And we're getting there. With the segment bearing roll issue behind us, not hindering us. I think we're looking for a sort of a step function improvement here in the next month or two.

Just as a reminder, on a through cycle basis, we still believe very strongly that Sinton, when it has four of the value-added lines operating, will have a through cycle EBITDA in the range of $450 to $500 million per year. So that outlook hasn't changed. So it is a significant benefit long term. It's just a matter of this year.

Thanks. Best of luck.

Thank you. Your next question is coming from Carlos de Alba from Morgan Stanley. Your line is live.

Great. Thank you. I'm just going to try it in a different way without maybe discussing the absolute levels. It is clear that the EBITDA per ton and the profitability of the fabrication business is extraordinary relative to history. It actually started, based on what I've seen, before the pandemic, but it exploded throughout the pandemic and it has remained at those levels. How do you see the normalization relative to, say, 2019 or 2017 to 2019 average? Do you expect to be able to sustain a significantly higher profitability relative to that 2017 to 2019 average? even if it is lower than we were experiencing today. You probably understand that we're trying to figure out what is a much more normal potential run rate of profitability in that business, given how extraordinary the results have been. Thank you.

Carlos, thanks. I know everyone's trying to figure that out. And what I would say to that is that, yes, we do believe that going forward, You're going to have, there has been a structural shift and change in how the commercial aspect of the steel joists and deck business has materialized in the last two years, if I would say it that way. And the change is that, first of all, there's considerable volume, and we believe that demand is going to stay in place for a considerable amount of time. There's limited supply. So in today's environment, and I think in the future environment, it's not so much as looking at just a product itself, but this is a highly engineered product. So it's looking at a product as well as a service, and that service is requiring time on the mill or time in the facility itself. And that has a value. And that's what now has come to the fore is that the customers understand there's a time element and a service element as well as a fairly highly engineered product set. So we believe those are structural changes. And I think that that came to bear and was proven in the second half of 2022 when steel prices actually were being reduced pretty significantly and we think an overcorrection. and yet we had increasing pricing within our steel, joist, and deck facilities themselves. So we do believe there's a structural change. I can't help you more than that. I would tell you that we expect very strong volumes this year to be comparable to last year, and I think that we've told you we've got an order backlog that goes out into October, November, and it has a significantly higher price, and that price is not too far off of what the average pricing would have been for 2020 to 2021. So I think we've given you a lot of data points to hopefully help you with your estimates.

Well, that's great color, Teresa. Thank you very much. And if I may squeeze one more, maybe Mark, could you comment as to how do you see right now, obviously that could change, but right now, how do you see the ramp-up profile in terms of capacity utilization of the flat-rolled alley project?

I think, again, as I said earlier, I'm expecting a step function improvement in the second.

Oh, I'm sorry. I'm sorry. I'm sorry. Yeah, the aluminum project. Yeah, the thing you mentioned.

Yeah. I would suggest that it's – and that's a great question, in all honesty, because we're wrestling with that ourselves right now, to be honest. and trying to understand fully the approval certification process of can sheet as opposed to auto sheet. The fact that we're creating slab ahead of time will aid that. And the fact that we have on the automotive side some very, very, very good relationships with two or three key auto producers that are seeking aluminum and I think that will accelerate that certification process so from the standpoint of actual ramp it would imagine it wouldn't be too much different than then you would expect you know for any facility and sort of 50% for the first 12 months 80% for the second 12 months and then ramping up thereafter that would that would be probably as good an estimation as I would suggest to you.

Great. Thank you very much, Mark.

Thank you. Your next question is coming from Timna Panners from Wolf Research. Your line is live.

Hey, good morning, everyone. I wanted to start out and ask a little bit more color on garage doors. I know you have a great position in garage doors and also on the warehousing side, if you could provide some more color on those end markets.

Slowly. Garage door is off a little, Timna, for sure, in concert or in parallel with the residential erosion. But as As you see, typically as you see the housing market come off, you see the replacement business go up. So it's not one for one, but it is off a little bit. The warehouse market, I think, when you're talking about warehouse market, I'm assuming you're looking at the distribution warehouse type facilities. Right. Obviously, there's been a lot of focus on the fact that Amazon overbuilt. Amazon wasn't the principal customer of ours. The other warehouse distribution organizations are not off to that same degree. That said, cloud computing, pharma is very, very, very strong. And as Teresa mentioned, you're starting to see true sort of reshoring sort of industrial manufacturing growth, you know, the Teslas of the world, the battery facilities, that sort of thing.

Okay, that's helpful. Thanks. And I wanted to follow up on something a little bit to think about the cadence of when we're going to see some of these mix shifts or improvement in the mix with the value add. So just I know you talked about the GALV lines coming on, and again, I also wanted to think about when we might see some more inroads into auto given your ability to make the thicker slabs and perhaps penetrate that market earlier than other mini mills. Can you talk a little bit more about when we should start to see first the galvanized capacity ramp up within Sitton and also the potential for penetrating exposed auto in the next several years?

We're really excited with the ramp up of the galvanizing down at Sitton. We do have to feed our paint lines right now, so we are working automotive discussions and trials into our production plants, but we're also anxious on making sure the whole plant's operational. All these units starting together, we want to feed the paint line. We want to feed our broader range of customers in the galvanized. We're really excited about the capabilities that we've seen in the galvanized itself paired with our technology on the hot side. So we are excited about the surface quality, especially. That was one of the big decision makers for us. And to this point, we're really excited. We have not begun actually putting material into automotive plants, but we're engaging with customers that have entrusted our future with them, and they're excited. They come through the shop, and they see a path. So our technical teams are very much in discussions there, and very much complemented with our Columbus operations that are doing the workhorse of the automotive today. So we're excited to see it, and I think it has to happen at a pace that technical people are comfortable with so that we can, once we earn that business, we can entrust it with them that we're going to be shipping a good product into them.

And obviously, Tim, the... Oh, my watch is going off. Sorry. My ears are such that I don't hear high-pitched voices. Well, definitely voices, but any sound. So if you heard my watch alarm, I apologize. But, Tim, I think the auto-penetration is going as planned, though. And if you look at the strength of our business model, the strength of Sinton itself, It's a very, very, very diversified product portfolio, and we can leverage different market segments and give us greater optionality. So, you know, currently the energy is incredibly strong. OCTG markets, line pipe is strong, and that will continue, I think, for the rest of this year going into the next year, particularly with the infrastructure build-out. And we're seeing actually, and it's surprising us a little bit perhaps, but the energy markets for heavy plate or heavier plate, heavier products anyway that we produce at any of our other mills, that is something that we're starting to leverage, particularly now we've got the castor issue behind us and can go up to full one inch thick. So we can sort of dance and work through or work around the different market segments. And to be honest, that's the strength of Sinton. It's the strength of all of our flat-rolled facilities.

If I could sneak one in on Sinton, I forgot to ask about the Mexican exports I've been hearing. Actually, that's been a big advantage for Sinton and other mills in the South. Do you think that's more sticky than taking a share from AMSA being closed or How much do you expect that could stick assuming AMSA restarts?

Well, I think the AMSA situation certainly is aided both not just the Mexican market but the U.S. market because Mexican output and capability has been sort of focused or redirected squarely within the Mexican market itself. So that's helped us. I think the customer base of AMSA is, you know, when you go through a shockwave like this, you sort of reflect on your future. And I think they see a need for optionality. So even when AMSA comes back, I think we're confident, in all honesty, of maintaining a lot of that business. So it's been very, very fortuitous for us.

Makes sense. Okay, thanks for the detail.

You're welcome.

Thank you. Your next question is coming from Tristan Gresser from BNP Paribus Exane. Your line is live.

Yes, hi, good morning. Thank you for taking my question. The first one, I apologize, it's again about the fabrication outlook. You flagged that you're targeting volumes of last year, so strong volumes. Is that fair then to assume a strong pickup then in volumes into Q2? And also, the second part to that question is maybe on the moving pieces there for the outlook, it's also on the cost side. Can you discuss a little bit the cost side there, especially into Q2? I mean, we've seen flat steel prices double over the past month. The backlog is kind of locked. So, yeah, anything you can say there in terms of potential cost pressure into Q2 that would be helpful.

Thanks, Tristan, for the question. Yeah, as it relates to volume, I mean, traditionally you're always going to have your strongest construction months and project months and quarters in the second and third quarter. So we absolutely would expect to see stronger volumes in that timeframe for our fabrication business as well. As it relates to cost, We generally, sometimes it changes, but we generally keep around eight weeks or so of steel on the ground for our fabrication business. Uniquely, we use primarily flat rolled steels and a little bit of merchant steels in the process. So if you can kind of follow that bouncy ball with how you feel the pricing will look going forward and what's done in the recent past, and that should give you some inclination of how the metal margin will move pushing forward into the second quarter.

All right, that's helpful.

So the price increase we've seen has not been reflected at all.

Yeah, it would lag around 8 to 10 weeks.

All right. I want to emphasize the obvious here because we all tend to sometimes focus near term, but the The new millennium of fabrication business as a whole is incredibly important, A, for pull-through volume, particularly in softer markets, as we said earlier, allowing the higher utilization rate through our steel mill. But it's also, yeah, in this environment, maybe you get a steel pricing comes up, you get a little bit of squeeze and vice versa on the opposite side. But there's a very strong natural hedge to our business here. And we've been very intentional with our growth into sort of value add, sort of diversification of our portfolio and the businesses that we grow to try and mitigate that volatility of three-cycle cash generation and not be as cyclical as we once were, maintaining higher highs and higher lows for sure.

Okay, that makes sense. And maybe a quick follow-up on working capital. We've seen quite a good release in Q1.

How would you see that evolve moving forward?

Yeah, so as we talked about it, there was a significant amount of working capital built in 2022. Much of that was not structural. It had to do with us layering on some additional raw materials with pig iron, some additional substrate that Mark mentioned. We have been able to work through most, if not all, of that. We still expect to have some working capital give back as we head into the second quarter, as we kind of still right-size some of our inventory levels, et cetera. So it may not be as significant of a benefit as you've seen in the last two quarters, but we definitely think working capital will be a funding source heading into the second quarter.

Okay, perfect.

Thanks a lot.

Thank you. Your next question is coming from Andreas Bokenheiser from UBS. Your line is live.

Thank you very much. Good morning, everyone. Two quick questions for me, one on steel and one on Alley. On steel, you're very obviously growing your volumes both quarter on quarter and year on year, and it certainly looks to be faster than the market. So you guys seem to be capturing market share faster. Can you, assuming you agree with that, can you give us a little bit of color on where specifically you're capturing market share from peers? Is it non-res, is it auto, is it energy, possibly all of the above, but is anything kind of standing out? And maybe also why you're able to capture that market share, obviously. And then secondly, on the alley question, obviously you're targeting automotive among other sub-industries. Where specifically will the alley go in automotive? Is this going into auto body sheet that historically has been dominated by steel and especially steel supplied by the blast furnaces? Is that where you envision the aluminum to go? Those are my two questions. Thank you very much.

Okay. Well, for the standpoint of our increase in volumes, I would say, yes, we are picking up market share. The The geographic location of the Sinton, Texas plant is pivotal. Obviously, that was an underserved market. We have access into Mexico now. Much, much, much cheaper than any other U.S. mill to the tune of, well, we can get it down there for $40, $30. Yeah, $30, sorry. Whereas, you know, if you're bringing it down from northern Indiana, it's probably $100 plus. So there's massive... geographic sort of advantage for that mill. And we're picking up, as I said, Mexican market. We're picking up energy, again, because of that location, OCTG and line pipe. So that is one sort of driver. The second driver, I think, and I got to applaud the automotive team. They've done a phenomenal job over the last two or three years. The traction there is amazing. particularly with the European auto producers. And we're favored because of our carbon footprint and our sustainability sort of profile. Our mills will be the, well, they report, not us, but they report that our Columbus facility, for instance, and our Butler facility, probably some of the lowest facilities or carbon producing facilities in the world. We're gaining a lot of market share from that. So I think those are probably the principal gains there. And then on the aluminum, firstly, there is a substantial supply deficit. That industry in Kanshi and aluminum is reliant on a very, very large portion of imports today. So we would intend or believe that our low-cost position, our efficiency, and our commercial approach will be very, very well received. and we'll offset A, some of those imports, and B, pick up the share of growth in that industry. You mentioned kind of the steel aspect. Having aluminum in our portfolio gives us the advantage, I guess, if there is a steel decline in any one area, with the pickup of aluminum, we can penetrate that or take advantage of that.

That is clear.

Thank you very much. Oh, sorry, sorry, sorry. And where is it going? Well, again, the facility is not, in this case, unlike our start in steel, we're not revolutionizing the technology necessarily. You know, it's absolute state-of-the-art technology for sure, but it will have the same capability of any high-class new aluminum facility in the world. So both the unexposed and the exposed.

Got it. Thank you very much.

Thank you. Your next question is coming from John Tumazos from Tumazos Independent Research. Your line is live.

Thank you. Congratulations on all the progress. I'm looking at your almost billion dollars of cash flow for uses in the quarter. It's just so large and formidable without sitting at a positive EBITDA and sheet prices were a little low. The numbers are just so big. My first question is, what will you do with all the money? Would you perhaps invest more in scrap ferrous, scrap non-ferrous iron ore? There's lots of opportunities in raw materials or resources. And second, you had a $418 million...

deduction from cash flow for accrued expenses I was just curious what was such a big accrual John I'll take the last one that's that's a simple one we have a company-wide profit sharing plan that's how we provide for retirement for all of our 12,000 people and it's simply 8% of pre-tax earnings and since we had a record 2022 we were able to give all of the employees $422 million in total, and that payment went out in March. So that's the reason for the significant change.

So it should really be almost amortized uniformly over the quarters from the standpoint of forecasting cash flow.

Yes. Well, I mean, you could do it that way, but in actuality it comes out in March. But, yes, you could look at it that way.

The first quarter had that big deduction from it, and it was still a lot of money.

That's correct.

Actually, John, if you're within about 100 miles of any of our facilities on March the 15th, you would have heard the shout and the screaming and the crying as to the amazing thing that is. It's a massive, massive, massive boost to our employees. And as I tell each and every one of them, it ain't a gift. Each and every one of them has earned that profit-sharing check. Sorry, that's profit-sharing. Relative to investing our wealth, so to speak, scrap iron sort of backwardly integrating is not a primary target. Certainly, iron ore is certainly not a target at this moment in time. We will and we are looking at options for securing a strategic supply of our own pig iron, a green supply, so that's ongoing but not a massive capital expenditure once we move forward with that. On the scrap side, we are spending money on segregation, different ways of cleaning up all the different scrap flows to maximize a recycled content in the aluminum business, and also to reduce the residual level of the obsolete flow, again, to supplant some of the prime scrap. And that's working out incredibly well, particularly when there's a good spread between obsolete and prime. Not only Are you securing a flow of prime scrap? But the cost impact is very, very, very significant reduction in cost or savings. But again, we are smaller, smaller investments in segregation there. You'll see us spend a few dollars expanding our scrap footprint in the southwest. But we're not talking about anything that's going to impact impact the balance sheet. In all honesty, we expect that cash flow generation to continue. And we will continue, I think, just the same cash allocation strategy that we've had in the past. With a strong balance sheet, huge liquidity, it allows us to have a balanced perspective. We'll continue to have a positive dividend profile. You saw us increase 25% here earlier this year. We'll continue to repurchase our shares. We think it's still at an incredible value today, for sure. We're continuing with the organic growth. We've got the four coding lines going in. They'll start up later this year. We've got the aluminum project. And the team, for 30 years, have continually found good, cost-effective, high-returning organic growth projects. And there's a bunch in the pipeline there. And obviously, we continue to review the sort of M&A activity as it comes across our desk. So we're very, very blessed, for sure.

Thank you, and congratulations.

Thank you, John.

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

Super. Thank you. Well, again, for those that are still on the call, Sony, appreciate your time today. We appreciate your support. For our customers, thank you, thank you, thank you. We can't do it without you. And to our customers, Sure. Our team, each and every one of you, you do an absolutely phenomenal job each and every day. And just do one thing for us and me personally, be safe, look after each other. Have a good day. Bye-bye.

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