Steel Dynamics, Inc.

Good day and welcome to the Steel Dynamics second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question and answer session and instructions will follow at that time. Please be advised this call is being recorded today, July 20, 2023, 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 Lipchitz, Director, Investor Relations. Please go ahead.

Thank you, Holly. Good morning, and welcome to Steel Dynamics' second 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 of 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 a state, 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 risk and uncertainties related to integrating or starting up new assets, the aluminum industry, use of estimates and assumptions in connection with anticipated project returns, and our steel, metal recycling, and fabrication businesses, as well as to general business and economic conditions. Examples of these are described in the related press release, as well as in our annual filed SEC Form 10-K, under the heading Forward-Looking Statements and Risk Factors, found on the Internet at www.sec.gov, and, if applicable, in any later SEC Form 10-Q. You'll also find any reference non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Scale Dynamics Report Second Quarter 2023 Results. And now I'm pleased to turn the call over to Mark.

Thank you, David, and good morning, everybody. Thank you for being with us on Second Quarter Earnings Call. Once again, our teams achieved a solid financial performance, including continued safety improvements, 81% of facilities were incident-free through the quarter. We had cash from operations of $808 million and EBITDA generation of $1.2 billion. We also received improved investment-grade credit ratings, providing further third-party confirmation of the strength of our business model. We're also making significant progress on our aluminum flat-wheeled investments. There is great excitement within the prospective customer base for new and innovative supply chain solutions from a differentiated supplier. 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, combined with our meaningful value-added growth, diversification, and supply chain positioning that is resulting in our earning strength in all market cycles. However, as I've often said, great financial performance is of no importance without safety for our SDI family. We were focused on providing the very best for their health, safety, and welfare. We were actively engaged in safety at all times, and at every level, keeping it top of mind and an active conversation. That focus, as I said, the team's safety performance further improved in the second quarter, way ahead of industry averages. There's more to do. We will not rest until we consistently achieve our goal of zero injuries. But before I continue, Teresa, would you like to give us some financial cover?

Thank you, Mark. Good morning, everyone. I had my sincere appreciation and congratulations to the entire team for another strong performance. Our second quarter 2023 net income was $812 million, or $4.81 per diluted share, with, as Mark mentioned, EBITDA $1.1 billion. Second quarter 2023 revenues of $5.1 billion were higher than sequential first quarter results driven by increased realized steel selling values. Our second quarter operating income of $1.1 billion was 27% higher than first quarter results as a result of significantly expanded steel metal spread. As we discussed our business this morning, we are positive with industry fundamentals for the remainder of 2023 and beyond. and we're focused toward our continued transformational growth. Our steel operations generated strong operating income of $706 million in the second quarter due to metal spread expansion and near record shipments of 3.2 million tons. High realized pricing more than offset moderately higher scrap costs in the quarter. We realized increased pricing and metal spread across both our flat rolled and our long product steel operations. As a reminder, we are the primary domestic steel supplier into the railroad rail market, as well as a producer of all other long steel products, including structural steel, special bar quality, merchant shapes, specialty shapes, and reinforcing bar, with over 4.5 million tons of annual capacity. Operating income from our metals recycling operations was $40 million, consistent with sequential first quarter results, due to increased shipments being offset by lower metal spread. The team continues to leverage our circular manufacturing models at FNES by providing high quality, lower cost scrap, which improves furnace efficiency and reduces company-wide working capital. Our Mexico recycling operations also provide a competitive advantage for reliable supply, as well as for future increased scrap aluminum collection. We are the largest North American metals recycler today, processing and using ferrous scrap and non-ferrous aluminum, copper, and other metals. Our steel fabrication operations achieved operating income of $462 million in the second quarter, lower than first quarter results, but historically strong, as average pricing decreased 13% and volumes were steady. Our steel joist and deck order backlog extends into the first quarter of 2024. It is contracted from record highs experienced in 2022 as shipments have outpaced spot order activity. However, forward backlog pricing remains very strong and spot pricing remains very resilient. Based on our backlog, customer sentiment, and manufacturing momentum, we expect steel fabrication earnings to remain strong, but slightly lower than the first half of 2023 levels for the second half of the year. Infrastructure, Inflation Reduction Act, Department of Labor, Decarbonization Support, and Manufacturing and Onshoring are expected to support not only fixed asset investment in steel consumption, but also steel joist index demand in the coming years. Our cash generation continues to be strong based on our differentiated circular business model and variable cost structure. At June 30th, our liquidity was $3.5 billion, inclusive of our recently renewed unsecured $1.2 billion revolver. I'd like to congratulate the team. They actually refinanced through over yesterday. So thank you to Rick and Dominic. During the second quarter of 2023, we generated cash flow from operations at $808 million and $1.5 billion for the first half of the year. During the first half, we invested $585 million in fixed asset investments. We believe capital investments for the second half of the year will be in the range of $1 billion, the vast majority relating to our aluminum flat-rolled investments and the completion of our four flat-rolled steel coating lines by the end of 2023. In February, we increased our cash dividend 25% and repurchased $734 million, or 3.9% of our outstanding shares in 2023. On June 30th, $606 million remained authorized for repurchase under our existing $1.5 billion program that we put in place during November of 2022. Since 2017, we've increased our cash dividend 174% and repurchased $4.8 billion of our common stock, representing 39% of our outstanding shares. In recognition of our growth, strong balance sheet profile, and consistent free cash flow generation capability, last month we received upgrades, as Mark mentioned, to our investment-grade credit designation from both Moody's and from S&P. Our capital allocation strategy prioritizes high return growth with shareholder distributions comprised of a positive base dividend that's complemented with a variable share purchase program, while we remain dedicated to our investment-grade credit designation. We've placed ourselves in a position of strength to have a sustainable capital foundation that supports meaningful strategic growth, strong shareholder returns, and investment-grade metrics. Our free cash flow profile has fundamentally increased over the last five years, from an annual average of $580 million to $2.6 billion currently. Our aluminum growth strategy is consistent with this strategy. 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 distributions, as we have clearly demonstrated. We are 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're committed to operating our businesses with the highest integrity. We have an actionable path toward carbon neutrality that is more manageable and we believe considerably less expensive than may lay ahead for many of our industry and other peers. Our sustainability and carbon reduction strategy is an ongoing journey and we're moving forward with the intention to make a positive difference playing a leadership role. For those of you on the call that like to track the product differentiation among our flat-rolled shipments, for the second quarter, our hot-rolled shipments were 972,000 tons, our cold-rolled shipments were 149,000 tons, and our coated shipments were 1,150,000 tons. With that, I'll turn the call back over to Mark. Thank you, Teresa.

Hopefully, you folks can hear us. I know our AV is not quite up to snuff today, so I apologize for that. But nonetheless, our steel fabrication platform turned in another strong quarter. The team continues to do an absolutely phenomenal job there.

One second. Sorry, everyone.

Apologies, but it appears that many folks can't hear us, hear the call. I would ask you to hang up and call back in, and we'll just pause the call for a second. Thank you.

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