Steel Dynamics, Inc. (NASDAQ:STLD) Q1 2024 Earnings Call Transcript

Steel Dynamics, Inc. (NASDAQ:STLD) Q1 2024 Earnings Call Transcript April 24, 2024

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Operator: Good day, and welcome to Steel Dynamics First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s remarks, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised this call is being recorded today, April 24, 2024, 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, Investor Relations. Please go ahead.

David Lipschitz: Thank you, Matthew. Good morning, and welcome to Steel Dynamics first quarter 2024 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; Theresa Wagler, Executive Vice President and Chief Financial Officer; 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 maybe forward-looking and predictive, specifically 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 integrating or starting out new assets, the aluminum industry, the 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. Example of these are described in the related press release as well as in our annually filed SEC Form 10-K under the heading Forward-Looking Statements and Risk Factors found on the Internet at www.sec.gov, and if applicable, in any later SEC Form 10-Q. You 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 First Quarter 2024 Results.

Now, I’m pleased to turn the call over to Mark.

Mark Millett: Thanks, David, and good morning, everybody. It’s good to be with you for our first quarter 2024 earnings call today. Once again, our teams achieved a strong first quarter financial and operational performance. Quarterly steel shipments were a near record 3.3 million tons. The team successfully began operating our four new value-added flat rolled steel coating lines, which adds about 1.1 million tons of higher margin product diversification to our portfolio. The Sinton team continues to make significant headway, hitting record milestones and achieving positive EBITDA for the quarter with significant improvements on the way. And we’re also making fast progress on our aluminum flat roll investments. There continues to be strong commercial support for a new and innovative supply chain solution provided by Steel Dynamics, as we’re a well-known and highly regarded metals producer.

And financially, the team continues to excel. They consistently achieve superior financial metrics and best-in-class return on invested capital. The product of the passionate can do performance driven culture and our high margin value-added growth strategy. A stark and persuasive indicator of the effectiveness of our business model is our relative EBITDA per employee generation, which is substantially higher than any of our competition. I’m incredibly proud of the Steel Dynamics team. They are the foundation of our company and they drive our success and I’m proud to stand among them. They are special and we’re focused on providing the very best for their health, safety and welfare. We are actively engaged in safety at all times and at every level of our company, keeping safety top of mind and an active conversation each and every day.

Despite excellent safety performance compared to industry peers, there’s more to do. We will not rest until we consistently achieve our goal of zero injuries. But with that, Theresa, would you like to give us some color on the quarter?

Theresa Wagler: Thanks, Mark. Good morning, everyone. Thanks for joining us. I add my sincere thanks to our teams for another strong performance. Our first quarter 2024 net income was $584 million or $3.67 per diluted share with adjusted EBITDA of $879 million. First quarter 2024 revenue of $4.7 billion was 11% higher than sequential fourth quarter results supported by strong volume and higher realized selling values across the steel platform. Our first quarter operating income of $751 million was 45% higher than fourth quarter results driven by steel metal spread expansion, especially within our flat rolled operations. A quick note as we construct the aluminum facilities, non-capitalizable expenses are required to flow through SG&A until startup, so you will see increased costs in that line item as we start operations mid-2025 and the first quarter that additional amount was about $14 million.

As we discussed our business this morning, we see positive industry fundamentals for 2024 and beyond and we’re focused toward our continued transformational growth initiatives. Our Sinton, Texas flat rolled steel division operated close to 70% of capacity for the quarter, and as Mark said, generated positive earnings. Our steel operations generated strong operating income of $675 million in the first quarter supported by near record shipments and increased realized product pricing. For those of you who track flat rolled products by type, in the first quarter, hot rolled shipments were 1,062,000 tons, cold rolled shipments were 130,000 tons and coated shipments were 1,220,000 tons. Operating income from our metals recycling operations was $23 million, significantly higher than sequential fourth quarter results as increased domestic steel demand supported higher volume.

As many of you already know, we’re the largest North American metals recycler processing and consuming ferrous scrap and non-ferrous aluminum, copper and other metals. The team continues to effectively lever the strength of our circular manufacturing model, benefiting both our steel and metals recycling operations as well as shortly our aluminum flat rolled operations. Our steel fabrication segment achieved strong operating income of $178 million in the first quarter, lower than sequential fourth quarter results due to weather impacted in seasonal and lower shipments and metal spread compression as realized pricing declined and steel raw material input costs increased. Our joists and deck backlog extends through the third quarter 2024 with strong forward pricing, and pricing has stabilized at historically strong levels during the quarter.

Infrastructure Inflation Reduction Act, and DOE decarbonization support and manufacturing onshoring are expected to increase domestic fixed asset investments later this year and into next year, which will support our steel operations and our fabrication business. Our cash generation continues to be strong based on our differentiated circular business model and highly variable cost structure. During the first quarter of 2024, we generated cash flow from operations of $355 million, which was reduced by an annual company-wide profit sharing contribution of $265 million. We ended the quarter with strong liquidity of $3.1 billion. For 2024, we believe full year capital investments will be in the range of $2 billion, of which approximately $1.4 billion relates to our aluminum flat rolled investments and $175 million toward our biocarbon facility.

In February, we increased our cash dividend 8% to $0.46 per common share, continuing our increasing dividend profile as through cycle cash flow grows. We also repurchased $298 million of our common stock, representing 1.5% of our outstanding shares. At March 31, $1.1 billion remained available for our share repurchases under our new $1.5 billion plan. 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, our free cash flow profile has fundamentally changed over the last five years. From an annual average of $540 million from 2011 to 2015 to currently $2.9 billion, 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.

We believe our track record proves itself with an average three-year after-tax return on invested capital of 32%, clearly a best-in-class performance across industries. 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’re committed to operating our business with the highest integrity. In that regard, we remain excited about our joint venture with Aymium, a leading producer of renewable biocarbon products. We believe our first joint venture facility, which we plan to start operating late in the fourth quarter could decrease our steel Scope 1 greenhouse gas emissions by as much as 35%.

We have an actionable path toward carbon neutrality that is more manageable and we believe considerably less expensive than they 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 continue our leadership role moving forward. Barry?

Barry Schneider: Thanks, Theresa. Our steel fabrication operations performed well in the first quarter, achieving strong earnings. At the end of the first quarter, our steel joist and deck order backlog was solid, extending through the third quarter of 2024. Additionally, current pricing has stabilized at historically high levels during the first quarter. We continue to have high expectations for the business. Continued onshoring of manufacturing coupled with infrastructure spending and fixed asset investment related to the IRA programs should provide momentum for additional construction spending later this year and through 2025. Our fabrication platform provides meaningful volume support for our steel mills, critical in softer demand environments, allowing for higher through cycle steel utilization compared to our peers.

It also helps mitigate the financial risk of lower steel prices. Our metals recycling operations improved earnings in the first quarter as increased demand from North American steel producers supported higher ferrous scrap volume and the team continues to grow our volume and recycled aluminum in advance of us starting our new aluminum flat rolled operations. The North American geographic footprint of our metals recycling platform provides a strategic competitive advantage for our steel mills and for our scrap generating customers. In particular, our Mexican recycling operations competitively advantage our Columbus and Sinton raw material positions. They also strategically support increased procurement of aluminum scrap for our future flat rolled aluminum operations.

Our metals recycling team is partnering even more closely with both our steel and aluminum teams to expand scrap separation capabilities through process and technology solutions. This will help mitigate potential prime ferrous scrap supply issues in the future will also provide us with a significant advantage to material increase the recycled content in our aluminum flat roll products and increase our earnings opportunities. The steel team had a strong quarter achieving near record shipments of 3.3 million tons. During the first quarter of 2024, the domestic steel industry operated at an estimated production utilization rate of 77% while our steel mills operated at 87%. We consistently operated higher utilization rates due to our value-added steel product diversification, our differentiated customer supply chain solutions and the support of our internal manufacturing businesses.

The higher through cycle utilization of our steel mills is a key competitive advantage supporting our strong and growing cash generation capability and best-in-class financial metrics. Our realized steel pricing improved across our product portfolios. However, flat rolled prices weakened early in the first quarter before recovering in March and April. Value add flat rolled steel pricing spreads were incredibly resilient actually expanding during the same timeframe. Underlying demand remains steady, but customers are managing to a lower inventory level, which can cause some volatility in spot prices as order activity increased quarter-over-quarter, our steel backlogs also improved nicely from December to March across the platform. As for Sinton, the team continues to make significant improvements in operating efficiency and consistency.

They averaged around 70% of capability for the quarter, breaking monthly utilization records across the lines in March. We are planning for Sinton to see additional improvements in production as the team took several maintenance days in April. Among other things in the outage, we resolved certain transformer limitations, which will allow us to access 100% of our melting capacity versus the previous 80%. Also, the additional two new value-added coating lines were successfully commissioned and have commenced operations with excellent results. These additional lines will support increased volume and margins as we head through this year. Regarding the steel market environment, North American automotive production estimates for 2024 were recently revised higher to just over 16 million units with continued growth expected in 2025 and 2026.

This improved forecast is based on demand resilience and stronger production results as supply chain constraints continue to dissipate across the automotive supply chain. Automotive dealer inventories are also continuing to remain below historical norms. Non-residential construction remains solid as supported by the increased sequentially quarterly order activity and shipments in our structural and rail division. Additionally, onshoring and infrastructure spending should provide further meaningful support to fixed asset investment and related construction oriented projects in the coming years. As for the energy markets, the solar industry continues to grow and oil and gas activity is steady. However, increasing OCTG and line pipe imports created a challenging first core environment for the domestic producer.

Looking forward, we are optimistic regarding steel demand and pricing demand for 2024.

Mark Millett: Good one. Thanks, Barry. Thanks, Theresa. While consistently strong through cycle operating and financial performance continues to support our cash generation and growth investment strategies. As mentioned, the four value add flat rolled steel coating lines are now online and in various modes of startup and certainly the line in Sinton was an absolute unqualified success. The team has done a phenomenal job there. And Sinton should see a step function improvement in operations and profitability as those two new lines ramp up after the April maintenance, which occurred actually two weeks ago that’s — they’re up and running again. The aluminum strategy, our growth is especially compelling. Responses from existing and new customers across all markets remains incredible and only strengthening as we move forward.

We are currently in discussions with numerous customers who wish to locate on site with us and this colocation strategy provides a sustainably competitive model for all of us, conserving time, money and reducing emissions across the supply chain. And this model has already proven itself tremendously successful in Sinton. And to just sort of review the project itself, 650,000 metric tons of aluminum flat roll capability in Columbus, Mississippi. The state-of-the-art plan, it has served the sustainable beverage and packaging sector, automotive and industrial markets as well. The roughly 300,000 metric tons a year of can stock about 200,000 tons of auto and 150,000 tons of industrial and construction. Actually, at the site in Columbus, we have a mill cap capacity of around 600,000 metric tons.

And that will be supported by two satellite facilities, one out West around Gila Bend and one in Central Mexico, which are located in scrap ridge regions. We can capture the scrap, turn it into cast lab and transport it very, very effectively and cost efficiently to the mill itself. Expanded the project scope to include additional scrap processing and treatment to maximize aluminum recycled content. The metals recycling team has also developed a commercially viable sorting solution at volume for 5,000, 6,000 series of aluminum scrap, which represents an incredible competitive advantage for us. Our startup plans have not changed. Rolling mill should be operating mid-2025. The Mexico slab center, the end of 2024, and then Arizona mid-2025. The total project cost, including the recycled slab centers remains at $2.7 billion.

With virtually all equipment and construction contracts complete, we feel confident in the expected amount of investment. We also are confident in the data add around about $650 million to $700 million of through cycle annual EBITDA, plus an initial $40 million to $50 million from the Omni platform as well. The investment premise, if you think about it, the market environment is similar to the domestic steel industry when we started SDI 30 years ago. They have older assets. They’ve had difficulty earning their cost of capital. So there’s been little reinvestment, heavy legacy costs, inefficient and operations are typically high cost. And also a significant aluminum flat rolled supply deficit exists in North America, which is expected to grow.

And this would be the first time we’ve ever entered a market where there’s a supply demand gap. Pretty positive for us for sure. We have business alignment and we can leverage our core competencies of construction and operational knowhow. We can lever Omni’s recycling footprint. As many of you know, we’re the largest aluminum scrap recycler in North America. And again, we are developing some pretty exciting new separation technologies. So it’s going to be cost effective. It’s very, very high return growth for us. Moving on, we are in passion, I think, by our future growth plans, as they will continue to drive the high return growth momentum, we have consistently demonstrated over the years. We have the highest, most recent five-year average after-tax return on invested capital within the S&P 500 materials companies.

And in the most recent three years, we have had an average of after-tax return on invested capital of 32%, which I think is a stunning number and an affirmation of the ability of all our team. Our disciplined and intentional growth strategy focused on differentiated value-added supply chain solutions to provide sustainable and growing cash generation. And we’ll continue to do so in the future. So I’m incredibly optimistic moving forward. I believe the market dynamics are in place to support increased demand across our operating platforms in 2024. North America will benefit from continued onshoring of manufacturing businesses. And the U.S. will benefit from the allocation of public monies from the infrastructure program, the Inflation Reduction Act and other public programs.

Steel Dynamics is levered to benefit from those programs through increased steel joist and deck demand, flat and long product steel demand and the associated higher demand for recycled scrap and aluminum. As I said earlier, our teams are our foundation. I thank each and every one of them for their passion and their dedication. We are committed to them, and I remind those listening today, the 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 operating and financial metrics. We’re no longer a simple steel company. We’re an industrial metals business providing enhanced supply chain solutions to numerous industries that are essential to global economies.

This differentiation and diversification mitigates cash generation volatility in all market cycles, as we’ve just seen in this past quarter. We are competitively positioned and continue to focus on providing superior value for our companies, for our customers, team members and shareholders alike, and we look forward to creating new opportunities for all of us today in the many years ahead. With that said, Matthew, could you open the lineup for questions, please?

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Q&A Session

Operator: Thank you. [Operator Instructions]. Your first question is coming from Martin Englert from Seaport Research Partners. Your line is live.

Martin Englert: Hello, good morning, everyone. Within steel, conversion costs appear to have declined a bit quarter-on-quarter, taking into account Sinton continue to ramp up and substrate costs going into 2Q, would you anticipated comparable reduction in the current quarter?

Theresa Wagler: Martin, the way that you and others are able to actually calculate what you call conversion costs is a little bit difficult. But yes, with the increasing production at Sinton, which we expect to continue to improve into the second quarter and second half of the year, you will see that the additional volume will help compress costs across the spectrum, but product mix is also something that you need to take into consideration when you think about flat versus long. But we would expect to see that the conversion rate, as you calculate it would continue to reduce. I can’t speak to the exact magnitude thereof.

Martin Englert: Okay. Appreciate that. And thank you and congratulations on results.

Mark Millett: Thank you.

Operator: Thank you. Your next question is coming from Curt Woodworth from UBS. Your line is live.

Curt Woodworth: Yes. Thank you. Good morning, Mark and Theresa. A couple of questions on the Greenfield aluminum project. Can you kind of give us a time line on where — when you think you could get to more of an EBITDA break-even level on the facility and what type of utilization rate you think you would need to achieve that? And then can you speak to what level of commercial commitments or arrangements that you’ve been able to achieve at this point? And then just lastly, I saw you kept the CapEx guidance flat at $2.7 billion, but obviously, there’s been some concern just around general inflationary pressures. But do you feel — are you seeing any upward pressure on the CapEx number? And are you pretty confident on keeping that number at $2.7 billion going forward?

Mark Millett: On — I’ll go backwards. That’s the easier way. From a CapEx standpoint, as I mentioned in my sort of preliminary thoughts, virtually everything is now contracted out. We did, and you saw here some months ago, we did bump it up to that $2.7 billion with the knowledge of some inflationary pressures. Those are all baked in to that $2.7 billion, and we see no expansion on that number going forward. From a commercial arrangement perspective, we’ve been working obviously with the major sort of beer can or the beverage can consumers, we’ve been working with automotive as well. And we’re pretty confident that we have the ability to match our customer demand with the ramp-up curve. As we also mentioned, operations should start mid-2025.

There will be some qualifications early on. But we’re confident that we can match the demand from those customers with that start-up ramp. From a standpoint of EBITDA break-even, I would imagine that come the end of the year, I would hope we are in that position.

Curt Woodworth: Okay. And then just a quick follow-up on fabrication. Last quarter, you talked about order entry improving and pricing continues to be stable. But obviously, there’s still downward pressure in the business. Can you just give us a sense for maybe volumetrically, how you see things performing into 2Q? I know 1Q is always seasonally weak, and there was some weather-related disruption, but do you think you can get close to getting back to positive growth in fabrication? And then just in joists and deck in general, can you give us a sense for maybe how those products fit into some of these federal programs in terms of the CHIPS Act, IRA battery plants? Do you see any new sources of growth that could mitigate what’s been somewhat of an air pocket on the warehouse side? Thank you.

Mark Millett: Yes. I guess the — from our perspective, and I will let Theresa and Barry chip in here in a little bit, but yes, from a shipment standpoint in Q4 and early Q1, shipments kind of leveled off at pre-COVID levels. We’ve seen some general seasonality and there’s some regional weather impacts here and there. But booking rates increased in March and are up again meaningfully in April. Backlogs are around about six months. So we personally consider that to be kind of a volume trough and we think things are going to move up, volume wise in the second quarter into the rest of the year. And I think the thing to emphasize there’s only been slight quarter-over-quarter price erosion. And so for that to — or that market strength to be there, I think it confirms our thesis that there’s been a paradigm shift in through-cycle spreads. And I think we’ve got a very, very, very constructive view of the long-term prospects for fabrication.

Theresa Wagler: I think something that I would point out in addition to what Mark said. If you look at — and take into consideration that volumes are, to Mark’s point, at a pre-COVID level, but earnings were still, from an operating income perspective about over $1,200 per ton. If you looked historically in a very strong market, that number might have been $150 to $200 per ton. So structurally, there has been a significant difference, and it is proving out the theory that we had if there’s a structural shift. Barry, maybe you want to talk a little bit about how the programs actually go into the public dollars.

Barry Schneider: A lot of these public the CHIPS Act to the IRA Act, there’s a lot of work that has to happen upfront. And once those projects are — owners are identified and engineering companies are identified, that’s when this starts flowing into all the steel products, but specifically, when we look at the joist and deck, once it’s a concrete kind of a plan on what’s going to be built, the timeline is actually pretty quick. So when those orders start to be in place, it’s typically in a kind of a three to six-month window, when they start shipping. So we’re encouraged by what we hear, what we communicate through the general contractors, the fabricators out in the marketplace. So again, we have a good reason to believe the second half of the year fills up nicely with these projects, as they start moving from conceptual phase to actually enter in construction phases.