Steel Dynamics, Inc. (NASDAQ:STLD) Q4 2023 Earnings Call Transcript

Steel Dynamics, Inc. (NASDAQ:STLD) Q4 2023 Earnings Call Transcript January 24, 2024

Steel Dynamics, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Steel Dynamics Fourth Quarter and Full Year 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, January 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, Holly. Good morning, and welcome to Steel Dynamics fourth quarter and full year 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; 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 in 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. 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 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 Fourth Quarter and Full Year 2023 Results.

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

Mark Millett: Thank you, David. Good morning, everyone. Thank you for being with us on our fourth quarter and full year 2023 earnings call. As you saw on our release, our teams achieved a strong annual 2023 financial and operational performance. I think most gratifying was achieving our best safety year with the lowest recordable incident rate ever. I want to applaud and congratulate all the teams because that it was a monumental effort put into get it. Steel shipments were record 12.8 million tons. I think, it needs to be emphasized that we’ve got 3 million tons yet of additional shipping capability to leverage. We have the second best year for revenues at $18.8 billion and cash flow from operations of $3.5 billion. Adjusted EBITDA was $3.7 billion.

I think, the year clearly demonstrated the through cycle earnings resilience of our business model. It’s manifest by a diverse value add product portfolio supported by a superior operating culture, driving world class low cost operations. I can be more pleased at Sinton. Sinton is showing significant operating improvement was EBITDA positive in December, with a clear path to profitability in the first quarter of 2024 and thereafter. We’re also achieving fast paced progress on our aluminum flat rolled investments. There continues to be strong commercial support for a new and innovative supply chain solution from Steel Dynamics. So the aluminum industry is considering a well-known and highly regarded metals producer. I’m incredibly proud of the Steel Dynamics team.

They’re the foundation of our company and they drive our success. And to be honest, they inspire me. Feeling they were esprit de core and commitment to the SDI family during the recent holiday parties was absolutely just simply humbling. And that is why we were so focused on providing the very best for their health, safety and welfare. They’re actively engaged in safety at all times and at every level, keeping it top of mind in an active conversation each and every day. As I already suggested, with that focus, the team’s safety performance was a record low incident rate in 2023. Obviously, though there’s more to do, we will not rest until we consistently achieve our goal of zero injuries. So that said, I will hand it to Theresa, who will then bet the ball to Barry and then back to me to finish up.

So Theresa?

Theresa Wagler : Thank you, Mark. Good morning everyone. Thank you for being with us today. In addition to the achievements Mark just mentioned, the teams also achieved our third best year for operating income of $3.2 billion and net income of $2.5 billion or $14.64 per diluted share. Cash flow from operations and liquidity of $3.5 billion and a three year after tax return on invested capital of 32%. A truly great performance, my sincere thank you and congratulations to our entire team. As for the fourth quarter of 2023, net income was $424 million, or $2.61 per diluted share with adjusted EBITDA of $659 million. Fourth quarter 2023 revenues of $4.2 billion, an operating income of $519 million were lower than sequential third quarter results driven by seasonally lower volume and realized steel and steel fabrication pricing.

Our steel operations generated operating income of $365 million in the fourth quarter lower than sequential third quarter results due to lower realized flat rolled Steel pricing. Our steel shipments remain steady at 3.1 million tons. Our four new flat rolled coating lines have or will begin operating this quarter, increasing our higher margin value added product mix by an additional 1 million tons, making our capacity in value added and flat roll at 7 million tons on the coating lines. For the full year of 2023, operating income from our steel operations was $1.9 billion with record annual shipments of 12.8 million tons. For those of you that track our flat rolled shipments in more specificity, hot rolled coil and P&O shipments were 927,000 tons.

Cold rolled shipments, 124,000 tons and coated shipments of 1,192,000 tons. For metals recycling fourth quarter operating income was $6 million due to seasonally lower volume in nonferrous metal spread compression. For the full year, operating income from our metals recycling operations was $108 million lower than prior year results based on decreased ferrous scrap pricing more than offsetting higher volume. We’re the largest nonferrous and ferrous metals recycler in all of North America, recycling aluminum, copper, and other metals. The team continues to lever our circular manufacturing operating model, providing high quality, low cost scrap to our steel mills, which improves furnace efficiency and reduces company-wide working capital. Our steel fabrication operations achieved operating income of $250 million in the fourth quarter, lower than sequential third quarter results, yet historically strong due to lower pricing and seasonally lower shipments.

Our steel fabrication platform had another great year in 2023 with operating income of $1.6 billion. Congratulations to the team. Our steel joists and deck demand remained solid with good order activity. Our backlog extends through the first half of 2024 and forward pricing remains strong. Infrastructure Inflation Reduction Act, the DOE decarbonization support and manufacturing onshoring are expected to support domestic fixed asset investment and related flat and long product steel consumption and related joists and deck consumption as well. During the fourth quarter of 2023, we generated strong cash flow from operations of $865 million. For the full year, we achieved our second best annual cash flow of $3.5 billion. Our cash generation is consistently strong based on our differentiated circular business model and highly variable low cost structure.

At the end of the year, we had liquidity of $3.5 billion. During 2023, we invested $1.7 billion in capital investments, of which almost 60% related to the construction of our aluminum flat rolled investments. For 2024, we believe capital investments will be in the range of $2 billion, of which approximately $1.4 billion relates to aluminum investments. During the fourth quarter, we maintained our cash dividend at $0.425 per common share after increasing at 25% in the first quarter of 2023. During the full year of 2023, we paid cash dividends of $271 million and repurchased $1.5 billion or 8% of our outstanding shares, representing a 62% net income shareholder distribution rate. The Board also authorized an additional $1.5 billion share repurchase program in November, and $1.4 billion remained available at the end of the year.

Since 2017, we’ve increased our cash dividend per share by 174%, and we’ve repurchased $5.5 billion of our common stock or 37% of our outstanding shares. 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 high return growth with shareholder distributions comprised of a base positive dividend profile that’s complimented with the variable share of purchase 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 to $2.8 billion. We are squarely positioned for the continuation of sustainable, optimized long-term value creation.

Our three-year after-tax return on invested capital of 32% as a testament to our profitable growth. 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. We have an actionable path forward to carbon neutrality that has more manageable and we believe considerably less expensive, that then 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. Thank you for your time this morning, Barry?

Barry Schneider : Thanks, Theresa. Our steel fabrication operations performed exceptionally well throughout 2023, achieving historically strong earnings. At the end of the year, our steel joists and deck order backlog was solid extending to the first half of 2024. We continued to have high expectations for the business, continued onshoring and manufacturing, coupled with infrastructure spending and fixed asset investment related to the IRA programs could continue to provide momentum for additional construction spending. Equally important, our customers tell us demand remains solid and share our optimism. Current pricing is stabilized at historically higher levels and order entry has improved. Fabrication platform provides meaningful volume support for our steel mills, critical and 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 also perform well this year, considering the challenge of declining scrap prices throughout much of 2023. 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. Particular our Mexican locations competitively advantage our Columbus and Sinton raw material positions. They will strategically support aluminum scrap procurement for our future flat rolled aluminum investments. Our metals recycling team is also partnering even more closely with both our steel and aluminum teams to expand our scrap separation capabilities through process and technology solutions.

This will help mitigate potential prime fair scrap supply issues in the future. It will also provide us with significant advantage to materially increase recycled content for our aluminum flat roll products and increase the earnings opportunities. The steel team had another strong year achieving record volume of 12.8 million tons. During 2023, the domestic steel industry operated at an estimated production utilization rate of 76%, while our steel mills operated at a rate of 93% excluding the Sinton plant. We consistently operate a higher utilization due to our value added steel product diversification, our differentiated customer supply chain, and the support of our internal manufacturing businesses. This higher through cycle utilization of all our steel mills is a key competitive advantage, supporting our strong and growing cash generation capability and best-in-class financial metrics.

Regarding the steel markets, steel pricing improved in the fourth quarter 2023 and into January. Customer order entry rate has been strong and lead times have been extended, while their inventory levels remained at historically low amounts. In fact, our flat wheel steel operations have experienced one of the strongest order entry environments in January, especially for our value added products. Additionally, steel imports have generally remained at a manageable level with expectations of this to continue. As Sinton and the team has achieved significant improvements in operating efficiency and consistency. They average about 65% of capability in November, December, and have been running even stronger rates here in January. We are planning for Sinton additional improvements in production after the team makes changes to certain transformers at the end of this first quarter, 2024, while we allow access to a 100% of our mill capacity versus the current 80% capacity.

Additionally, the two new value added coating lines will begin operating in the first quarter, supporting increased volume and margins. Regarding the steel market environment, automotive production estimates for 2024 or estimated 16 million units, while automotive dealer inventories remain below historical norms. Non-residential construction remains solid as evidenced by the strength of shipments and backlogs at our structural rail division, and customer inventory levels are low. Additionally, onshoring and infrastructure spending should provide meaningful support to fixed asset investment in related construction oriented projects in the coming years. As for the energy market, oil and gas activity is strong, driving approved orders for OCTG and solar, those areas all grow.

Looking forward, we are optimistic regarding steel demand and pricing dynamics for 2024. With that, Mark?

Mark Millett : Thanks Barry. Thanks Theresa. I think, our consistently strong through cycle operating and financial performance continues to support our cash generation and growth investment strategies. As Barry mentioned, the four value add flat roll steel coating lines are starting this quarter, and Sinton should see a step function improvement hitting its stride in the second quarter of this year. Our aluminum growth strategy is especially compelling, responses from existing and new customers across all markets remain incredible, only strengthening as we move forward. Many customers have already indicated they would like to build facilities on our rolling mill site in Columbus, Mississippi, and this core location strategy provides a sustainably competitive model for all of us, conserving time, money, and reducing emissions across the supply chain and has already proven itself clearly in Sinton.

The project itself was 650,000 metric ton aluminum flat rolled facility located in Columbus, Mississippi. It’s going to be a state-of-the-art plant, obviously, serving the sustainable beverage and packaging both the ore body and then TAM, automotive and industrial sectors. Roughly 300,000 metric tons of Canstar, which is about 45% of the output roughly 200,000 tons of auto and 150,000 metric tons of industrial and construction products. The onsite metal cast slab capability of 600,000 metric tons will be supported by two satellite recycled aluminum slab casting centers located in UBC scrap rich regions, one in West, and one in Central Mexico. The expanded product scope is including additional scrap processing and treatment to maximize aluminum recycled content.

Our plans are on schedule, rolling mill should be mid-’25, the Mexico slab center at the end of ’24, and then Arizona slab center around mid-’25. The total project cost, as you saw in the release, including the recycled slab centers has risen to $2.7 billion. The installation cost for the rolling mill has expanded due to inflationary installation costs that we are all facing. So with virtually all equipment and construction contracts complete, we are confident in this final budget. As we’ve said before, 100% to be funded with cash. And the expectation is to have a through cycle annual EBITDA of around $650 million to $700 million from the [aluminum] facility with an additional $40 million to $50 million from [indiscernible]. I think we’re definitely going to see superior financial metrics relative to our competition.

The — as we see it, the market environment is similar to the domestic steel industry when we started SDI 30 years ago, other assets, little reinvestment, heavy legacy costs with inefficient high-cost operations. We’re confident, we can emulate the performance-driven high-efficiency, low-cost model that drove our success in steel to drive superior financial metrics. Our organizational mill structure to just advanced layout and technology and our performance-driven sort of speed core culture will drive a census of around about 750 people versus typically 2,000 or more in a similar competitor out there. We will have higher yield through the system. We will leverage OmniSource’s market position and their separation technologies to ensure higher recycled content.

We obviously won’t have the legacy burden that others have. We will have production cost efficiencies and along with the customer co-location. In the end, we also have a preferred sustainability profile. If you put it all together, we’re confident that our earnings profile is going to be far superior to the industry today. We’ve developed the best financial metrics in the steel industry. And as I said, we have confidence we can do the same in aluminum. We’re poised for continued growth. We have an additional 3 million tons, as I said earlier, have shipping capability that will be leveraged through our new processing lines, new products and new supply chains. And we are on passion 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 average five year after-tax return on invested capital within the S&P 500 materials companies. In the last three years, we had an average after-tax ROIC of 32%. I’m going to say that just doesn’t happen. Our disciplined, intentional organic and acquisition strategy focused on differentiated value-added supply chain solutions is providing sustainable cash generation and strong returns. I continue to be optimistic moving forward. I believe the market dynamics are in place to support increased demand across our operating platforms in 2024 and the years ahead. North America will benefit from continued onshoring and manufacturing businesses. And the U.S. will benefit from the allocation of public monies from the infrastructure program, Inflation Reduction Act and other public programs.

Fuel dynamics is levered to benefit from those programs through increased steel joists and deck demand, flat and long product steel demand and the associated higher demand for recycled scrap and aluminum. In closing, there is no doubt our teams are our foundation. And I thank each of them for their passion and dedication. We’re committed to them. And I remind those listening today that safety for yourselves, your families and each other is the highest priority. Our culture and business model continue to positively differentiate our performance, leading to best-in-class financial metrics. We are no longer a pure steel company, but an integrated metals business providing enhanced supply chain solutions to the industry and, in turn, mitigating volatility in 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. We look forward to creating new opportunities for everyone, today and the years ahead. So with that said, Holly, I would love for you to open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question for today is coming from Martin Englert with Seaport Research.

Martin Englert: Quick question on steel conversion. Costs were estimated around $5.30 per ton in the fourth quarter and kind of average around there for the year. Looking ahead at 1Q, taking that point of reference into account, should we expect some decline there based on the ramping of Sinton further and some better fixed cost leverage?

Theresa Wagler: As the way that the information that you guys can use to back into our conversion costs, I know it’s a little difficult, but you hit the primary driver with Sinton and ramping up as significantly as we’re expecting them to do in the first quarter and as they are doing right now in January already, we would expect to see that overall as you calculate it conversion costs come down absent any other factors, correct?

Martin Englert: Okay. And any goalpost as far as when we think about what that could potentially decline on a sequential basis? And I understand there might be other offsets there with substrate that’s flowing kind of flowing through there as well. But.

Theresa Wagler: No, it is really hard for us to give you guidance, as you know, Martin, as it relates to the conversion costs as you’re calculating it. As conversion costs really stand within the steel operations themselves, the two conversion costs are very stable. We don’t expect to see a lot of movement except for Sinton again because of the additional volumes. The substrate does have an impact, as you mentioned, but we don’t expect to see that mix of processing versus production be dramatically different in the first quarter.

Martin Englert: Okay. If I could one follow-up on steel fabrication in the release, you noted improved activity as well as well price backlog extending through first half of ’24. On average, is the backlog price higher or lower than the fourth quarter ASP of $3,500 per ton?

Theresa Wagler: Martin, the backlog prices held in very steadily. There’s not a dramatic difference. And again, we don’t give specific sense to the backlog pricing for fabrication or for other operations. But the resiliency and the price, both what we’re seeing now and in that backlog is very steady.

Mark Millett: I would just add, in the fourth quarter, and our belief is that the fabrication is kind of troughed in large part. But in the fourth quarter, we had the highest order input rate of the prior six quarters. So volumes are — will turn. Obviously, you’ve got a little seasonality in Q1, but the expectation is things will go upward thereafter.

Martin Englert: Your comment on you believe that its trough, does that pertain to volumes or price or volumes and price?

Mark Millett: I would say that for sure, volume and pricing appears to have stabilized.

Operator: Your next question is coming from Tristan Gresser with BNP Paribas.

Tristan Gresser: The first one is kind of a follow-up on the fabrication guidance, maybe on the volumes. If we look at the shipments you had in Q4, it’s probably the lowest fab shipments we’ve seen in five years, and you mentioned you’ve seen that trough, but could you explain a little bit what is been holding you back there of late. And if we look at 2024, what kind of growth expectation do you foresee for the business? I know you provided some guidance last year on a half-on-half basis. So anything there would be helpful. That would be my first question.

Mark Millett: I guess, I would just leave it as already stated, the order input rate increased in Q4. That will flow through this year. You all have as you — I know you appreciate sort of seasonality in this first quarter with the winter months and construction being a little inhibited by the weather. But I think we will certainly see a turn into the second quarter and through the rest of the year.

Tristan Gresser: All right. That’s fair. And my second question is more on the CapEx hikes or the project budget hikes. I think you mentioned the aluminum, but I think the biocarbon project also the CapEx has been high. So what drove that? And when we look at this, let’s say, $300 million budget hike versus prior, how should it be spread out between 2024 and 2025. I know you provided some insight on the budget for 2024, around $2 billion but there is a significant drop in consensus expectation into 2025. So it’d be helpful to get a sense of how much is flowing into 2025 for those projects? And also, do you — when you look at this elevated CapEx budget for next year and your expectation for your several businesses, do you expect to be free cash flow positive for 2024?

Theresa Wagler: Thanks, Tristan. So the biocarbon project hasn’t increased in cost. It’s stayed put. It stayed the same. It’s $260 million. We did expect at one point in time to possibly get some tax credits that became unavailable once the definitions kind of became more precise from the administration. But otherwise, the capital cost of $260 million remains what we thought it would be. And that project is still online to be completed and to start before the end of 2024 which, as a reminder, is incredibly additive to our decarbonization path, and it’s going to really help our customer base as you look at the carbon content across our steel operations with the benefit of using the biocarbon. So incredibly excited and the team is doing a fantastic job in Mississippi getting that up and running.

So that will be spent primarily in 2024. And that $2 billion is a number that I would have given you last quarter as well. So that stayed the same for total CapEx in 2024. As it relates to the aluminum project, most of the incremental and it rounded to $200 million, but it was less than that in actuality. But most of that will be spent in 2024. So I gave you the spend for aluminum of about $1.4 billion. This year, and it would be our expectation. And then there would be a trailing, call it, $150 million to $200 million remaining to be spent in 2025 related to the aluminum projects. And so really nothing significant has changed on the capital front, except for that incremental addition in the aluminum project itself — I’m sorry, I forgot, I had to look at my notes.