Good day and welcome to the Steel Dynamics' Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that this call is being recorded today, July 20, 2021, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to David Lipschitz, Director of Investor Relations. Please go ahead.

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

Thank you, David, and good morning. Welcome to our second quarter 2021 earnings call. We appreciate your time and thank you for joining us today. The entire Steel Dynamics team delivered yet another phenomenal performance filled with operating and financial records, including record sales, operating income, cash flow, and adjusted EBITDA, a tremendous performance driven by the dedication and passion of our teams executing on our long-term strategies that will continue to drive higher through-cycle earnings. The team is delivering exceptional results and I'm very proud to be among them. Due to the continued commitment of our teams to one another, our families, and our customers, we continue to operate safely amidst COVID. The health and welfare of our teams is paramount, and I thank each of them for their continued commitment to safety. Record financial results are a little important unless everyone goes home safely at the end of each day. The number of injuries and associated severity improved in the first half of 2021 compared to last year. The teams have focused on reducing hazards and practices that could result in significant injury. Nothing is more important than the health and safety of our people. It is our number one value. Our safety performance continues to be significantly better than industry averages, but our intent will always be to have zero incidents. To achieve this, we must all be continuously aware of our surroundings and our fellow team members, keeping safety top of mind in order to take control of safety. Our commitment to all aspects of sustainability is embedded in our founding principles woven into the fabric of our Company, valuing the health and safety of our teams, partnering with our customers, supporting our communities, and minimizing our environmental footprint. An extension of this commitment is evidenced in our recent announcement concerning goals for greenhouse gas emissions reduction and renewable energy milestones, including a goal for our steel mills to be carbon-neutral by 2050. We've been a leader in the area of sustainability for more than 25 years, and we plan to stay right in that position. We are starting from a place of strength with already industry-low Scope 1 and 2 carbon emissions, yet we plan to do more. As we progress on this strategic path, we will plan to share our outcomes with you. But now, Theresa will share insights into our recent performance.

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

Super. Thanks, Theresa. I would just add a little more color to each operating platform. The steel-fabrication platform delivered a strong performance again, achieving record quarterly shipments and almost tripling sequential operating income. Based on the strength of steel joists and decking demand, increased product pricing more than offset the continued rise in steel input costs. Order activity continues to be extremely strong. We again ended the quarter with a record fabrication order backlog at levels considerably higher than historical peaks. The non-residential construction market is strong, especially in areas that support online retail, computing activities, and pharmaceuticals represented by the construction of distribution and warehouse facilities. We believe this dynamic will continue for the next several years as we see long-lasting changes in consumer behavior. As we mentioned last quarter, we've hired additional people and expanded operating hours at our several steel and fabrication locations in order to meet increased customer demand. These changes should increase annual production capability by well over 100,000 tons. Our metals recycling operations had an extremely strong quarter with quarterly operating income of $51 million. Strong ferrous demand and increased pricing related to higher domestic steel production drove strong performance. Prime scrap index pricing average increased $60 to $70 per gross ton during the quarter. Prime scrap generation has been solid based on strong North American manufacturing. We expect US scrap generation and alternative iron unit production to keep pace with the increased demand from steel-making in the coming years. Additionally, we believe China's scrap reservoir will grow considerably over the next three to five years, offsetting their expanding EAF capability while providing additional global raw material supply. We believe metallics pricing in general has peaked and scrap will remain flat in the coming quarters. The steel team had an outstanding quarter, continuing to achieve numerous operating and financial records, including record shipments of 2.9 million tons and record operating income of over $1 billion. While the domestic steel industry operated at a utilization rate of 81%, our steel mills operated at 91% during the second quarter, slightly lower than our first quarter rate of 93%. In June, we experienced the burn-through in one of our furnaces at our Columbus flat-roll steel mill. Importantly, no one on the team was injured. The resulting outage, though, lasted about 10 days impacting second quarter production and shipments by about 60,000 tons and 30,000 tons, respectively. Columbus is now again fully operational. Steel demand is strong across our entire steel platform. Our long product steel operations achieved increased shipments at all of their locations with the structural and rail division achieving record quarterly volume. The flat-roll steel markets remain especially tight. Strong demand, coupled with extremely low customer inventory levels across the supply chain, continue to support flat-roll steel prices above historical peaks. Customers are placing orders for immediate demand requirements and have not had the ability to rebuild inventory. Additionally, the speculative risk associated with the accumulation of higher-priced inventory is also a significant deterrent to procuring imports. We believe current legislated steel trade policies, such as the Section 201 cases imposed in 2015, 2016, and subsequent anti-circumvention restrictions, will continue to keep steel imports at moderated levels. The current US administration has also commented constructively concerning trade parameters and the issues created by China's steel making overcapacity. Regarding the ongoing negotiations between the US and the EU on revoking 232 tariffs, we expect the final agreement will include import surge protections to protect US national security goals. Aside from Turkey, Europe has never been a significant import source, and we have long thought collaborating with them against China and other Asian export-based economies that are the greatest contributors to global overcapacity is the most effective path to fair trade. From an end-market perspective, the automotive sector is operating at solid production levels due to low inventories coupled with strong consumer demand. Current build rate forecasts for 2022 and 2023 are at 17 million units, representing a very strong outlook. Auto inventories are 55% below the five-year average and at the lowest supply level in over 35 years. Additionally, at this point, we've been fortunate that our automotive order book has not seen any significant impact from the ongoing electronic chip shortage. The non-residential construction sector remains strong, as evidenced by our record structural and tail division shipments, record steel fabrication shipments, and strong long-product steel order backlogs. We expect this strength to continue through the rest of this year and into next. Residential construction has also been strong resulting in high demand for HVAC, appliances, and other related products. We're also seeing healthy demand from mining and yellow goods customers at our engineered bar products division. More recently, we're finally seeing some indications of an improved energy sector as global energy prices have improved. We've executed numerous strategic investments across the Company in the last several years and we continue to position Steel Dynamics for the future. We and our customers continue to be extremely excited about our Sinton, Texas electric arc furnace flat roll steel mill investment. It represents transformational, competitively advantaged strategic growth with associated long-term value creation for all of our stakeholders. It provides lower carbon-emitting, next-generation EAF steel production capabilities, new products, and new customers. The 3 million-ton state-of-the-art facility is designed to have product capabilities beyond that of existing electric arc furnace flat roll steel producers, competing even more effectively with higher carbon-emitting integrated steel facilities and high-carbon foreign competition. It provides us with a broader steel portfolio while providing our customers with an even larger climate-conscious supply option. The electric arc furnace production route is by far the most sustainable, environmentally-friendly supply chain, and the lowest carbon footprint. We are currently hot commissioning the 250,000-ton paint line and we expect the 550,000-ton galvanizing line with Galvalume coating capability to be operational next month. The entire Sinton team is doing a tremendous job, but due to excessive heavy rains experienced in Texas over the last several months, actual steel production at Sinton is not likely to begin until mid-fourth quarter of this year. Theresa shared our views concerning shipments and through cycle earnings capability of this new steel mill. It is truly a transformational project, and we are just at the edge of seeing the tremendous benefits it will bring to us, our teams, our customers, and our stakeholders. The Town of Sinton provides a strategic location near Corpus Christi with regional commercial markets representing over 27 million tons of relevant flat roll steel consumption in the US and Mexico as customers are excited to have a freight advantaged regional flat roll steel supplier. We currently have five customers committed to locate on-site representing over 1.5 million tons of annual processing and consumption capability. Based on our location with much shorter lead times, we can provide a superior customer supply chain solution. It also allows us to effectively compete with imports coming into Houston and the West Coast, which inherently have long lead times and speculative price risk. We've also made considerable progress concerning our raw material procurement strategy for Sinton. We completed the acquisition of a Mexican scrap company last August, a critical step. The operations are strategically located near high-volume industrial scrap sources throughout Central and Northern Mexico. They have an estimated annual scrap processing capability of almost 2 million gross tons, and we also acquired three smaller scrap locations in the Houston and Corpus Christi area, which we did in the last quarter. Our performance-based operating culture, coupled with our considerable experience in successfully constructing and operating highly profitable steel mills, positions us incredibly well to successfully execute this transformational growth. We're not simply adding flat roll steel production capacity, we have a differentiated product offering, a unique regional supply chain solution, a significant geographic freight, and lead time advantage, and offer an import alternative to a region in need of options. We also recently announced plans to add four additional value-add flat roll coating lines comprised of two new paint lines and two new galvanizing lines with Galvalume coating capability. Our preferred supply chain has resulted in our existing lines consistently running at full capacity through both increased consumption and market share gain. Two of the new lines will be in the Southern US region to support Sinton. The other two lines will be in the Midwest and will also be comprised of a new paint line and galvanizing line with a combined annual capacity of 540,000 tons. These lines will support our regional flat roll steel operations, providing them with more value-added product diversification to serve our customer needs. We currently believe these lines will begin operations in the second half of 2022. Our strategy consistently places value-added products and supply chain differentiation on the fore and has benefited us well. In closing, our business model and execution of our long-term strategy continues to strengthen our financial position through strong cash flow generation, demonstrating our sustainability and differentiating us from our competition. Additionally, our customer focus coupled with market diversification and low-cost operating platforms support our ability to maintain our best-in-class financial performance. Our amazing teams and the spirit of excellence are the foundation of that success. I thank each of them for their passion and dedication to one another and remember that your health and safety are always the most important issue at hand. So, thanks to all for being on the call today. I appreciate your listening, and now, Daryl, please open the line for questions.

Thank you. Our first questions come from the line of Emily Chieng with Goldman Sachs. Please proceed with your questions.

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

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

It also is being priced on current steel values, and so that appreciates the total project cost as well.

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

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

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

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

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

Thank you for that. Essentially, you're anticipating that margins will improve as scrap prices decrease and steel prices remain elevated. What might this mean for working capital? Cash generation has been robust, but working capital has been constrained due to consumer cash flow issues in the first half. Do you expect to maintain similar levels of working capital in terms of days for accounts receivable and inventory compared to what we saw in the second quarter?

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

All right. Excellent. Thank you very much.

Thank you. Our next questions come from the line of Sathish Kasinathan with Deutsche Bank. Please proceed with your question.

Yes, hi. Good morning, Mark and Theresa. Thanks for taking my questions. My first question is on the steel fabrication segment. The second quarter 2021 shipments were at record levels, but if you look at a quarter-on-quarter basis, the shipments were only up 3% despite the record backlogs and your guidance in April on adding more crews. So just wanted to get a sense of what was there, any weather-related impact in 2Q and how should we look at the shipment progression for the rest of the year?

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

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

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

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

Thank you.

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

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

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

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

Okay, that's helpful. Thanks. My second question is about the cost side. If we analyze conversion costs, it seems they have significantly increased. Can you discuss the reasons behind this increase? Is it driven by mix, or are there underlying cost pressures? Additionally, how should we project conversion costs based on what we observed this quarter moving forward? Thanks.

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

Okay, that's helpful. Thank you.

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

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

The simple answer is no. Demand is extremely strong across all our sectors. We can't produce enough steel. There is significant pent-up demand, especially in the automotive sector. Current inventories are at historic lows, and there is a clear need for products. Conversations with large dealers indicate they are struggling to meet demand and suggest it may take a couple of years to catch up. Therefore, we remain very optimistic for the rest of this year and into next year. There is no doubt about that. While there may be some uncertainty in people's minds, we are actively engaging with customers daily. We feel confident about our position and see strong potential moving forward.

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

Well, as many of you on the call know, I have a long-standing different perspective on the overcapacity situation. What many have not grasped is that the US is among the few, if not the only countries, facing a shortage of steel. Additional capacity is not the problem. In fact, our industry is on the right track. It needs to reinvest and acquire state-of-the-art equipment to remain globally competitive. If you look at China, 85% of its steel production capacity is less than 15 years old and modern. Therefore, our industry must invest continuously in electric arc furnace production methods for sustainability. In my view, when the industry has a production capability of around 95 million to 100 million tons and a normal market demand of at least 120 million tons, the issue lies not in production capacity but in imports and how we manage them. We believe the necessary tools are in place, with Section 201 providing a barrier even if the 232 tariffs diminish. So I am not worried about overcapacity at all. Some older, high-cost integrated facilities will likely remain offline, which should help mitigate the approximate 6 million tons of new flat roll entering the market.

Thanks, again for the questions.

Thank you. Our next questions come from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

Hey. Good morning. Congrats on all the progress.

Thanks, Phil.

Mark, I just have the first question just on the demand side with automotive and oil and gas. I know auto has been a strong kind of the first to lead us out of the whole last year, but recently, IHS has kind of taken down their forecast on demand and the semi-chip issues. Wondering just what you're seeing there in terms of pull from your customers? And then, secondarily, you did mention oil and gas getting better at the margin. Maybe just expand upon what you're seeing there and if your customers are trying to prepare you for a strong bounce back in 2022?

So again, Phil, based on our intelligence, people are expecting a 17 million ton build rate this year and next year. That's an incredibly strong figure. As I mentioned, when we talk to the dealers and examine the inventories, there is a pent-up demand that will support this. The chip shortage may be slowing shipping capabilities for some, but very few of our auto platforms have been affected so far, which has put us in a fortunate position. While chip shortages may cause some delays, the demand remains strong and will continue to drive this remarkable cycle we are experiencing.

And then, on the oil and gas side, Mark?

Yes. Theresa whispered that across, sorry.

No worries, not in hurry.

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

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

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

Terrific. Thanks so much. Appreciate it.

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

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

Good morning. Thank you for the question. That was quite detailed, and I'm not sure I can address everything right now. There are some topics we cannot discuss at the moment, but they're very exciting regarding renewable energy. We will be investing in efficiency projects and working towards more renewable energy and carbon reduction. Currently, we don’t have estimates to share because several projects are still being evaluated. We will provide updates as we progress. It is important to note that we are committed to being transparent in our efforts to meet our carbon and renewable energy goals. We have a clear plan for achieving our targets for 2025 and 2030, and once we're able to share details about these projects, we certainly will, but for now, it’s too early to provide specifics.

All right, no problem. And maybe a follow-up on raw material. Can you talk a bit about how your raw material strategy will evolve in both the context of capacity expansion, but also decarbonization as it has an impact on, for instance, Scope 3? How do you think your raw material mix will evolve in the coming years? Thank you.

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

No, I believe we are successfully implementing our plan that has been established for a while. We are fortunate to have a strong foundation through our omni-source recycling platform, which has the capacity for about 6 to 7 million tons. Therefore, securing a supply of scrap will not be a problem for us. Additionally, we are enhancing that capacity in Mexico, and some of those tons will be directed to Sinton and our Columbus mill. So, we are in a solid position regarding scrap. As Theresa mentioned, we are using hot-rolled pig iron and have recently increased our usage. We also have iron direct reduced iron, which is very effective for our Butler mill, producing around 260,000 tons of liquid iron annually fed into our electric arc furnace. It's important to note that across our steel platform, pig iron constitutes less than 8% of the total input. While it has an impact, it's not significant.

Thank you.

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

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

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

So, there could be a big project before 2024, 2025, or a transaction?

We don't anticipate a project similar to Sinton in the near future. However, there is potential for meaningful transactional activity.

Thank you very much, and congratulations on $3 billion annual rates, amazing for profits.

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

Thank you. Our next questions come from the line of Michael Glick with JPMorgan. Please proceed with your questions.

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

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

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

Michael, we won't go into the specifics of the spreads. However, we can tell you that they are determined based on mid-cycle levels, which are not reflective of current conditions. We start with a mix of base hot roll and prime scrap spreads and then develop the value-added product mix from that point. Our approach is informed by historical data as well as future market expectations on a mid-cycle basis. While we cannot provide specific spread figures, our expectations indicate that the volume will function similarly to our Columbus and Butler facilities, meaning production and shipments will likely be at or near capacity on a mid-cycle basis.

Got it. Thank you.

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

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

Yes, Sinton is expected to provide a tax shield this year as we are able to expense that successive investment. It could shield over $350 million. However, our strong earnings mean we will still incur tax payments this year, and we estimate our effective tax rate to be around 15%. Regarding working capital, Sinton is likely to build working capital starting operations in the next six to nine months, estimated at between $150 million and $200 million. Aside from that, I expect our other operations' working capital to remain fairly stable since our volumes have already increased and pricing has been strong. Therefore, I do not anticipate significant changes in working capital.

Great, thank you. That's helpful. And then, just in terms of opportunistic use of cash flow, you have $1 billion of cash on the balance sheet. You're going to continue to generate cash going forward. You've obviously done a nice job outlining the various ways you can use that cash, but I guess my question is, do you think it's prudent to keep a solid cash balance there should an opportunity arise, or should the market turn at some point just so that you have the ability to go out and make these transactions?

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

I would just add that our growth over the years has always been very intentional and disciplined. We will not engage in transactions at outrageous valuations. We always consider long-term sustainability. Therefore, if we were to pursue a transaction today, it would be a solid investment over the long term, rather than relying solely on the high profitability that some might currently enjoy.

That makes sense. I think you've shown that as you've grown this business, it's not always straightforward. My final question is related to something you mentioned earlier, Mark. Considering that the US market has been in a deficit for years, do you believe that domestic producers will eventually adapt to meet that demand, or will we always rely on imports?

I think there will always be some level of imports. It has been a long time since imports were minimal, probably since the mid-70s or 80s. We won't be a country that completely meets its demand domestically. Imports will always be present. Currently, about 20% of demand is met through imports. We don’t need 30 million tons or 30% of our demand satisfied by imports. Much of the current discussion has focused on the near term, around six to nine months into next year. However, people may not recognize that the industry is transitioning. There are paradigm shifts happening that will lead to better market health and higher margins in the future. Today's leadership mindset emphasizes consolidating and rationalizing assets to increase shareholder value, which should strengthen the market long term. The USMCA has changed market dynamics for us, particularly with European automakers shifting from imports to domestic sourcing, which has greatly benefited us. The market in this country is undeniably changing, and as I mentioned earlier, it will require more capacity, modern technological capabilities, and low-cost, sustainable production methods. I have no fears about the necessary capacity coming online; it is needed and will significantly benefit the North American manufacturing sector in the future.

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

Thank you.

Thank you. That does conclude our question-and-answer session. I would like to turn the call back over to Mr. Millett for any closing remarks.

Thank you, Daryl. I want to extend my gratitude to everyone still on the call for listening to our insights today. It was an outstanding quarter, and we believe that the next quarter will be even better. This outlook is fueled by positive market conditions and, more importantly, by our exceptional steel metals team. They are a remarkable group of individuals. We have about 10,000 people here, and if you count their families, the SDI family includes roughly 25,000 people who all play a role in our success. I want to thank each one of them and also express our gratitude to our customers. We cannot succeed without your loyal support. We appreciate it immensely, and we wish we could do even more to meet all your needs, as we are currently facing challenges in that regard. Thank you, everyone. Have a great day, and stay safe.

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