Steel Dynamics Inc Q4 FY2021 Earnings Call

Good day and welcome to the Steel Dynamics' Fourth Quarter and Full Year 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 this call is being recorded today, January 25th, 2022, 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.

Thank you, Kate. Good morning and welcome to Steel Dynamics' fourth quarter and full year 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 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 that actual results to 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 heading Forward-Looking Statements and Risk Factors, some on the Internet at www.sec.gov and is applicable in any later SEC Form 10-Q. You will also find any reference to non-GAAP financial measures reconciled to the most directly compared GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Record Fourth Quarter and Record Full Year 2021 Results. Now, I'm pleased to turn the call over to Mark.

Thank you, David, and good morning, everybody. Happy 2022. Welcome to our fourth quarter and full year 2021 earnings call. We all appreciate your time and thank you for joining us today. The entire Steel Dynamics team delivered an exceptional performance in 2021 with record sales, earnings, and cash flow generation. The team totally surpassed the previous full year records. It was a tremendous achievement certainly supported by a strong market, but driven by the commitment and passion of our teams executing on our long-term strategies that continue to grow through the cycle and the capability. Thank you, team, for your dedication to excellence in every pursuit. I'm proud to work alongside you. Due to the steadfast commitment, our people helped one another and their families to our communities and to our customers, we are operating safely amidst the extended pandemic. The health and welfare of our teams remain paramount. Record financial results are not important while teams did not remain safe. Although our safety performance continues to be better than industry averages, our safety performance deteriorated year-over-year. This is an unacceptable trend that we're working diligently to resolve as our intent will always be to have zero incidents. Since our founding over 25 years ago, we've been intentional in managing our resources sustainably for the benefit of all of our stakeholders. We are a steel industry leader in sustainability, operating exclusively with electric arc furnace technology with a differentiated circular manufacturing business model. As our journey continues, we are committed to the reduction of our climate footprint, including a practical and achievable goal for our steel mills to be carbon neutral by 2050. We're starting from a position of strength, yet we plan to do more. We're competitively positioned and focused on generating long-term sustainable growth. But before I continue with additional market commentary, I'd like Theresa to share insights into our recent performance.

Thank you, Mark. Good morning, everyone. Good to be with you. I'd like to add my sincere appreciation and congratulate the entire team. We continue to achieve new milestones throughout the business, attaining record annual performance, with record revenues of $18.4 million derived from strong product pricing and volumes across all of our operating platforms. Record operating income of $4.3 billion and net income of $3.2 billion or $15.56 per diluted share and record cash flow from operations of $2.2 billion and adjusted EBITDA of over $4.6 billion, truly an exceptional performance. Regarding our fourth quarter 2021 results, net income was $1.09 billion or $5.49 per diluted share, which includes additional performance-based company-wide special compensation of approximately $21 million or $0.08 per diluted share, which was awarded to all non-executive eligible team members in recognition of their extraordinary performance. Our fourth quarter contribution to the company’s charitable foundation is $10 million or $0.04 per diluted share and costs of approximately $52 million or $0.18 per diluted share associated with the construction and startup of our Sinton, Texas flat roll steel mill. Excluding these items, fourth quarter 2021 adjusted net income was over $1.15 billion or $5.78 per diluted share. Our fourth quarter 2021 record revenues of $5.3 billion were 4% higher than sequential third quarter results, driven by higher realized selling values in our steel fabrication business and our flat-rolled steel operations. Our fourth quarter 2021 record operating income of $1.4 billion was 8% higher than sequential results, driven by the continued demand trends at our steel fabrication operations. As we discuss our business this morning, we see positive industry fundamentals for 2022, and we're focused on our continued transformational growth initiatives. Our steel operations generated record operating income of $1.4 billion in the fourth quarter, as increased realized selling values expanded margins across the steel platform, offsetting seasonally lower volumes. Our lagging flat rolled contract business represented approximately 80% to 85% of our total flat roll volume in the quarter. We had quarterly steel shipments of 2.7 million tons, with our steel mill operating at 88% of their capability. For the full year 2021, our steel operations achieved numerous financial and operational milestones. The platform's full year operating income was a record $4.4 billion, with record shipments of 11.2 million tons, a truly phenomenal performance. Now to remind you, we still have additional market opportunity, mostly within our long products group and in line with the startup of our Sinton, Texas mill. Because based on our existing annual steel shipping capability, we have over 13 million tons of shipping capability on the steel side and with Sinton fully ramped, it will be over 16 million tons. Operating income from our metals recycling operations for the fourth quarter remained strong at $44 million, based on the improved metal margins offsetting lower share of shipments. Many domestic steel mills have planned maintenance outages throughout the fourth quarter, lowering various scrap metals. For the full year 2021, operating income for metals recycling operations was a record $195 million driven by uniquely higher volume and average selling value for both ferrous and non-ferrous recycling. The team continues to effectively leverage the strength of our circular manufacturing and operating model, benefiting both our steel and metals recycling operations by providing higher quality scrap, which improves furnace efficiency and reduces company-wide working capital requirements. Our steel fabrication operations also achieved record operating income in the quarter of $238 million, 2.5 times record third quarter results, driven by materially higher realized selling value, which more than offset escalated average steel input costs. For the full year 2021, our steel fabrication platform achieved another record year with operating income of $365 million and record volumes of 789,000 tons, both steel sheets. Congratulations to the team. Steel joist and deck demand remains very strong as evidenced by continued robust order activity, resulting in another record order backlog in the quarter, extending throughout 2022. Based on our backlog and customer sentiment, we expect steel fabrication earnings to continue to increase into 2022. Our cash generation continues to be strong based on our differentiated circular business model and highly durable cost structure. At the end of the fourth quarter, we had liquidity of $2.4 billion comprised of cash of $1.2 billion and our fully available and secure revolver of $1.2 billion. During the fourth quarter of 2021, we generated record cash flow from operations of $724 million and $2.2 billion for the full year, also a record. Working capital grew $1.7 billion during the year due to higher selling values resulting in increased customer account and inventory value. During 2021, we invested $1 billion in capital investments, of which $831 million was invested in our new Texas flat rolled steel mill. During 2022, we believe capital investments will be in the range of $750 million, the majority of which relates to four new flat-rolled coating lines to be placed in Sinton and Heartland. Regarding shareholder distributions, we maintained our quarterly cash dividend of $0.26 per common share after increasing it by 4% in the first quarter of 2021. We also repurchased $330 million of our common stock in the fourth quarter, representing 3% of outstanding shares. At December 31, we had $383 million remaining on the price for repurchase under that program. In the past five years, we've increased our cash dividend per share by about 86%, and we repurchased $2.3 billion of our common stock, representing 23% of outstanding shares. While during the same timeframe, we achieved an investment-grade credit rating and maintained our growth company profile by investing $3.1 million in organic capital investments and funding various initiatives. These actions reflect the strength of our capital foundation and consistently strong cash flow generation 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 profile that is complemented with a variable share repurchase program, while also dedicated to preserving our investment-grade credit designation. We are squarely positioned for the continuation of sustainable, optimized long-term value creation. Sustainability is a part of this strategy, and we're dedicated to our people, our communities, and our environment. We're committed to operating our business with the highest level of integrity. Further committing to this path, in 2021, we announced greenhouse gas reduction and renewable energy goals, including a goal for our steel mills to be carbon neutral by 2050. To increase transparency and accountability, we also have interim milestones for 2025 and 2030. We've led the steel industry with an exclusive use of electric arc furnace steelmaking technology, circular manufacturing model and innovative solutions to increase efficiency, reduce raw material usage, reuse secondary materials and promote material conservation and recycling. We plan to sustain our leadership position by executing our climate 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. We have an actionable path that is more manageable, and we believe, considerably less expensive than what may lay ahead for our traditional blast furnace industry peers. Our sustainability and climate strategy is an ongoing journey, and we're moving forward with the intention to make a positive difference. We play an industry leadership role moving forward.

Super. Thank you, Theresa. And as you said, our steel fabrication operations performed exceptionally well throughout 2021, achieving record volume and earnings. The earnings power of this platform in a strong construction environment is yet to be completely displayed. At the end of the year, our steel joist and deck order backlog was at a record level for both volume and forward pricing, extending through March of 2022. The nonresidential construction market remains sound, especially in areas that support online retail, data centers, schools, and health care, specifically represented by construction of distribution warehouse facilities. Our steel fabrication operations provide a powerful natural hedge to our steel production operations in a steady or softening steel price environment. Our metals recycling operations also performed well this year, achieving record annual earnings and strong volume growth. The acquisition of a Mexican metals recycling company in August of 2020 has proven to be both strategic supply and an excellent investment, combining a great financial result with the additional benefit of growing access to prime scrap at North Central Mexico in support of our southern electric arc furnace at flat roll steel mill. The metals recycling footprint provides a strategic competitive advantage for our steel mills and our scrap-generating steel customers. We have ample access to ferrous scrap supply, including prime scrap and believe this will remain the case in the future. The steel team had an incredible year, achieving record volume and also record earnings of $4.4 billion, which eclipsed previous peaks. During 2021, the domestic steel industry operated at a production utilization rate of 81%, while our steel mills operated at a rate of 91%. We consistently operate at a higher utilization due to our value-add steel diversification, our differentiated customer supply chain solutions and the support of our internal manufacturing businesses. As we suggested during our last earnings call, new capacity and moderate import growth is pressuring hot-rolled coil prices. Supply-side issues have largely been resolved and lead times are back to manageable levels after ballooning post-COVID as manufacturing steel demand recovered much more fruitfully than expected by the industry. Hot-rolled coil pricing has moderated. But contrary to recent alarmist commentary, the magnitude of the price correction is in no way connected to any material change in overall demand. Inventory levels have certainly normalized to pre-COVID levels but are more than appropriate for the present demand environment. December MSCI shipments dropped to approximately 2.4 million tons, but this is consistent with typical seasonality, not an abnormality. Monthly import levels have undergone controlled growth in recent months as the arbitrage expanded. But as anticipated, there's been no surge. The recent hot-rolled coil price declines should effectively eradicate import volume growth in the months ahead. These are natural market adjustments and are not structural changes. Hot-rolled transactions are currently consistent with published index numbers in the range of $1,300 to $1,400 per ton. There are a limited number of large-volume spot hot band offerings that can be procured at lower numbers, but these are not prevalent or reflective of the market in general. One must recognize that the spot comp and market has diminished in size over recent years as contract businesses increased across the industry. Therefore, it's not necessarily a true indicator of the whole market. Current hot-band spot offers are based on import values today, which are quickly drying up as the arbitrage strengthens. Traders are reportedly finding it difficult to execute any business for second-quarter delivery. Throughout our history, we have intentionally grown our value-added steel product portfolio and created valuable customer supply chain solutions to mitigate the impact of price volatility. Today, over 70% of our steel sales are considered value-add. This differentiated business model will continue to provide best-in-class financial metrics and through-cycle cash generation. Looking forward, we remain steadfast in our optimism for 2022. After a short period of seasonally lower steel demand in November and December, our flat-rolled order input rate in January was one of the best months ever. And backlogs are very healthy. Automotive sector steel consumption should grow year-over-year as the chip shortage eases, fueled by an extreme lack of dealer inventory, which is 60% lower than normal, and strong pent-up demand. The automotive sector operated at production rates lower than normalized levels in 2020 and 2021, around about 13 million units, and is expected to grow to 15 million units this year and 17 million units in 2023. Nonresidential construction sector is strong as evidenced by the strength of shipments and backlogs at our structural and rail division and steel fabrication businesses. Residential construction has also been reversed, resulting in high demand for HVAC material, appliances, and other related products. Stronger energy prices are now pushing up the rig count and associated new pipe production. In aggregate, our steel backlogs and our order input strength, coupled with broad optimistic customer commentary and general market momentum, drive us to conclude that steel market dynamics will remain strong through 2022. We anticipate steel demand increasing year-over-year, and with a likely retraction of import volumes possibly a moderate rebound in pricing. Steel Dynamics is a dynamic growth company, increasing through-cycle earnings and cash flow to support continuous value creation. Our new Sinton, Texas flat roll steel mill represents our most significant investment to date, providing the avenue for transformational growth and opportunity for ourselves and our customers. This differentiated investment facilitates significant through-cycle operational and financial growth for all of our stakeholders, from our teams and customers, to our vendors and shareholders. This EAF steel mill represents next-generation lower carbon-emitting steel production capabilities, providing differentiated products and supply chain solutions. The 3 million tons state-of-the-art facility is designed to have product capabilities beyond that of any existing electric arc furnace flat-rolled steel producer, competing even more effectively with higher carbon-emitting integrated steel facilities and high carbon from our competition. It provides us with a more diverse steel product portfolio and benefits our customers with an even broader climate-conscious supply option. The Sinton construction team has experienced numerous challenges related to supply chain disruptions and COVID impacts. These challenges resulted in hot-side production shifting from the end of 2021 to a class start before the end of February 2022. The Sinton group navigated through the challenges as well, and we are on the verge of seeing the significant benefits this facility will generate. Sinton's strategic location is centralized in an underserved steel consumer region and represents over 27 million tons of relevant flat-rolled steel consumption in the US and Mexico. These customers are excited to have a freight-advantaged regional flat-rolled steel supplier. We have six customers committed to locating on our site, representing up to 1.8 million tons of annual flat-rolled steel processing and consumption capability. Five of these customers have already broken ground. We can offer shorter delivery times, providing a superior customer supply chain solution to the region. We will also effectively compete with steel imports arriving in Houston and the West Coast, benefiting our customers in these areas with lower logistics costs, removing risks associated with ocean transit, quality, and delivery. We have also made considerable progress in setting our raw material procurement strategy to the mill. As I mentioned, the acquisition of a Mexican metals recycling company is a critical source of prime scrap supply. They are strategically located near high-volume industrial scrap sources throughout Central and Northern Mexico and have already done a great job growing volume with a lot more to come. Sinton is not simply adding flat-rolled 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 a sustainable alternative to imports in a region in need of options. We're also going to build four additional value-added flat-rolled coating lines comprised of two new paint lines and two new galvanizing lines with Galvalume coating capability. Our unique value-added coating supply chain strategy has resulted in our existing lines consistently running at or near full capacity. Our existing customers are anxiously awaiting the volume from these new lines. One galvanizing line and one paint line will be located on site at Sinton, while the other two lines will be placed at our Heartland Flat Roll division located in Terre Haute, Indiana. Each site will increase flat-rolled capacity by 540,000 tons to further support our regional flat-rolled steel operations, providing them with more value-added product diversification to serve our customers. We expect these lines will begin operating in mid-2023. In closing, our unique culture and the execution of our long-term growth and capital allocation strategy continue to strengthen our financial position through strong cash flow generation and long-term value creation. Our sustainable, symbiotic operating platforms and customer-centric supply solutions demonstrate our financial and operating stability, differentiating us from any competition. We're excited to continue our growth with new value-creating opportunities. Our people and the spirit of excellence provide the foundation for our success. I thank each of you for your passion and dedication and remind you that safety is always our most critical priority. So, everyone, thank you for joining us today and, Kate, will you please open the line for questions?

Thank you. We ask that you please limit yourself to one question to allow time for everyone. Any additional questions can be addressed upon reentering the queue. Our first question today is coming from Michael Glick at JPMorgan Securities. Your line is live, you may begin.

Good morning. In your fabrication segment, could you give us a bit more color about how we should think about the trajectories of both pricing and margins moving through the year? Any ranges there would be helpful. Thank you.

Good morning, Michael. So I think on the last quarter call, we mentioned that we have firm expectations that the fabrication business is going to earn more earnings in the first half of 2022 than in the second half of 2021. We believe we’ll invest firmly in that. So as I mentioned in my remarks, there is an expectation that we see another improvement in the first quarter and in the second quarter as well based on the backlog. So there's more visibility in fabrication, because the backlog is still lengthy, but also because of the pricing that we're seeing that we're able to achieve, as demand remains incredibly strong. So as far as specifics, it's hard to give specifics. I will just tell you that the first quarter will definitely be, I think, meaningfully higher than what we saw in the fourth quarter and, again, another step function increase in the second quarter as well.

Got it. That’s helpful. Thank you.

Thank you. Our next question today is coming from Emily Chieng at Goldman Sachs. Your line is live.

Good morning, Mark and Theresa, and thank you for the update today. My question is just around growth. Now that Sinton is coming towards the end there, and you've got a couple of coating lines and galvanizing lines in the hopper, how do you think about other greenfield growth potential in your portfolio, particularly as it relates to the rebar segment? Do you have a view as to whether or not you need to see further capacity growth in the long product side from Steel Dynamics? Thank you.

Well, thank you, Emily, for your question. I think we will continue to demonstrate our sort of organic growth opportunities. In all honesty, rebar is not a focus of ours. It certainly has given us diversification in our structure and rail division and Roanoke Bar division, and we'll flex that as markets go up and down. But that rebar is not a target, so to speak, of any major growth. We will continue to grow in the value-added business. Obviously, I think we've demonstrated that the strategic path has been very intentional and very, very profitable for us. And more importantly, it allows us that diversity of product mix to sustain higher utilization levels through the cycle. So I think that there's still opportunity to further value-add processing on the flat rolled side of things. Additionally, though, it's an intriguing marketplace out there, and we're seeing a pipeline that is full of transactional opportunities today as well.

Great. That’s very helpful. Thank you.

Our next question today is coming from Timna Tanners at Wolfe Research. Your line is live.

Hey, good morning and Happy New Year.

Happy New Year.

Thanks. Happy New Year. I want to ask a little bit more about what you're seeing in the first quarter in terms of volumes. Clearly, the softer spot market that prevailed, as you mentioned in the fourth quarter, with some of the lighter volumes has spilled over a bit to the first quarter. And wondering any early thoughts about what that could mean for shipments quarter-over-quarter. Any thoughts on what's driving that and what might cause that to stabilize? Thanks.

Well, I think we certainly saw the seasonality. And as I said earlier, there is one headline that MSCI shows that 17% compared to August and December. Well, if you look at it each year in history, it always does that. And it's just the seasonal adjustment is going to sort of disappear in the first quarter of the year. The shipping volumes we would anticipate will increase accordingly.

Do you expect a normal increase from the fourth quarter to the first quarter in your shipping volumes across the board?

Pretty much, yes.

Okay. Interesting. Thanks.

Again, we’re not observing that individuals are correlating some pricing softness with demand. As I mentioned earlier, demand from our perspective is exceptionally strong and is expected to remain that way throughout the year.

The only thing I would add just to that, Timna, that we actually experienced at the end of the fourth quarter some logistics issues as well, like I'm sure people are experiencing outside the steel industry as well as trucking and rail, and things have been disrupted. So there were shipments that we expected to actually deliver in December that we're not able to be delivered. So it's more of a timing issue. So that's going to benefit the first quarter as well.

Okay. I’ll get back in the queue. Thanks.

Thank you. Our next question today is coming from Seth Rosenfeld at Exane BNP Paribas. Your line is live.

Good afternoon. If I can follow-up, please, with the outlook for free cash flow and in particular the role of working capital. Obviously, the last year, in particular, Q4, saw a lot of investment in working capital. There were some delays to the Sinton ramp-up. Wondering if that was one reason particularly elevated investments in Q4. And with that in mind, can you give us a bit of color on expectations, both outcome in Q1 and for the year ahead? Is it reasonable to assume that with Sinton ramp-up and a slight decline in ASPs for sheet, we could expect a meaningful working capital release? Thank you.

Good morning, Seth, thanks for the question. So yes, working capital, we did see significant growth during 2021, most of which is associated with the value growth in our steel products and in the increased volume and product pricing growth in our fabrications business. Sinton, at the end of the year, had about $150 million of working capital, and we would expect to see that grow by probably end of the year $50 million during 2022. So in the first half of the year, there's still some structural growth attached to that. But otherwise, as we see product pricing fees and we see the strength in volume, so we would expect to see valuations come down, which should have a pretty significant working capital release during the entirety of the year. You might not see as much of it in the first half, but definitely in the second half of the year.

Okay. Thank you very much.

Thank you. Our next question today is coming from Andreas Bokkenheuser at UBS. Your line is live.

Thank you. Just a question on inflation. I mean, obviously, it's a bit of an inflationary environment. How are you kind of thinking about inflation this year? Is there anything you kind of got on the table that can kind of mitigate inflation and looking at energy, even scrap? I mean, you've already integrated some scrap yards. Is there room for more scrap yard integration and acquisition there? That's the question on inflation. Thank you very much.

I think we can't comment on the overall effects of inflation on the domestic economy. However, concerning Steel Dynamics, our impact is not significant. Scrap will eventually enter the marketplace, but in terms of conversion costs, we're fairly well managed. We have experienced some cost increases, particularly with zinc over the past 12-18 months, but most of that has been passed on. The hourly costs at our engineered bar division are higher than at other mills, and again, those costs are generally transferred to our customers. Therefore, we are not facing a substantial inflationary effect on our cost structure.

I would add that, as it relates to wages, many people are experiencing a significant increase because a large portion of our team's compensation is performance-based, which naturally fluctuates. Therefore, we're not experiencing the same pressure from wages, as much of the performance bonus compensation is structurally in place. I think Mark said it well when he noted that we’re not facing a lot of pressure with costs that are passed on to the customer.

I have one more point to add. We may have mentioned this in the previous call, but it's truly impressive how our teams across the organization continue to achieve record productivity. Over the years, we have noticed that our conversion costs remain remarkably stable, as the increased volume helps reduce our fixed and overhead costs, which offsets any inflationary pressures on materials like alloys. Just last November, we conducted a study with our Board, and it was astounding to see how stable our conversion costs are throughout the business cycle.

So your performance-based structure is a good point. Thank you very much. I appreciate the insight.

Thank you. Our next question today is coming from Curt Woodworth at Credit Suisse. Your line is live.

Yeah. Thanks. Good morning, Mark and Theresa. First question is just with regards to the Sinton ramp-up. I was wondering if you could help us understand the cadence of volume growth in the next couple of quarters and what level of start-up costs we should expect. And then you noted, I think, $1.8 million of on-site captive supply. When would you expect that to be fully functional?

We are expecting to finalize the last piece of the puzzle in the coming days, possibly within the next week, making it challenging to predict the specific ramp-up over the next three months. However, we believe we can demonstrate our performance comparable to others who have signed on in the past five to ten years. We are aiming for at least two million tons of shipments this year, reaching our essential capacity by the late third or likely the fourth quarter.

Okay. And then in terms of the on-site supply, when would you expect that to be at that consumption rate?

I believe the operations will align with our mill. Currently, we have one facility running, and a large facility will be operational in the coming months. While it wasn't completely intentional, these facilities are set to ramp up alongside the steel mill. Regarding value-added production, our paint and coating lines have been performing exceptionally well. The Galvalume capability will be available soon, in a couple of weeks. Our finishing facilities have also done very well, and the hot strip mill is nearly commissioned. We have procured slabs from third parties and used our own intermediate slabs, which we preheated in the tunnel furnace and successfully processed through the mill. Many of the components are in great condition; we're just waiting on cash flow.

Okay. And then my follow-up is just maybe get a little bit more color on market dynamics the last few months. I mean, it seems like between COVID, seasonality, destocking, rising supply, there's a lot of moving pieces here. And it seems like you're indicating that your January order book definitely strengthened relative to November and December. I think you had a comment that you said that inventories were normal, but some service centers saying they've got way too much, others don't. So I'm just curious, is your sense that the inventory level in the industry is generally getting rightsized pretty quickly at this point? And then in terms of the volume trends you saw in the fourth quarter, was it more concentrated on, say, the service center side of your business or on the OEM side? Thank you.

I believe that inventories have returned to normal levels based on historical trends. If you review the past five to six years, and even further back, the levels are appropriate. They have indeed increased from a historically low point, and we think they are suitable for the current demand cycle we are experiencing. There is a slight lull that we are navigating through, and having gone through several cycles in the past equips our team with valuable experience. The industry came to a standstill during COVID, but things ramped up quickly afterward, leading to some chaos as we all worked to catch up. Once we did catch up, however, the industry tends to overshoot a bit. In November and December, we observed this overshoot as customers received supplies from multiple mills at once. This was particularly noticeable in the automotive sector, leading to some softness, especially in hot band. However, this situation will stabilize. We do not anticipate any changes in the underlying demand for steel in the near future, and we believe the recent spike in supply is seasonal. Overall, we remain very optimistic for 2022.

Thank you. Our next question today is coming from Carlos De Alba at Morgan Stanley. Your line is live.

Thank you very much. I would like to follow up on the previous point. How do we reconcile the fact that lead times in the industry and information on product availability have been decreasing? However, you mentioned that you are very positive about your order book and demand expectations. Is this just a recent uptick in supply that will now be taken up by demand, or is Steel Dynamics gaining market share against competitors, which might explain the difference between what you're seeing and the industry statistics available to us?

I believe we are definitely seeing an increase in market share in certain areas, especially in the automotive sector. We've made significant progress with automotive manufacturers that weren't as affected by the chip shortage compared to US domestic producers. So, we are gaining some incremental market share there. Additionally, we have highly supportive and loyal customers who will continue to place orders with us during these times. Our business model, with our diverse product portfolio and unique supply chain solutions in our coated and prepainted business, is distinct and provides significant value to our customers. These sectors remain robust, and we anticipate that the coated value-added market will continue to be very strong in the future. For now, we are experiencing a bit of seasonality and some catch-up moments that have put pressure on spot prices. It's important to consider that the increase in import volumes over the past few months has been driven by substantial arbitrage opportunities, which I expect to moderate as the arbitrage narrows. From what we hear from traders, they're facing challenges sustaining their business into the latter part of the second quarter this year. If imports decrease, we could see renewed demand pressure, and it wouldn’t be surprising if pricing rebounds slightly.

All right. Excellent. Thank you very much, Mark.

Thank you. Our next question today is coming from David Gagliano at BMO Capital Markets. Your line is live, you may begin.

Great. Thanks for taking my questions. I'll just ask a couple of quick ones here. Just on the commentary around 85% of flat roll lagged pricing in the fourth quarter. Can you just give us a sense so we can tighten up the models a little bit for first quarter? What was that average lag duration wise? And are those reasonable proxies for the first quarter as well?

Yes. The contract business, David, in the fourth quarter was at 80% to 85%, and it's likely to stay in that range at least through the first half of the year, as we're servicing our contract customers. And then, as Sinton comes online more strongly in the second half of the year, that's naturally going to decline to a certain degree, just because of the shift in mix. But we're expecting that to be maintained. As it relates to the lag, it's really about, on average, a two-month lag on the flat roll pricing, and it's generally tied to the CRU index.

Okay. And that's a reasonable proxy for the first quarter as well, two-month lag?

Yes. Correct.

Okay. Perfect. Thanks. And then just last question for me. The CapEx, it went up a little bit, 700 prior guide to 750, what was the reason behind that?

Well, it is simply that we went through the extensive study that we do every year, and that generally takes place in the November time frame. So we proved additional projects, and those projects, as kind of attested to by our return on invested capital metrics, are really efficiency and growth-oriented, but they're just smaller in nature. So there's nothing individually to call out for the reasons we increased. They're just some really nice projects came to light.

Okay. Perfect. It’s helpful. Thanks.

You’re welcome.

Thanks, David.

Thank you. Our next question today is coming from Phil Gibbs at KeyBanc Capital Markets. Your line is live.

Yes. Thanks very much. Good morning.

Good morning, Phil.

Hi, Theresa, can you provide the sheet shipments by product grade?

I apologize. I'm smiling because I did miss that. The hot mill and P&O shipments for the fourth quarter were 693,000 tons. Cold rolled was 136,000 tons. And finally, the coated products were 994,000 tons.

Perfect. Last quarter, you mentioned that yellow goods had a decent outlook, and we know your thoughts on automotive. What do you think the future holds for SBQ this year and engineered bar?

I think for Engineered Bar is relatively steady. I think we'll gain some volume as automotive picks up is again 15%, 20% for auto with Engineered Bar, I do believe. So they're going to gain on the automotive side. They are going to lose a bit of volume, not much. As hot band has come off, folks are switching from seamless pipe over to ERW pipe. And so there was a little bit of volume there. For us, though, generally, that's going to benefit. We're already seeing the benefit then in Columbus, to be honest, as we're picking up energy orders there in one large mill – pipe mill is starting back up.

Can you talk about those dynamics a little bit more on the energy side in terms of the switch that it have to do with the trade case that was filed?

From our understanding, it is primarily a cost issue. The expense of using Engineered Bar and producing seamless pipe has increased since the hot band pricing changed. Consequently, many are opting for ERW pipe instead.

Thank you so much.

Thank you. Our next question today is coming from Andrew Cosgrove at Bloomberg Intelligence. Your line is live.

Hi. Thanks for taking my question. I know you said conversion costs have been kept in check and the team has done a pretty good job. I was just a little bit curious as to if you take the raw material spread and then the excess on top of that. It looks like it ticked up 10% to 15% quarter-on-quarter. I was just curious if that anything to do with having to buy more hot band because Sinton was not up and running and the finishing lines were or anything else that you could add on that particular front?

Great question. Yes, the conversion costs are being managed effectively through our specific lines. Currently, we are purchasing approximately 1.7 million to 1.8 million tons of substrate from external sources to support our operations in Pittsburgh, including some third-party materials for our New Millennium fabrication business, as well as supplies from U.S. Steel and the Heartland facility. Therefore, the additional substrate costs do affect the perceived conversion expenses.

Right. Okay. And then just lastly, could you just give us a little bit of an idea how much it costs to move things geographically, say from the Gulf up to the Midwest or from where you guys are situated at in the middle of the country to the western part? And then, I guess, along the same lines would be, are you still planning on sending 30% of Sinton's shipments to Mexico?

Well, several questions there, I guess, well several answers to give. From the Midwest – you mentioned Midwest, the West Coast, very little material moves from Midwest or East through the Rockies to the West Coast. It's quite an exorbitant freight rate. That's why one of the many advantages of Sinton is actually the freight rate, believe it or not, all the way to the West Coast to compete with the inflow market there. I think the freight rate there is $55 a ton or thereabouts. That the cheapest freight rate of any mill to the West Coast to sort of calibrate freights, Northern freight folks in Northern Indiana are shipping down to Mexico. And that's in the order of, I do believe, $95 to $110 a ton or as from Sinton into Mexico into Monterrey is going to be likely $37-ish a ton. So, the Sinton facility itself is a phenomenal sort of geographic advantage there to move that material into Mexico. And you're right, 30% or so, a million tons or thereabouts should flow into Mexico from the Sinton facility.

Okay. Great. Thank you.

Thank you. Our next question today is coming from John Tumazos at John Tumazos Very Independent Research. Your line is live.

Congratulations on all the customers on your campus at Sinton. With prime metals and the coating lines and then those customers, it's, I guess, close to 4 million tons of potential demand, do you expect to have the 6 more vacant lots for new customers filled? Does it make sense to build a second mill next to the first one if the demand is this good? Is it possible from an engineering standpoint to add another caster to increase the capacity at Sinton above 3 million tons given how much the customers seem to love it?

Thank you for your insightful research, John. I appreciate your kind words about the team’s performance; they truly excelled last year. I believe Sinton is a remarkable asset. The positive reception we've received from those six customers who are engaged even before the plant is operational demonstrates the impact of the current demand for primary steel production. Sinton is indeed a valuable addition to our industry and stands out among competitors. While the possibility of adding a second caster is slim, we have designed the facility to increase capacity by one million to 1.5 million tons. Therefore, the potential for expansion is certainly there.

Mark, what is the limiting factor to the capacity of the plant? Is it the caster or the surrounding infrastructure?

The hot strip mill, like our other mills, has the ability to produce 4.5 million tons of capacity, based on the width gauge combination we can utilize there.

Thank you. My son went on a Sinton tour in November. He joined the American AIST, American Iron Steel Technology Group, and he was telling me how great it was and sent me along his notes. So I'm not all that insightful, Mark. I learned from the younger generation.

Yeah. I know, John. I don't know how that happened, but we were glad that he was there, I guess.

Thank you. Our next question today is a follow-up from Timna Tanners. Your line is live.

Thank you for including me. There are many questions about the fabricating business. Historically, the profitability in that division has consistently been between $50 and $200 in EBITDA per ton. Recently, with prices increasing by $1,000 per ton, EBITDA per ton has surged, and you suggest this level will be maintained. I would like to understand if this represents a new normal in earnings, what factors are influencing this change, and whether customers are resistant to the significant price hikes considering the decline in underlying steel prices. Any additional insights would be appreciated.

Well, it depends on what time period you're calibrating to, Timna, I guess. That industry since the last peak has changed and consolidated to a large degree. And at the same time, currently, the actual market demand is at a historical high.

So Timna, the visibility that we have isn't predicated upon falling steel prices. Its predicated upon the forward pricing that we know we have in the order book for steel joists. The team has done a really good job of managing the steel raw material inputs. So that's why we have more certainty. I would not say this is a new normal, no. This is an extraordinary time for them. But to Mark's point, we're gaining market share as well as the team has been doing some really interesting things on the operational side. We've added ship. Unique thing about our fabrication business is we can really achieve whatever volume demand will allow us to have just by adding people rather than adding assets, which is a very powerful tool. As we add volume, it really drops to the bottom-line. And so that's why, again, we feel really confident about 2022 for the fabrication, but it shouldn't be our expectation that this is something that is the new normal.

Thank you. Our final question for today is a follow-up from Seth Rosenfeld. Your line is live.

Thank you again for taking our questions. One final one of mine for shareholder returns. In the past, you've talked about the completion of Sinton as a potential catalyst to increase the base dividend. Can you talk us through the timeline in terms of the de-risking of Sinton that you would want to secure before making that step? When we think about the scale of any potential increase, how do we consider that versus historical strategy? Thank you.

So, I think we mentioned it on the last quarter conference call as well as there is definitely the emphasis from the Board and from the senior leadership team to increase the dividend when we have through-cycle cash earnings that are increasing. And so that definitely is Sinton. We generally have our increases in the first quarter. I can't tell you what that will look like. I would expect to see it sometime in the first half of the year. But again, that's a Board decision to make. They're very supportive of this substantial increase. We have a target of a net income payout ratio of at least 35%. So, that's something that we'll take into consideration as we look at the through-cycle earnings for Sinton and what that dividend increase will look like. But in the meantime, we're using the share buyback program as a complement. That's something that we believe is very powerful for shareholder insurance as well.

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

Thank you, Kate. I want to express my sincere gratitude to everyone on the line for your support. To our customers, my heartfelt thanks go to you. You define who we are. To our team, you have significantly exceeded any past performance. While the market played a role, your daily efforts set us apart and make us proud to be part of this team. Lastly, we achieved outstanding results in terms of volume and profitability. However, we need to refocus on our safety practices and steer that trend back to where it once was. Thank you all once again. Have a great day. Goodbye.

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