Good day, and welcome to the Steel Dynamics Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s remarks, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised this call is being recorded today, July 21, 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, Holly. Good morning, and welcome to Steel Dynamics second quarter 2022 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 should actual results turn out differently. Such statements involve risks and uncertainties related to integrating or starting up new assets, the aluminum industry, the use of estimates and assumptions in connection with anticipated project returns and 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 will also find any referenced non-GAAP financial measures reconciled to the most directly compared GAAP measures in the press release issued yesterday entitled 'Steel Dynamics Reports Record Second Quarter 2022 Results'. Now I’m pleased to turn the call over to Mark.

Thank you, David. Thank you, everyone, for being with us on our second call this week. It was exciting to announce our new growth initiative on Tuesday with our entry into the aluminum market. It has only been about 48 hours, and the customer response from all three market segments, whether it be distribution processes, the packaging industry, or even automotive, has been absolutely staggering as early signs of affirmation of us getting into the marketplace. This reflects the lack of supply and optionality within that market, which is very exciting. Additionally, it's even more thrilling to announce yet another record quarter with record consolidated volumes, earnings per share, and cash flow, all supporting our cash allocation strategy and commitment to build shareholder value. Specifically, we repurchased $517 million worth of the company’s common stock, representing 3.5% of our outstanding shares in the quarter. We are certainly beneficiaries of a strong market tailwind, but I’m incredibly proud of our 11,000-strong team. They are the foundation and the catalyst of our success. Their culture of excellence and strategic positioning executed over the last 10 years allows us to exploit the current market and continue to produce higher lows and higher highs through the cycle. I’ve said it many times before, but none of this matters without keeping everyone safe. Employees are often described as a company’s most important asset. For us, they are more than that; they’re part of the SDI family. We strive to provide the best for their health, safety, and welfare. We are actively focused on safety at all times, keeping it top of mind and an active conversation at every level within the organization. We continue to see material market share gains driven by our ESG profile, an industry-leading low carbon footprint for flat rolled products. We will continue our journey to environmental excellence through a defined plan to be carbon neutral by 2050. Our recent Aymium investment and joint venture is a perfect example of that. It presents an exciting opportunity to reduce greenhouse gas emissions by using renewable biomass, replacing fossil fuels in our electric arc furnaces. We have tested the product, and it works beautifully. We believe it will also work within our iron operations. Initially, it will be 160,000 metric tons per year, with CapEx estimated to be around $125 million to $150 million. This will reduce our Scope 1 steelmaking greenhouse gas intensity by some 20% to 25%, with further potential upside from the use of biogas. With that said, Theresa, would you like to share some thoughts?

Thank you, Mark. Good morning, everyone. As Mark said, what an incredible week! We announced our aluminum strategy on Tuesday, and now we’re sharing our record results. Your performance resulted in record sales, earnings, and cash flow, a truly exceptional performance. Our second quarter 2022 net income was $1.2 billion, or $6.44 per diluted share, which included costs of $77 million, or $0.29 per diluted share, associated with the continued start-up of our Sinton, Texas flat rolled steel mill. Excluding these costs, our second quarter adjusted net income was $1.3 billion, or $6.73 per diluted share. Revenues improved across all platforms to a record $6.2 billion, driven by record steel shipments and pricing in our steel fabrication business. Our record operating income of $1.6 billion in the second quarter improved 8% compared to first quarter results, driven by record steel fabrication earnings. Our steel operations generated strong operating income of $1.1 billion in the second quarter with record shipments of 3.1 million tons, of which Sinton contributed 171,000 tons. Sequential earnings were 5% lower due to metal spread compression in our flat-rolled steel operations as realized pricing declined and average scrap costs increased. Conversely, our long product steel operations experienced metal spread expansion due to rising product prices, and we set quarterly record shipments at our Structural Engineer Bar and Roanoke Bar divisions. Our mills recycling operations demonstrated strong operating income of $58 million, reflecting a 20% sequential quarterly improvement as ferrous metal margin and volume improved. The team continues to leverage our circular manufacturing operating model, benefiting both our steel and mills recycling operations by improving furnace efficiency and reducing overall working capital requirements. Congratulations to our steel fabrication team for achieving record second quarter operating income of $599 million, driven by record average pricing coupled with record shipments. Demand for steel joists and decks remains strong, as evidenced by our near-record order backlog containing strong forward pricing. Based on this strength, we expect steel fabrication earnings to continue increasing throughout the year. Our cash generation remains strong due to our differentiated circular business model and highly variable cost structure. By the end of June, we had record liquidity of $2.5 billion, which includes $1.3 billion in cash and short-term investments and an undrawn unsecured revolver of $1.2 billion. We generated a record cash flow from operations of $1 billion in the second quarter and $1.8 billion year-to-date. In the first half of 2022, we funded $323 million in capital investments. For the second half, we estimate capital investments will be approximately $350 million to $400 million, primarily relating to our four new flat roll coating lines located in Sinton and Heartland. We maintained our cash dividend at $0.34 per share after increasing it by 31% in the first quarter. Year-to-date, we repurchased $906 million or 6.5% of our outstanding shares. As of the end of the second quarter, $727 million remains available under our most recent share repurchase authorization. Since 2017, we’ve increased our cash dividend per share by 143% and repurchased $3.2 billion of our common stock, representing 30% of our outstanding shares. These actions reflect the strength of our capital foundation, consistent cash flow generation throughout all market cycles, and our continued optimism and confidence in the future. Our capital allocation strategy prioritizes strategic growth with a positive dividend profile and a variable share repurchase program while preserving our investment-grade credit rating. Our recently announced aluminum investment aligns with this unchanged strategy. As I mentioned on Tuesday’s call, our cash flow profile has fundamentally changed over the last five years. We will fund this investment with available cash and operational cash flow while continuing our strong shareholder distributions. We are well-positioned to create sustainable long-term value. Sustainability is fundamental to our long-term value creation strategy, and we are dedicated to our people, communities, and the environment. We are committed to operating with the highest integrity. As Mark noted, we’re excited about our joint venture with Aymium, a leading renewable biocarbon products producer. Steel Dynamics owns 55% of the joint venture and is the operating partner. We have a clear path towards carbon neutrality that we believe is more manageable and affordable than for many industry peers. Our sustainability and carbon reduction strategy is ongoing, and we are committed to making a positive difference in the industry. We will continue to address these matters and play a leadership role. Mark?

Thank you, Theresa. The results from the New Millennium fabrication platform have been absolutely incredible, with record operating income of $599 million in Q2 on record shipments of 218,000 tons. We observe that non-residential construction markets remain strong, despite caution from Amazon regarding next year. We have received reaffirmation from major customers, including warehouse clients, that everything remains strong heading into 2023. Areas like cloud computing, data centers, pharma, and schools are all showing strength. Although the ABI index may have drifted slightly month-over-month, reports indicate strong ongoing order activity and architectural firms continue to report new work online. For us, order input activity remains robust, and we still have near-peak backlog persisting. This is a very favorable position to be in. Q3 earnings from fabrication are expected to increase as we anticipate higher shipments and metal spread expansion due to increased selling prices and lower steel input costs. This serves as a perfect hedge against softening steel prices. As we mentioned in our Q1 call, Russ Rinn had his final official day in the office last week after approximately 11 years with SDI and the OmniSource recycling platform. While it may be bittersweet, it was difficult to see him go. He repositioned OmniSource to record earnings last year and significantly influenced safety performance over the years, making numerous key contributions to our company's strategic moves. Currently, he is hiking in Virginia. Thank you, Russ, for all that you have done. Our recycling platform saw stronger earnings due to higher domestic steel industry utilization, which also drove higher shipment volumes, pricing, and associated metal spreads. After a notable decline in prime scrap relative to shred during the quarter, that spread has normalized, and pricing is expected to remain stable in the months ahead. Our Omni platform is collaborating with the steel melt teams to expand our shred segregation efforts, providing higher volumes of low residual shred scrap, which reduces our reliance on more expensive prime grades. The availability of pig iron has normalized, and pricing has dropped significantly to the low $50 per ton range. We have secured pig iron sourced well into next year, ensuring that supply is not a concern, and any rumors regarding us having issues with fos levels are entirely inaccurate. There are no issues using the Brazilian pig iron we are bringing into our mills. Our steel operations had another strong quarter with record shipments of 3.1 million tons and strong operating income of $1.1 billion. Our production utilization rate for the second quarter was 95%, significantly higher than the industry average of about 82%. As we have previously communicated, higher utilization rates have demonstrated clear advantages over time. Our strategy to offer value-added diversified products, coupled with differentiated supply chains, supports our strong and growing cash generation capabilities throughout the cycle. Our customer order entry remains strong, especially for value-added products. Around 70% of our steel sales are value-added, further contributing to our best-in-class financial metrics and cash generation. I expect the automotive sector to remain strong and perhaps improve as the chip issues begin to normalize. Dealer inventories remain extremely low, resulting in strong pent-up vehicle demand from consumers. The 2022 build rate is anticipated at around 14 million units, growing to 16.4 million in 2023 and potentially 16.8 million in 2024. The ongoing chip shortage has inadvertently extended the auto cycle, creating a stronger market for a longer time. Construction continues to demonstrate strength, as evidenced by the fabrication backlog. Long products steel backlogs are also robust, with several divisions recording record earnings and volume in the second quarter, showcasing the market depth. Infrastructure also remains a substantial support factor, with high demand for HVAC, appliances, and other related products. The energy sector is showing signs of improvement, with large orders coming in from the South. It is significant to note that import arrivals driven by the Ukraine-Russia conflict are beginning to arrive now, but interest in imports for October, November, and December is very low, suggesting moderated import volumes in the second half of the year. Furthermore, our hot-rolled coil order inputs have significantly increased in the last week, indicating signs of recovery. Regarding Sinton, commissioning continues on the hot side and the tandem cold mill. The rest of the mill is fully operational, and the hot mill has established target volume throughput rates with an average run rate of 75% to 80%. I want to emphasize that when we are operating, we run at that rate. The surface quality of our output is excellent and superior to our Columbus and Butler facilities. The hot strip mill design accommodates thermomechanical rolling, allowing for the production of higher strength grades with lower alloy content. The coil shape reported from our processes is excellent. This confirms both the technical process capabilities and the soundness of the design decisions made years ago concerning the mill. We are facing some uptime challenges in July due to a substation arcing issue that should be resolved this week. We are also experiencing some typical commissioning-related equipment failures. The supply chain is complicating matters; needed parts are sometimes taking a day or two to arrive instead of just a few hours. We are encountering these typical obstacles of a new plant start-up, but I expect substantial resolution in the upcoming weeks. The July issues may cost us around 100,000 to 150,000 tons of production for the year, but we are moving in the right direction and expect to be EBITDA positive in Q4. We are continuing our growth initiatives, and the four value-added coating lines are under construction and progressing well. They are expected to start up in the second half of 2023. As the largest non-automotive coater of flat-rolled steels, we now hold annual coating capacity exceeding 6 million tons, which will increase by an additional 1.1 million tons with these four new lines. We have developed unique supply chain solutions for our customers, and these lines are typically fully utilized with our highest-margin products. Moving on to aluminum dynamics, it's been an incredibly exciting week with staggering initial support from our customers, alongside a significant number of new inquiries. To recap, we're establishing a 650,000 metric ton per year flat-rolled facility in the Southeastern U.S. with on-site melt and cast lab capacity of approximately 450,000 metric tons. This facility will be fully equipped with casting lines, coating lines, and downstream processing and packaging capabilities. It's also supported by two satellite recycled aluminum slab casting centers, one in the Southwest U.S. and one in Mexico. We anticipate the mill to start operations in the first half of 2025, with the Mexican slab casting center in 2024 and the Southwest center at the end of 2025. The total project cost is projected to be about $2.2 billion, which will be spread over four years of development and funded entirely through available cash and operational cash flow, with no need for additional debt. Recent discussions indicate some skepticism around our EBITDA per ton target of $1,000. We are confident in this figure. It is influenced by several factors, such as the project being a greenfield facility where everything occurs in one location—rolling, processing, coating, and heat treating—allowing for optimized layout and logistics, drastically reducing labor input. The state-of-the-art equipment we will install will decrease energy costs and yield improvements while moving towards higher scrap content levels. From an investment perspective, there is a very clear gap in supply and demand, creating a growing deficit. Should we film both a steel mill and an aluminum mill, most would not perceive any significant differences—it's simply a different metal. We firmly believe in our capability to execute this project efficiently. Given the opportunities in today’s marketplace and the extreme multiples expected from sellers, this is an efficient capital growth project. Our extraordinary customer support confirms our path forward. Ultimately, our success has always been attributed to the SDI culture and our workforce, driving unparalleled efficiency and cost reduction. The steel industry faces a steep cost curve; being in the lowest quartile will support margins through the cycle. To sum up, it’s been a fantastic week and year for SDI, which will continue throughout the remainder of the year. Our team is foundational to our success, and I express my gratitude to them for their hard work and commitment. I would like to remind everyone that safety is our top priority. We will keep focusing on providing superior value for our customers, employees, and shareholders alike. I look forward to creating new opportunities for everyone in the future. With that said, I’d like to open the floor for questions. Holly?

Thank you. Your first question for today is coming from Emily Chieng with Goldman Sachs. Emily, your line is live.

Good morning, Mark and Theresa, and thank you for the update today. My question is just around your power cost exposures across the portfolio. Can you highlight for us what is hedged or fixed-price power and what still remains on spot? Is Sinton actually exposed to market prices? Or have you since put some hedges in place there?

Emily, across our portfolio of steel mills, we have a mix regarding power costs. I would estimate that approximately 50% to 60% of our power contracts are long-term contracts with escalating factors included in them, while the remainder is on a spot basis. Some of it is hedged. Currently, Sinton's situation is a bit complicated as we are still in the startup phase, and they constructed a considerable substation on our behalf in the region. Therefore, most of Sinton's power remains on a spot basis due to our recent performance.

Emily, that pertains to electrical power. On the natural gas side, we typically hedge around 60% to 65% of our consumption.

Great. That's very clear. Thank you.

Your next question for today is coming from Seth Rosenfeld with BNP Paribas. Seth, your line is live.

Thanks for taking our question. If I may ask about the fabrication and non-residential activity. At the time of Q1 results, I think you mentioned maintaining a record backlog that has now shifted to a near record. Can you provide color on how substantial the contraction in backlog tons or duration has been? Concerning pricing, you previously indicated aggregate price realizations would increase in the upcoming quarters. Are we witnessing any downward inflection in recent orders?

Thanks, Seth. Regarding the fabrication business, we used 'near-record' as a descriptor simply because we want to account for recent adjustments we have made. There has been some contraction from the peaks, but we still possess a backlog extending well into 2023, which does not concern us or indicate any significant changes. In terms of pricing, we continue to enjoy strong price support, and there is still increased pricing reflected in the backlog. Overall, our outlook for the non-residential market, particularly in steel fabrication, remains positive. Mark, do you have anything to add?

No, that sums it up well.

Thanks very much. I'd like to ask a separate question, please. On the working capital side, I believe in your earlier call, you indicated a potential tailwind from working capital release in the future. Given that Q2 saw another sizable investment, can you provide insight on your expectations for the second half of the year as steel raw material prices decline?

Absolutely, Seth. The increase in working capital in the second quarter was just a little over $100 million, which is not significant; however, given the overall size of working capital, it was incremental. We expect a considerable working capital release over the next two to three quarters, not necessarily due to a pronounced weakness in market prices but due to our ongoing efforts to reduce physical inventories at our steel fabrication business. Therefore, we anticipate working capital release in the second half of the year extending into next year.

Your next question for today is coming from Carlos De Alba with Morgan Stanley. Carlos, your line is live.

Thank you. Good morning, Mark and Theresa. I have a question regarding the progression of CapEx for the recently announced aluminum project. What can you share regarding CapEx for this year and the subsequent years until the project's readiness for startup?

Carlos, I suggest referencing the presentation available on our website from Tuesday. However, concerning CapEx progression, we estimate spending around $200 million to $300 million on the flat-rolled aluminum project in 2022, adding to the previously mentioned estimate of about $350 million to $400 million for the remainder of 2022. The majority of spending will occur in 2023 and 2024, with each of those years projected at $750 million to $800 million. Lastly, the remaining amount will be spent in the 2025-2026 timeframe, around $300 million to $350 million. This investment will span four to five years and will be funded through cash and operational cash flow.

Fair enough. Thank you. If I might ask another question quickly, have you seen specific pricing pressure in the southern steel markets or Northern Mexico with the ramp-up of Sinton and the ramp-up of Ternium's facility or Metals facility further south?

Carlos, generally a slight erosion has been observed in hot band and hot-rolled coil pricing across the U.S., with Southern markets facing more pronounced impacts due to the reasons you mentioned. Recently, our order activity for hot band has spiked dramatically, which has created some support in that product category.

Fair enough. Thank you very much. Good luck.

Thank you.

Your next question for today is coming from Timna Tanners with Wolfe Research. Timna, your line is live.

Good morning, everyone. I’d like to inquire about the pig iron alternative leveraging your Iron Dynamics operations. Could you expand on that? I also found it interesting that you mentioned that the market is pessimistic, but your customers are optimistic. Could you elaborate on this?

Regarding pig iron, we certainly aim to pursue a level of captive supply and self-sufficiency. As mentioned in the last call, we are exploring whether Iron Dynamics technology or an alternative suits our needs. This is a project in process. As for market sentiment, I can only speak for our order book. As I've mentioned before, 'the order book tells all', and it has remained quite clear for us. While there is a sense of caution in the market, as reflected by some recessionary pressures, we have not witnessed a dramatic structural change in underlying demand. Our order activity remains strong, and I believe that speaks for itself.

Thanks for clarifying on Iron Dynamics. I appreciate that. So it does not present a substantial capital concern, is that correct?

Absolutely correct.

Thank you. I just wanted to stimulate that inquiry.

Did you have a market query as well?

Indeed, you discussed how customer optimism contrasts the prevalent market pessimism. Would you mind elaborating on that, especially in light of elevated inventories?

Certainly, all I can do is view things through the lens of our order book. It remains robust, and we haven't detected any significant deterioration in actual demand. Although hot-rolled coil experienced some softness, it seems to be rebounding. Presently, there's a sense of cloudiness in the market, with concerns of recession weighing on sentiment. Yet, our order book does not reflect dramatic shifts.

Thank you very much.

Thank you, Timna.

Your next question for today is coming from Phil Gibbs with KeyBanc. Phil, your line is live.

Good morning.

Good morning, Phil.

Mark, you mentioned that spot prices for pig iron are declining, which we also note. However, are you locked into higher prices than those prevailing spots if you had extensively hedged during the conflict?

We have a mix. At the onset of the conflict, we purchased a couple of suppliers at the high end of the range during that period. However, we now have a mix of material. The highest pricing we may have paid is around $900 per ton; we acquired a couple of boatloads at that rate. The rest of our material is priced lower. Forward purchases are generally indexed against the market price, so the impact on us shouldn’t be significant.

Thank you. Could you provide the normal mix dispersion on sheet if you have that information?

Certainly, Phil. The hot roll P&L number is 861,000 tons; cold rolled, 131,000 tons; and coated products are at 1,132,000 tons.

Thank you. I have one more question to sneak in. Regarding Sinton, have you changed your expectations for volume contributions from the second half? There have been some production losses in July, and I’m trying to gauge what the next few months may hold, as we are nearing the end of the year.

We are indeed facing challenges as we deal with typical startup hurdles. As I noted previously, our July issues are likely to cost us around 100,000 to 150,000 tons from our annual projection, which we initially estimated around 1.5 million tons.

Understood. That clarifies the anticipated outcome relative to the 1.5 million tons. Lastly, could you provide the updated CapEx numbers for this year, if I missed it? I understand you have the aluminum project and other expenditures.

Phil, for the second half of the year, excluding the aluminum project, we estimate CapEx to be between $350 million and $400 million. The majority of this amount relates to the four new flat-rolled coating lines. If we include the aluminum investment, we may spend an additional $200 million to $300 million, bringing the total for the second half of the year to approximately $550 million to $600 million.

Thank you.

Your next question for today is coming from Andrew Keches with Barclays. Andrew, your line is live.

Hi, good morning. Theresa, I don’t want to belabor the point, but I want to approach the capital deployment question from earlier in the week from a slightly different angle. You have a two-turn net debt threshold, but you've been operating at about half of that for the year. You've also mentioned that without buybacks, you would move toward a net cash position, but you also do not want to reach the lower end of that range. What do you consider the optimal leverage level for the business at this point in the cycle? Should we regard the 2 times threshold as your target, or should we view your current lower leverage position as an indication of a desire to maintain flexibility within that range?

The intention is not to intentionally increase leverage. We prefer to maintain it at a flexible level that permits growth projects like we're engaged in now. We executed this strategy with Sinton as well; we began with additional cash and reduced leverage, enabling us to commit to a capital investment funded through cash and cash flow while preserving flexibility for potential acquisition opportunities. We aim to sustain a positive shareholder distribution plan, allowing us to continue increasing dividends at an appropriate level. There's no intention to leverage intentionally, but we appreciate the flexibility that comes with adjusting our position.

Okay. Just as a quick follow-up, you've mentioned that your cash flow profile is structurally changing, but the business is also growing. What do you believe is the right level of cash for the business going forward?

We do not target a specific cash level on the balance sheet. We assess liquidity in totality. Therefore, I am uncomfortable answering that question.

Thank you very much.

There appear to be no further questions in the queue. I would like to turn the call back over to Mr. Millett for any closing remarks.

Thank you, Holly. Thank you again to everyone on the call today. I'd like to congratulate the team on their outstanding performance last quarter. We are determined to maintain this momentum throughout the year. To our customers, we express our gratitude for your loyalty. Thank you for your continued support and interest in our aluminum side. I invite anyone interested in a dynamic career to join us as we venture into aluminum production. Thank you all, and have a great day!

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