Good day and welcome to the Steel Dynamics' Third 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, October 20th, 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, Ali. Good morning and welcome to Steel Dynamics' third 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, 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 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 heading, Forward-Looking Statements and Risk Factors, found on the Internet at www.sec.gov, and if applicable, in any later SEC Form 10-Q. You'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 Third Quarter 2022 results. And now I'm pleased to turn the call over to Mark.

Thank you, David. I forgot to turn the microphone on there as always. But thank you, everyone, for being with us on our third quarter earnings call. It certainly was an exciting quarter with great performance by the team and growth on many fronts. Firstly, a great welcome to the ROCA team, Senate in Monterrey. In combination with the former Zimmer Group, OmniSource Mexico now is a significant recycling presence within Mexico that will support their existing Mexican customer base, while providing strategic sourcing opportunities for our Sinton and Columbus steel mills and soon to be aluminum mill. Sinton has turned the corner and is showing significant improvement. The team is also making great progress on our aluminum flat rolled strategy, which I will share later on the call. Operationally, our third quarter was a great quarter, achieving several new benchmarks, including record steel and steel fabrication shipments and record cash flow from operations, all supporting our cash allocation strategy and commitment to further expansion of shareholder value. I continue to be incredibly proud of our teams. They are on our foundation and the catalyst of our current and future success. It's their culture of excellence and the strategic positioning executed over the last number of years that allows us to maximize opportunities, resulting in higher lows and higher highs through the cycle. So a great quarter, yet none of this matters without keeping our teams safe. Often employees are described as a company's most important resource. For us, they are more than that. They are family and the SDI family now is 26,000 strong. We are focused to provide the very best for their health, safety and welfare. We're actively engaged in safety at all times at every level of our organization, came in top of mind and an active conversation throughout the company. We will not rest until we consistently achieve our goal of zero incidents. But before I continue, Theresa, would you like to give us some details?

Thanks, Mark. Good morning, everyone. I add my sincere appreciation and personal congratulations to the team on another strong operational and financial performance. Our third quarter 2022 net income was $914 million or $5.03 per diluted share, inclusive of costs of $111 million or $0.43 per diluted share associated with the continued start-up of our Sinton, Texas flat-rolled steel mill. Excluding these costs, third quarter 2022 adjusted net income was $992 million or $5.46 per diluted share. Third quarter revenues of $5.7 billion declined 9% sequentially based on lower flat-rolled steel and scrap pricing. Our third quarter 2022 operating income was $1.2 billion lower than sequential results due to lower pricing and resulting metal spread compression in our flat-rolled steel operations. Our steel operations generated solid operating income of $658 million in the third quarter, with record shipments, as Mark mentioned, of 3.2 million tons, of which Sinton contributed 268,000 tons. Sequential earnings were significantly lower due to the previously mentioned metal spread compression within our flat-rolled steel businesses. In contrast, our long product steel operations experienced metal spread expansion as average scrap cost declined more than product pricing in the quarter. In fact, our Structural and Rail and Roanoke Bar divisions each achieved record earnings. Congratulations to those teams. Third quarter operating income for our mills recycling operations declined to $10 million as ferrous pricing declined month-over-month through the quarter, resulting in significant metal margin compression but 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 to our steel mills, which improves furnace efficiency and by reducing company-wide working capital requirements. I also give my welcome to the Roanoke team. A huge congratulations once again to our steel fabrication team. They achieved record third quarter operating income of $677 million. These earnings were driven by record average pricing, record shipments and lower steel input costs. Steel joist and deck demand remained solid as evidenced by our continued strong order backlog, which extends well through the first half of 2023. We generated record cash flow from operations of $1.5 billion in the third quarter as strong results and release of working capital benefited cash flow. Year-to-date 2022, we've generated a record $3.3 billion. Our cash generation is consistently strong based on our differentiated circular business model and highly low-cost variable cost structure. At the end of September, we had record liquidity of $3.2 billion comprised of cash and short-term investments of $2 billion and an undrawn unsecured revolver of $1.2 billion. Year-to-date 2022, we funded $565 million in capital investments. For the fourth quarter of 2022, we estimate capital investments will be close to $400 million, of which about $200 million is related to our recently announced aluminum flat-rolled investments, with much of the remaining capital related to our four new flat-rolled coating lines that will be located in Sinton and Heartland. We maintained our cash dividend at $0.34 per common share after increasing it by 31% in the first quarter. We also repurchased $482 million of our common stock in the third quarter, representing over 3% of our outstanding shares. Year-to-date, we paid cash dividends of $177 million and repurchased $1.4 billion or 10% of our outstanding shares, representing a 48% net income distribution ratio. At the end of the third quarter, $245 million remained available under our current share repurchase authorization. These actions reflect the strength of our capital foundation and consistently strong cash flow generation capability throughout all market cycles 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's complemented with a variable share repurchase program, while remaining dedicated to preserving our investment-grade credit designation. Our recently announced aluminum investment is consistent with our unchanged capital allocation philosophy. We have strategically placed ourselves in a position to have a sustainable capital foundation that provides the opportunity for strategic growth; strong shareholder returns and maintain investment-grade metrics. Our cash flow profile has fundamentally changed over the last five years. We will readily fund our flat-rolled aluminum investments with available cash and cash flow from operations. We also plan to continue strong shareholder distributions as we clearly demonstrated in the third quarter. We're squarely positioned for the continuation of sustainable optimized long-term value creation. Sustainability is also a significant part of our long-term value creation strategy, and we are dedicated to our people, our communities, and our environment. We're committed to operating our business with the highest integrity. In that regard, we're excited about our newly formed joint venture with Aymium, a leading producer of renewable biocarbon products. We believe our first joint venture facility will decrease our steel Scope 1 and 2 greenhouse gas emissions by as much as 25%. We have an actionable path to our carbon neutrality as more manageable, and we believe considerably less expensive than may lie ahead for many of our industry peers. Our sustainability and carbon reduction 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 moving forward. In conclusion, I know some of you track the details behind our flat-rolled shipments. And so for the quarter, we shipped hot-rolled and P&O of 951,000 tons; cold rolled of 139,000 tons; and finally, coated flat rolled products of 1,102,000 tons. For a total of 2,192,000 tons of flat rolled shipments.

Thank you, Theresa. We achieved remarkable results from our steel fabrication platform, benefiting from favorable market conditions and our strategic efforts over the years. In the quarter, we recorded operating income of $677 million, with shipments reaching a record 218,000 tons. The nonresidential construction market remains robust, as supported by positive macro indicators. The ABI index is just above 53, indicating strong business conditions, and the Dodge Momentum Index saw a 6% improvement in September. Nonresidential construction starts and build rates are expected to remain strong into 2023. Importantly, our customers report solid demand despite economic uncertainty. Order activity is more balanced compared to the frenetic pace of recent times and is above historical averages. Our order backlog extends well into the first half of 2023 with favorable pricing dynamics, and we anticipate continued high volume for fabrication in the fourth quarter and throughout 2023. Additionally, our New Millennium unit serves as an excellent complement to our steel operations. While our mills experienced steady utilization in the third quarter, overall domestic steel industry utilization decreased, leading to lower scrap demand. Scrap prices have fallen since May, decreasing from about $735 a ton to roughly $380 per gross ton. Consequently, Omni's earnings were negatively impacted by this shift in market pricing and reduced industry demand. However, Omni continues to collaborate with our steel mill teams to enhance shred separation capabilities, aiming to increase the volume of low residual scrap. Our collaborative efforts, along with industry innovations, strengthen our belief that any concerns about prime scrap shortages in the future can be addressed. With new producers entering the market, pig iron availability has stabilized, and prices have significantly moderated to just over $500 per ton. We have secured adequate pig iron supply through next year, ensuring that our flat rolled operations are well-supported. We are also enthusiastic about the integration of ROCA into our OmniSource Mexico portfolio, increasing our annual ferrous and non-ferrous capacity to approximately 2.5 million tons. The steel platform had a very successful quarter with record shipments of 3.2 million tons and operating income of $658 million. Our production utilization rate for the third quarter was around 93%, slightly down from 95% in the second quarter, yet significantly higher than the industry average of 78%. The high utilization rates are a testament to our diversified product offerings and effective supply chain solutions, which, along with internal pull-through volume, provide lower utilization rates compared to our competitors. This, in turn, bolsters our strong cash generation capabilities and leading financial metrics. Looking ahead, customer order intake is solid and backlogs are healthy, supported by our diverse portfolio of value-added products, which now represents about 70% of our steel sales. We prioritize value-driven supply chains to reduce the impacts of price volatility, which helps maintain a higher utilization rate through cycles. In terms of market trends, the automotive sector is stable, and we expect an improvement from the low production rates of 2022 due to very low dealer inventories and pent-up vehicle demand. The production forecast for 2022 is around 14.5 million units, with an anticipated growth to approximately 15.5 million units in 2023 and over 16 million units in 2024. The non-residential construction market remains strong, as evidenced by our fabrication backlog and long product steel volumes. Long product steel backlogs are healthy, with several divisions, including Summa City and Roanoke, posting strong volume and record earnings in the third quarter, showcasing our market strength. Infrastructure spending is expected to provide significant support in the coming years. New residential construction activity has slightly declined, affecting HVAC and housing-related products; however, our focus on replacement products mitigates this impact. The oil and gas sector is seeing improved orders for OCTG and line pipe, with continued growth in solar renewables. At Sinton, both coating lines are performing exceptionally well, and the hot side of the tandem cold mill is ramping up successfully. The hot mill has shown consistent improvement, running at around 60-65% efficiency, with days exceeding 80%. Surface quality and coil shape from processing customers are also excellent. Our hot strip mill design allows for thermal mechanical rolling, producing higher strength grades with lower alloy content and costs. Notably, we have already approved and shipped some API grades, which is impressive given the mill has been operational for only about nine months. Our team has done an outstanding job, confirming the effectiveness of our technical and process choices, marking it as a next-generation mill. Our strong operational and financial performance continues to underpin our cash allocation strategies and growth. The four new flat-rolled steel coating lines are set to start up in the second half of 2023, with two at Sinton and two at Heartland, and we are already observing customer interest in this new volume. We hold the title of the largest domestic non-automotive coater of flat-rolled steel, with an annual coating capacity exceeding 6 million tons; these new lines will add an extra 1.1 million tons to that capacity. We have developed innovative supply chain solutions for our customers, ensuring our downstream lines remain consistently filled with our highest margin products. Regarding lunar dynamics, the market reaction from both current and new customers across all sectors has been overwhelmingly positive. To summarize the upcoming project, we are establishing a 650,000 metric ton per year aluminum flat roll facility in the Southeastern U.S. and anticipate announcing the site location soon. This project will include 450,000 metric tons of on-site mill and cash slab capacity, supported by two satellite recycled aluminum slab casting centers located in the Southwest and South U.S. We will have two cash lines along with a coating line and downstream processing and packaging lines, enabling us to supply products for the beverage, food packaging, automotive, and industrial sectors. The planned startup for the mill is mid-2025, with the Mexico Slab Center commencing in 2024 and the Southwest Slab Center in the first quarter of 2025. The financial implications will involve approximately $2.2 billion in CapEx over four years, fully funded by available cash and cash flow from operations, without incurring additional debt. We expect to generate around $650 million to $700 million in annual EBITDA once operational. In conclusion, we are enthusiastic about our future growth opportunities, which will sustain the high-return momentum we have built over the past 15 years. Our teams are our foundation, and I appreciate their passion and dedication. We are committed to health and safety, emphasizing that safety remains our highest priority. Our culture and business model continue to set us apart from others, keeping us competitively positioned as we strive to provide exceptional value for our company, customers, team members, and shareholders. We look forward to creating new opportunities for everyone today and in the future. We invite any questions you may have.

Thank you. Our first question is coming from Emily Chieng with Goldman Sachs.

Good morning, Mark and Theresa. Thank you for the time this morning. My question is just around the fabrication business, and we've certainly seen realized pricing trend higher on a sequential basis. But perhaps could you share some color on where new contract awards are getting priced? And how should we be thinking about the sustainability of your margins in this segment in the near-term and perhaps call it on a normalized basis?

Certainly, Emily. Well, again, that business is incredibly robust. Our backlogs are strong, both from a volume standpoint and pricing standpoint at historic highs. And we see that backlog well into 2023, probably about eight months from there, and it remains solid. Spreads are at very high numbers, as you can see from our most recent results. And we see that volume being sustained. Our Q3 volume into Q4. And our earnings should certainly parallel that as relative to the third quarter. I do believe. So very, very strong. As you may recognize, that industry over the years has sort of rationalized and consolidated. It is no longer fragmented as it once was. And we see higher pricing and higher spreads being sustained through the cycle going forward.

Thank you.

Thank you. Our next question is coming from Carlos De Alba with Morgan Stanley.

Thank you very much. Good morning. Based on your comments regarding end markets, it seems that long products should perform better than flat end markets in lending products. However, in the reported volumes, we noticed a slight decline in your long steel volumes quarter-on-quarter, while flat volumes improved. Can you share your perspective on how this may evolve in the fourth quarter? Do you anticipate a reversal based on the end market situation? Additionally, you mentioned in your press release that you typically see lower volumes in the fourth quarter. However, your seasonality over the past couple of years has been quite different compared to the period from 2015 to 2019, before the pandemic. It would be helpful if you could provide insight into how you see the seasonality playing out this time.

Good morning, Carlos, thank you for being on the call. In terms of the flat products, long products performed very well with record shipments in the second quarter, showing continued strength. It's important to note that Sinton is starting up during this period, and its ramp-up will help mitigate some of the seasonal effects on our flat roll shipments as we approach the fourth quarter. Nevertheless, we anticipate robust volume from steel, both in long and flat products, despite the seasonal trends. The situation with Sinton and our coated products, particularly Galvalume, which had an excellent third quarter, provides some positive offset.

Right. Thank you, Theresa.

Thank you. Our next question is coming from Timna Tanners with Wolfe Research.

Great. Thanks. Good morning.

Good morning.

I wanted to ask about why your utilization continues to be higher than your peers. There seems to be a significant difference, especially since you're ramping up production in Sinton while US Steel has reduced their output due to low demand. This discrepancy in utilization is quite notable. Additionally, Nucor mentioned that they are being cautious about holding back production because of weaker demand. Could you explain what factors contribute to your situation? Also, please discuss the opportunities you've previously mentioned for exporting to Mexico and the West Coast from the Sinton operation. Thank you.

I believe our business model is definitely distinct from our competitors. The high utilization rate can be attributed to three key factors. First, we have a much more varied value-add product portfolio compared to other steel producers, which gives us flexibility across different market sectors and products. This has a significant impact. Second, we have built strong relationships with many of our customers over time, which provides us with resilience during economic cycles. Lastly, our downstream conversion facilities, including New Millennium, have substantial pull-through volumes. This year, New Millennium will be using approximately 800,000 tons of substrate, most of which we source from our own mills, contributing to a significant volume pull-through. Additionally, our Heartland facility converts around 800,000 tons a year, and The Techs consumes about 850,000 to 900,000 tons. When there's demand, we increase our in-house production to maintain utilization. Typically, our utilization rates are 10% to 15% higher than the industry average, which greatly enhances our cash generation capability throughout the economic cycle, supporting our growth and balanced cash allocation strategies.

Okay. Great. Could you elaborate on the other part of the question regarding the opportunities related to your allocation strategies and the ability to ramp up production to higher levels as well?

Yes. Sorry. I mean, a little tough time hearing Timna. The Sinton mill, obviously, ramping up focused on furnishing material through the two coating lines, the galvanized line, the paint line and just ramping up and commissioning all the different product capabilities we have there. We believe Mexico will long-term, despite the additional hot band capability that's come on stream, continue to have a mismatch in the cold-rolled coated arena, so it's our intent to be transferring or selling into the Mexican market, HVAC appliance, and automotive there. And we have yet to develop a meaningful sort of shipping volume to the West Coast, but I'm confident that, that will occur over time as that ramp continues.

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

Thank you. Our next question is coming from Cleveland Rueckert with UBS Securities.

Hello everyone. Good day to you, it's nearly noon here. I appreciate the question, and I'll just start with one. Mark, I wanted to expand on your comment regarding the availability of raw materials and scrap. As we consider investment opportunities, I understand that you're currently prioritizing investments in aluminum. However, I'm curious if there is an opportunity to invest in some of the raw materials businesses you already manage. In previous calls, you've mentioned the increased use of various scrap grades, and I'm wondering if that is primarily an R&D focus for your steel operations or if you have some plans for infrastructure that could enhance efficiency in that area?

I believe our investment in Mexico for Zimmer and with ROCA has presented a unique opportunity, as this area is rich in scrap and will help us support Columbus and Sinton. However, we are not looking to make any significant recycled acquisition-type investments. Our focus will be on streamlining and enhancing our current operations to reduce costs across the organization. Specifically, we will invest in technologies for segregation and separation to optimize our waste streams. This includes dividing materials into more valuable raw materials for our aluminum mill. Additionally, we plan to expand our current technologies in ferrous separation, particularly in what we call Shred One, to improve shredded material. We have the technologies we need and just need to expand their use across our Omni base. The capital expenditure required for this isn't substantial, but it is important to recognize how it impacts scrap flows, which is also being seen with some of our peers producing low residual shred. It’s evident that if you look at shredded cars today, much of the metal comes from integrated mills and has very low residual. By separating out minor amounts of copper and nickel, we can obtain prime scrap from this obsolete flow. Currently, prime materials are even selling for less than shred prices, highlighting concerns that may arise as additional capacity is introduced in the next few years. The industry has shown clearly that innovation will consistently overcome challenges.

That’s well understood. Thanks.

Thank you. Our next question is coming from Alex Hacking with Citi.

Yeah. Thanks Mark and Theresa. So on Sinton, Mark, I think you mentioned that it had turned the corner. How close are you there to operating at consistent 80% rate? What are the remaining challenges? And then what needs to happen to get it up to 90%, 95% or whatever you would be targeting longer term? And is that the rate you would be expecting 90%, 95% exit rate in 2023? So you stopped below 80% and then you build up through the year, or it would be more of a consistent rate through the year? Thanks.

Well, I would describe the issues at Sinton today as just typical start-up issues, a little amplified by the supply chain constraints out there. In the old days or the other mills we started up, you need a spare part, and it's like literally on the shelf in the local city. We were seeing a little more time to react to certain issues. That said, it is purely making sure that we are operating each piece of equipment all the way from the electric arc furnaces through the label furnaces cast and external just operating each and every minute of each and every day. As I said earlier, the equipment is proven to be able to produce everything we intended. It's produced out to 84 wide. We've gone down to 043 or 044 and light gauge. We produced 1-inch plate. As I said earlier, we've already been certified on some of the perhaps slightly easier API grades, but the other grades will come with time. There's no issue or challenge to get there. It's just a matter of time. So from a capability standpoint, it's definitely there. We've had shifts. We've had days close to 85%, 86% of production rate, which again, given the relatively short time that, that team has been ramping up is absolutely incredible. I think it took us three years in Butler to get a 4,000 ton shift, and we've had many of those already. So I'm not concerned. It's just a matter of time. Would expect that 2023, we should get around 80% of our 3 million tons of shipping capability.

But Alex, you're correct. That's for the entirety of the year. So there will be a progression of ramp so that by the time we're exiting 2023, we would expect to be operating at or near that full capacity rate.

Okay. Thanks. And then just to clarify on the earlier comments, again, on Sinton. Would you be expecting to ship more flat-rolled in the 4Q, considering the ramp-up of Sinton or the seasonality will offset that? Thank you.

Alex, I think you were asking about the full complement of our flat roll operations? And we are expecting to have higher shipments from Sinton itself, but I'll leave you to determine what seasonality does to the rest of the group.

Thank you. Our next question is coming from Curt Woodworth with Credit Suisse. Please go ahead.

Yes. Hi, Mark and Theresa. How are you?

Good, thanks.

So I just wanted to talk a little bit more about fabrication. Can you kind of talk to the diversity within your backlog and maybe how bidding activity has progressed maybe the last 90 days? I think there is some concern in the market that the data center and warehouse build-out has really driven the bulk of this growth rate, and that could potentially fall sharply. And it sounds clear, if you have like a lot of big chunky projects that once those burn off, then you could be more at risk. And then within that, I know you spoke about pricing being fairly favorable. And I think you talked about how pricing would be going up progressively, I believe, into the second quarter, but can you just confirm that?

Good afternoon, Curt. Thanks for the question. I'll let Mark address the diversity within the backlog of the fabrication business. It has changed just slightly. And I think it's become more favorable as these things are changing. As it relates to the backlog and the pricing, what Mark was suggesting is that we still have incredibly favorable pricing heading with the backlog that goes through much of the first half of 2023. It's not likely to be at that same peak level of $5,000-plus, but still very favorable. And at the same time, we're going to and expect to have lower steel input costs as we move through at least the fourth quarter. And so, as you can imagine, that's why the power in the business model of having fabrication be a real natural hedge to lower steel prices is very favorable to us. And that's what you're seeing today, and we would expect to see in the coming quarters as well. Mark, do you want to describe the diversity in the order backlog?

Yes. I believe the focus is shifting a bit. Initially, the emphasis was heavily on distribution warehouses, particularly in cloud computing, and that trend is continuing. Construction in cloud computing remains strong and is expected to grow, while warehouse construction might stabilize or remain flat. We're also noticing an increase in infrastructure projects, such as those for hospitals and schools. Overall, the activity is still robust. However, it's not at the frantic level it was six to eight months ago; it's normalized but remains high compared to historical standards. Considering the current interest rate environment and the economic uncertainties, it's understandable that people are hesitant about projects planned for the next several months and may be delaying decisions. Nevertheless, we anticipate that nonresidential construction will remain very strong throughout at least the first half of next year into the latter half.

And just to address your point on the backlog, if there's any risk that we’d want to point out, there's really not. It's a well-diversified backlog. There are not individual projects that are of too large of a size. And something to just keep in mind as well is once something enters the backlog for the fabrication business, the projects have already been engineered. They generally have already been financed. There's a lot of certainty in that backlog. And if you look on average of the projects that we do, the cost of steel joist and steel deck as a part of the entire project itself is only between 10% and 15%. So it's a small piece of that project in and of itself, which also reduces the risk.

Okay. Very helpful. And then, just as a follow-up, I think there have been some maybe incremental concerns on the aluminum flat rolled market, just given some of the announcements by Ball and others on the beverage can sheet side. So can you just give an update on maybe how you're progressing commercially with that project and what initial discussions have been like since you announced the project? Thanks very much.

Well, relative to aluminum, we are awash with interest, an incredible interest. To be honest, we have been focused of late locating the facilities. Glenn and his team have just, in the last week or two, completed the purchase of all the major sort of components. Certainly, all the long lead time issues and equipment packages. So progress is being made dramatically. We're now starting to focus on the commercial side. We've had initial conversations with all but one of the major beverage outfits, can makers. Incredible interest in honesty there. And also in automotive, there are several folks that have approached us to partner with us going forward. So, from a standpoint of contracted volumes, pricing, those sorts of things, that's too early yet.

Great. Thank you very much.

Thank you. Our next question is coming from Phil Gibbs with KeyBanc.

Sorry, I was on mute. Can you hear me now?

We can. Hi Phil.

Hey, how are you?

Good.

Specifically, you talked about in the script that you were at a 60% to 65% utilization on average for the month of October so far. Is that what we should expect for the fourth quarter, which would get us near 500,000 tons for that asset, or do we expect something a little bit more than that as you ramp?

I wouldn't anticipate 65% for the entire quarter. It's difficult to provide a specific number. If things continue as they have been this month, we could see a very strong result for the quarter. However, I cannot predict the future. I can say that operations have become more stable and consistent. We are experiencing more significant shifts and high-performing days, and importantly, we are not facing the zero shifts that were common during the summer and that typically occur in startups. The consistency of our operations has significantly improved, which gives me a lot of confidence moving forward.

Should we expect, given higher volume incrementally and some of that stabilization and just the overall operations that you will get to EBITDA positive in the fourth quarter and sort of out of the start-up phase that you've been in?

Yes, Phil, good afternoon. We talked about it on the second quarter conference call that our expectations were sitting at that point in time was that we would reach EBITDA positive sometime in the fourth quarter. That's likely pushed out sometime in the first quarter rather than the fourth quarter. But definitely, as Mark mentioned, we're seeing a lot of positive changes and there's been some key successes that the teams had just recently in October that we would expect to result in some really good changes heading forward. But I would suggest it's probably closer to in the first quarter versus the fourth.

Okay. And then as just a follow-up, if you could take a shot and talking about 2023 CapEx if you have a general idea? And then just also thoughts on net working capital in Q4. Thank you.

You're welcome. We are currently in the detailed planning phase regarding capital. I can provide some direction, but we will have clearer expectations for you when we meet in January for the fourth quarter conference call. At this time, our aluminum investments are expected to be around $750 million in 2023, which includes both the recycled shop centers and the rolling mill. We are also completing four flat roll lines, which will likely cost about $200 million in 2023. Additionally, we have the biocarbon facility. Overall, these growth projects alone will likely bring our capital spending to around $1 billion in 2023. As we evaluate other projects, I anticipate that the total should not exceed $1.2 billion to $1.3 billion, but we'll provide more clarity in January. Regarding working capital, we expect to see seasonality in volume as customers adjust their inventories by year-end, along with pricing declines in both scrap and steel. Therefore, I anticipate a significant contribution from working capital in the fourth quarter.

Thank you. Our next question is coming from Tristan Gresser with BNP Paribas.

Yes, hi. Thank you for taking my questions. First one is on the cost of ferrous scrap. This came much higher than what we forecasted. And I guess this is due to the purchase of more expensive metallics in H1 that some of your peers also flagged. Are you able to quantify this extra negative impact yet in the quarter? And do you believe this will remain a headwind into Q4? Thank you.

So the question related to ferrous scrap pricing and our average price was higher than expected from their models. And I would tell you, there's a significant piece of that that has to do with higher pig iron prices. So during the first quarter with the Russian-Ukraine circumstance, we, as did others, went out and purchased more pig iron to have certainty around supply. It was at a higher price than we're currently seeing today, which I think Mark mentioned was around $500 per ton. And so the flat-rolled steel mills, specifically Sinton, Columbus and Butler are still working through that higher cost pig iron at this time. Mark, do you wish to add any more commentary?

The pig iron, and we also ended the quarter with some scrap inventory that obviously flows through into the higher-priced scrap inventory that flowed into the third quarter too. Those inventories are well in control now, and we're back to four-week, maybe five-week inventory level. So going forward, I think that will normalize. But the pig iron price in all honesty is going to continue into the fourth quarter, for sure.

Okay. That's very helpful. And maybe just a quick follow-up on the Buy Clean Initiative that has been put in motion by the US government. What kind of impact are you expecting from that new policy the potential boost to demand? And are you seeing already some impact on that initiative? Thank you.

Regarding the Buy America policy, it’s still early stages, and we haven’t seen much traction from it yet. However, discussions with commercial customers suggest that its impact won't be limited to Buy America alone. Looking at our steel operations, especially concerning our low carbon footprint for carbon steels and long product steel, we expect to benefit from these developments moving forward. We also anticipate that the Buy America policy, along with the Jobs Act and the infrastructure program, will positively affect demand, with noticeable traction likely in the next nine to twelve months. This should support steel consumption in the US, in our view. Mark, do you have anything to add?

No.

Thank you. Do you expect a significant drop in scrap flows with funds and scrap steel prices?

John, they've eased and ebbed a little. I would say that reduction in flow is probably going to sort of mitigate any further substantial decline in scrap pricing.

Thank you. Mark, I just want to recall that we met in 2003 at Darlington when you were working the House Lancaster for Nucor when you were a fresh student.

I remember.

Your aluminum competitors have 30- to 50-year old houses with Twin belt casters that you intimately understand often unionized. And maybe you're a little bit too humble or modest and don't want to say that you think you can build a new plant with an SMS design that's more efficient. People don't understand the opportunity you have in aluminum and congratulations. It looks great.

Thank you, John. I appreciate the reminder. To your point, the new aluminum mill represents a new opportunity for us. It reminds me of 27 years ago when we established SDI and successfully expanded in the steel industry. We face similar conditions in aluminum today as we did in steel back then. The industry is aging, facing significant legacy costs and inefficiencies, and it has been 45 years since a new mill was constructed. Glenn and his team are exceptionally skilled at utilizing the right technology and executing the build effectively and efficiently. This is an exciting time for us and for our younger team, as this project will serve as the foundation for our growth over the next 25 years.

Congratulations.

Thank you. Our next question is coming from Timna Tanners with Wolfe Research.

Hi, everyone. I appreciate the follow-up. I have another overarching question, if you don't mind. There are many new galvanizing lines being introduced by your company, Nucor, and potentially some upcoming ones from US Steel and Ternium. I'm curious if there's a more favorable outlook for galvanizing. Is there an incremental demand or a supply aspect that I'm overlooking that will continue to support the increased level of galvanized supply?

I believe the use of galvanized products is generally on the rise. Over my 20 or 30 years in the industry, there has been a shift from just one or two car parts being galvanized to nearly the entire vehicle becoming galvanized. This indicates a broad growth trend. Additionally, while discussions about lightweighting in the automotive sector often focus on stronger products, it also involves using thinner gauge materials. If you compare the amount of coated material now to what it used to be, thinner materials mean less throughput, necessitating more production lines to achieve the same volume. Therefore, I don't anticipate a flood of galvanized products or any issues related to that.

Okay, great. Thanks again. Appreciate it.

Ladies and gentlemen, that concludes our question-and-answer session. I'd like to turn the call back over to Mr. Millett for any closing remarks.

Well, super. Well, thank you, everyone, for your time today. Certainly, for those that have enabled our success, our customers, our service providers, and most importantly, our teams, an absolutely phenomenal group of people. We appreciate your loyalty because we've been doing business together for years and years and years. And to those in the investment community that support us, thank you. We will endeavor to continue to treat our money or SDI's money like our own, like your money. We're going to utilize it very, very effectively. I think if you look at our use of those proceeds, we're very diligent, very disciplined in this interesting environment, spending money, again, effectively with higher returns than perhaps the industry in general. So thank you. Thank you for your support and to every individual of the SDI family that's on the line. Thank you for what you do. Be safe each and every day and look after each other. Cheers. Bye.

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