Steel Dynamics Inc Q2 FY2025 Earnings Call

Good day, and welcome to the Steel Dynamics Second Quarter 2025 Earnings Conference Call. Please be advised this call is being recorded today, July 22, 2025, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to David Lipschitz, Director of Investor Relations. Please go ahead.

Thank you, Holly. Good morning, and welcome to Steel Dynamics Second Quarter 2025 Earnings Conference Call. As a reminder, today's call is being recorded and will be available on our website for replay later today. Leading today's call are Mark Millett, Chairman and Chief Executive Officer of Steel Dynamics; Theresa Wagler, Executive Vice President and Chief Financial Officer; and Barry Schneider, President and Chief Operating Officer. The other members of our senior leadership team are joining us on the call individually. Some of today's statements, which speak only as of this date, 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 the 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 annual 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 comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Second Quarter 2025 Results. And now I'm pleased to turn the call over to Mark.

Super. Thank you, David, and good morning, everyone. Thank you for being with us on our second quarter 2025 earnings call. As evident in our release, our team's achieved a solid second quarter performance. Now most fulfilling to me was the team's overall safety performance. They achieved an all-time low quarterly recordable and lost time injury rates. In fact, 80% of our over 100 locations didn't even have a single recordable injury. It's a supreme achievement by the team. My sincere thanks to everyone involved. Although experiencing some challenges in the second quarter relating to vendor oxygen supply that inhibited steel production, the Sinton team continued their progress. They increased sequential earnings, achieving pretax breakeven and another positive EBITDA quarter. We expect a steep acceleration of profitability for the remainder of this year and next. We believe we have reached an earnings inflection point for Steel Fabrication with expectations for increased profitability in the third quarter. We achieved record quarterly Metals Recycling shipments. Adjusted EBITDA was $533 million. Biocarbon is in the midst of commissioning with expectations for product shipments to begin later in the third quarter. We were awarded the Volkswagen Global Group Award for Sustainability. This is a testament to our low-carbon steel program and its associated impact on us becoming the supplier of choice for auto groups expanding in the U.S. And aluminum is here. We shipped our first commercial quality aluminum flat-rolled coils on June 16. So congratulations to absolutely everyone involved there, phenomenal, phenomenal progress. So we are successfully executing on many fronts, and I'm proud of the entire Steel Dynamics team. There's no doubt they are the foundation of our company and remain our first and foremost priority. As such, we are focused on providing the very best for their health and safety. We're building a world-class safety culture. Our team's dedication to our tech controller safety program is absolutely extraordinary and resulted in the record metrics this quarter. Continually inspired by the commitment of our team members to one another. They consider themselves family and challenge the status quo each and every day. But that said, there will always be more to do as we strive for a zero incident environment. So with that introduction, Theresa, some details on the quarter.

Thank you, Mark. Good morning, everyone. Thanks for joining us. Our net income for the second quarter of 2025 was $299 million, or $2.01 per diluted share, with adjusted EBITDA of $533 million. The revenue for this quarter reached $4.6 billion, surpassing first quarter results due to increased steel prices across the board. Our operating income for the second quarter was $383 million, which is 39% higher than the previous quarter, primarily driven by the expansion of the steel metal spread as prices rose more than the costs of scrap raw materials. We are focusing on our transformational growth initiatives. In our Steel Operations, we generated $382 million in operating income for the second quarter, which is over 65% higher sequentially, thanks to an increase in average realized pricing of $136 to $1,134 per ton, although total shipments slightly decreased due to a drop in flat-rolled shipments. The earnings from our steel platform were impacted by approximately $32 million due to a noncash write-off of consumable assets and reduced shipments at Sinton by around 55,000 tons due to a temporary shortage in oxygen supply, which has since been resolved. For shipment modeling in the second quarter, hot-rolled shipments were 930,000 tons, cold-rolled shipments were 114,000 tons, and coated shipments were 1,387,000 tons. Our Metal Recycling operations posted an operating income of $21 million for the second quarter, which was $4 million lower than the first quarter due to decreased ferrous pricing, where prime prices dropped by $50 per ton and other grades by $80 per ton. This price differential offset our record shipment levels. We continue to be the largest metals recycler in North America for both ferrous and nonferrous metals and are expanding our capabilities to support our growing steel capacity and aluminum flat roll operations through new supplier relationships and innovative separation technologies. Our Metals Recycling platform gives us a strong competitive edge for our steel, aluminum, and copper operations. Our steel fabrication segment recorded an operating income of $93 million in the second quarter, lower than the previous quarter due to a slight decline in realized pricing and rising steel substrate costs that compressed our margins. Federal programs, growth in manufacturing, and onshoring are expected to drive domestic investments and consumption of related flat and long product steel as well as steel joists and decks in the years ahead. I also want to congratulate our Aluminum Operations team on their first shipment; this is an impressive milestone. Operating losses in the Aluminum Operations totaled $69 million in the first half of 2025. We anticipate comparable losses around $40 million for the third quarter of 2025, consistent with the second quarter, improving to between $15 million and $20 million in the fourth quarter as we finish commissioning, start product certification, and ramp up production. We believe we’ll see positive monthly EBITDA results before the end of 2025, and with the project startup, we will stop capitalizing interest expense, estimating interest expenses to rise to about $30 million in the third quarter and the full $45 million in the fourth quarter. Regarding cash flow, we generated $302 million from operations in the second quarter of 2025. Working capital grew by $131 million during this quarter as we increased inventories for our aluminum investments. In June, we repaid our $400 million senior notes with a 2.4% interest rate that matured. We ended the quarter with $1.9 billion in liquidity, including $744 million in cash and short-term investments and our fully available unsecured revolver. For the second half of 2025, we expect capital investments to be around $400 million, mainly for completing our aluminum and biocarbon growth projects. Earlier this year, we raised our quarterly cash dividend by 9% to $0.50 per share, maintaining a positive dividend profile. Additionally, we repurchased $200 million of our common stock in the second quarter, which represents over 1% of our outstanding shares. As of June 30, we have $1.2 billion authorized for additional share repurchases. These actions highlight our robust capital structure and strong cash flow generation, reflecting our confidence in future growth. Our capital allocation strategy prioritizes high-return growth opportunities while ensuring shareholder distributions through a solid dividend profile and a flexible share repurchase program, all while we aim to uphold our investment-grade credit rating. Our free cash flow has significantly increased over the last five years from an annual average of $540 million to $3 billion, excluding our large strategic investments in Sinton and aluminum. We have established a robust capital foundation that supports meaningful strategic growth and strong shareholder returns while maintaining investment-grade credit metrics. We are well-positioned for sustained long-term value creation. In line with the 1.5-degree scenario from the Paris Agreement, we have set a 2030 emissions intensity target aiming for a 15% reduction in greenhouse gas intensity and a long-term target for 2050. We announced that all our steel mills achieved product certification from the Global Steel Climate Council in the second quarter, which offers our customers more transparency and confidence in sourcing lower embodied carbon steel products. This certification verifies emissions data with a certified science-based standard that aligns with the Paris Agreement. Decarbonization is a crucial part of our long-term value creation approach, and we are committed to our people, communities, and the environment, adhering to the highest integrity standards. We are excited about our first biocarbon production facility transitioning from construction to commissioning, with expectations for production to start in the coming months. We believe this facility could reduce our steel Scope 1 greenhouse gas emissions by as much as 35%, providing unique value and supply chain opportunities for many of our flat-rolled steel customers. We have a clear and manageable carbon reduction strategy that we believe will be less costly compared to what many of our competitors might face. Our journey towards carbon reduction continues, and we are determined to make a positive impact. Thank you.

Thank you, Theresa. Our Steel Fabrication Operations achieved a solid performance in the second quarter in a somewhat challenging environment as steel input costs increased and customer hesitancy prevented any meaningful increase in volume. However, order activity remains solid with the order backlog increasing by 15% since the beginning of the year and now extending into 2026. Pricing for steel joist and deck bookings has remained relatively stable through the first half of the year. Based on the current market environment, we believe we have reached an inflection point in profitability from our fabrication operations and expect third quarter earnings to improve sequentially. We continue to have high expectations for the business based on continued onshoring of manufacturing, recently announced significant privately funded manufacturing projects, and public funding for infrastructure and other fixed asset investment programs. The long-term uplift from this backdrop could be considerable for all of our platforms. Our Steel Fabrication platform provides meaningful volume support for our steel operations, critical in softer demand environments, allowing for higher through-cycle steel utilization compared to our peers. It also helps mitigate the impact of lower steel prices. Earnings from our Metals Recycling operation were modestly lower in the second quarter despite record shipments due to lower realized ferrous scrap prices as scrap flows were steady and exports declined. We believe ferrous scrap prices have stabilized and are likely to remain relatively steady throughout the rest of the year, aside from the typical seasonal fluctuations. Additionally, the team continues to expand its access to recycled aluminum in preparation for the ramp-up of our aluminum flat-rolled operations. The North American geographic footprint of our Metals Recycling platform provides a strategic competitive advantage for our steel mills and for our scrap-generating customers. Our Metals Recycling team is also partnering more closely with both our steel and aluminum teams to expand scrap separation capabilities through advanced process and technology solutions. This collaboration helps mitigate supply risk by making more grades of ferrous and nonferrous scrap usable for our steel and aluminum production. Additionally, it positions us to significantly increase the recycled content in our aluminum flat-rolled products, unlocking enhanced earnings opportunities. The steel team delivered a solid quarter with shipments of 3.3 million tons. In the second quarter of 2025, the domestic steel industry operated at an estimated production utilization rate of 77%, while our steel mills operated at a notably higher rate of 85%. This consistently higher utilization reflects our value-added steel product diversification, differentiated customer supply solutions and strong support from our internal manufacturing businesses. Our elevated through-cycle utilization rate is a key competitive advantage, underpinning our growing cash generation capability. Our realized steel pricing increased throughout our product portfolio in the second quarter. And just last week, Long products saw additional price improvement. Overall, domestic steel inventories remain lean from a historical basis. However, coated flat-rolled steel volume and pricing compressed during the quarter due to an inventory overhang related to imports that were received just ahead of the final ruling related to the associated industry trade case. Last fall, we and other industry participants initiated a trade case related to these products and have since received favorable preliminary countervailing and antidumping rulings. We anticipate final rulings to be determined before the end of September. This uniquely positions us as we are the largest producer of nonautomotive coated flat-rolled steel products in North America. Together with the announced Section 232 steel tariffs, these developments are expected to positively impact demand for lower carbon emission U.S.-produced steel. The underlying steel demand remains steady. However, customers continue to exercise caution in placing orders due to ongoing uncertainty related to trade policies and interest rates. That said, we believe steel prices have stabilized in the near term with potential for upward movement in the future. Our Sinton, Texas flat-rolled mill achieved higher earnings in the second quarter despite operating at a lower utilization rate of 71% due primarily to lack of sufficient oxygen supply caused by a vendor. We believe this impact to our operations could be as much as 55,000 tons. Sufficient oxygen, as Theresa mentioned, has been restored and the mill is operating very well. The team continues to make improvements in yield, cost reduction and quality. They are also continuing towards additional product development to expand our current flat-rolled steel capabilities. Meaningful progress is being made on API pipe grades, high-strength grades, grade 100, 110, pressure vessel quality and OEM qualification packages for our automotive customers. We are seeing increased shipments from Sinton's value-added coating lines, which are strengthening the facility's product mix and boosting its through-cycle earnings capabilities. Regarding the steel market environment, North American automotive production estimates for 2025 were recently revised modestly downward, reflecting ongoing uncertainty related to trade discussions. Fortunately, our specific automotive customer base has not only remained stable, but have provided opportunities for growth. We have become a supplier of choice for many U.S.-based European and Asian automotive producers due to our current and planned future superior carbon content capabilities. Additionally, numerous announcements have been made regarding a considerable volume of automotive production moving to the U.S. from foreign locations in the coming years. Meanwhile, we continue to grow market share in both flat-rolled and SBQ steels within the sector. Nonresidential construction remains stable despite broader predictions of a potential slowdown. So far this year, construction sector employment and spending have been stable. Pricing for most long products has generally improved, supported by strong backlogs. Looking ahead, ongoing onshoring activities, recently announced domestic manufacturing projects and continued infrastructure spending are expected to further support fixed asset investment and construction-related demand. In the energy sector, oil and gas activity remains steady with encouraging signs of increased demand for both flat-rolled and SBQ products heading into the third quarter. Additionally, solar is particularly strong currently as producers attempt to benefit from expiring incentives. Overall, we remain extremely optimistic concerning steel demand and pricing dynamics for the domestic producers in the coming years based on the expected demand from new manufacturing and U.S. produced steel content requirements. With that, I'll return us to Mark Millett.

Super. Thank you, Mr. Schneider. Appreciate that. Well, as you've seen these past years, I believe it's more than evident that our performance-driven team-based culture in combination with a proven, diversified and value-add business model drives consistently superior financial metrics. This consistently strong performance continues to support our cash generation and growth investment strategies, allowing a balanced cash allocation strategy that has delivered high shareholder returns. Our disciplined investment approach continues to support a strong and growing through-cycle cash generation profile while maintaining one of the highest return on invested capital amongst our peers. As mentioned, Sinton did face some oxygen supply challenges in the quarter, which have since been corrected and productivity has been reestablished at around 80% and growing. The facility continues to improve operational reliability, enhance its downstream operations. Despite the hurdles, Sinton increased its EBITDA, as we said, and we expect a meaningful positive shift in its financial performance for the remainder of the year. The four flat-rolled steel coating lines are also continuing to increase volume and achieve high-quality standards. These types of high-return investments are key to our value-added product and supply chain differentiation strategies. Theresa already shared the exciting update for biocarbon. This is an integral part of our sustainability program that is truly differentiating us in the eyes of our customers. As I said, finally, we're incredibly excited to be officially part of the aluminum flat-rolled product supply chain. Our aluminum investments are compelling and parallel our entry into the then antiquated steel industry over 30 years ago, and there are distinct similarities. An industry with generally older inefficient assets at a considerable cost disadvantage and companies challenged to earn their cost of capital, thereby unable to reinvest in facilities and new technology due to the lack of funds. So we believe we have a significant competitive position with aluminum. Unlike our entry into the oversupplied steel market, there is a significant domestic supply deficit of over 1.4 million tonnes for aluminum sheet, and this deficit is forecasted to grow. In 2024, that deficit was supplied through high-cost imports which are now even higher cost as the tariffs increased from 10% in '24 to the current 50% level. There's clear alignment with many of SDI's core competencies of construction and operational know-how. Our ability to build large capital-intensive assets has been proven once again at Columbus. It's a phenomenal facility. The customers are in awe. Our team did a great job. We have deep experience operating melting, rolling and finishing facilities. Our differentiating performance-driven culture will drive higher efficiency and lower cost operations. There's also excellent commercial alignment. Two-thirds of our carbon flat-rolled steel customers consume and process aluminum flat-rolled sheet. We will have both steel and aluminum product offerings as we gain market share in the automotive sector. And our new penetration into the countercyclical beverage can market sector is a new market for us. We can take great advantage of our raw material platform to drive higher recycled content. As noted by Theresa earlier, we are the largest North American metals recycler, including aluminum, and we've developed new separation technologies allowing us to have access to usable aluminum scrap at lower cost. Feel confident in our earnings differentiation through-cycle EBITDA of $650 million to $700 million, plus $40 million to $50 million for Omni. As we discussed in the past, the four key areas of advantage are labor efficiency, higher recycled content, higher yield and optimized logistics. This strategic investment is a cost-effective and high-return growth opportunity, providing SDI with a new product offering and growth platform. And obviously, the project is no longer just a vision, it's here. The customer base is excited to have a new market entrant that is known to be innovative, customer-focused and responsive to their needs. For us, business relationships are long-term, founded on trust and the continuous goal of creating mutual value. As our aluminum growth has become a reality and our reputation permeates the industry, aluminum professionals with vast experience have joined us in this exciting project. They see the vision and are energized by our culture, where they realize they will be heard and can have an impact. They have helped us build a phenomenal team that combines in-depth knowledge of aluminum flat-rolled steel aluminum operations, commercial markets, process technology, and customer service, complementing our SDI professionals that bring our performance-driven entrepreneurial culture. Conversations with existing and new customers remain robust as they need and desire new supply options. We have several automotive and beverage can producers that plan to aid us in the product development and rapid product certification as we ramp operations. In the interim, we will be selling a lot of industrial and can sheet products with the expectation to reach our optimized product mix sometime in 2027. Three of our four melt cast houses are fully commissioned at Columbus and are producing all 3000, 5000 and 6000 series ingots for industrial, can sheet and automotive sectors. The hot mill and cold mill are in startup and are on schedule and have successfully produced 3000 series industrial coils. The numerous stream lines are also in various stages of commissioning and startup, all on schedule. Based on our current pace, we anticipate exiting 2025 at a utilization rate of between 40% to 50% and exit 2026 at a rate of 75% as product certifications occur. We expect to be at EBITDA breakeven to slightly positive before the end of '25 and increasing thereafter as we continue to ramp and optimize our product mix. You have to be there, but there's a real sense of excitement across our company and the plan, driven by a passion to build on our legacy in steel and lead the transformation in the North American aluminum market. We're impassioned by our current and future growth plans as they will continue to drive the high-return growth momentum we have constantly demonstrated. The earnings growth of these new projects is compelling. The capital spending for Sinton, the four value-add lines, and Aluminum Dynamics is largely complete with a projected future through-cycle EBITDA contribution from these projects alone of over $1.4 billion. Steel Dynamics has grown to an incredibly resilient cash-generating business of scale and diversification, driven by the best teams in the world. They will maximize opportunity as the industry continues to undergo a paradigm shift, where we have a renewed focus on strategic mercantile policies to ensure fair and sustainable competition. It's already evident by the recent positive trade determinations for coated flat roll and obviously, all the 232 tariff initiatives on steel and aluminum. And importantly, the inclusion of tariffs on steel content and derivative products, particularly fabricated structural steel, which has plagued the domestic industry for years. We have risk mitigation to address supply chain dislocations that have accelerated reshoring of manufacturing. AI and cloud computing will support the need for more nonresidential construction for data centers, chip factories, battery plants, along with growing fixed asset investment associated with public and private dollars. Decarbonization itself will materially steepen the global cost curve, providing Steel Dynamics with a meaningful competitive advantage to gain market share and increase margins. The evolving metals industry landscape provides an opportunity for us to further enhance our earnings potential. So as we've said before, we really are blessed and our people are the foundation and fuel of our success. I want to personally thank each of them for their passion, commitment, and unwavering dedication. And we are committed to them, and I remind those listening today that safety for yourselves, your families, and to each other is our highest priority. I'd also be remiss not to express my gratitude to our loyal customers, many of whom have been with us since the beginning. These partnerships are built on mutual trust, keeping our word, and delivering innovative solutions that enhance their value. Our new aluminum partners can expect the same level of commitment and collaboration. And to our suppliers and service providers, thank you. We value your continued support and the strong relationships we've built together. Our culture and business model continue to differentiate our performance, leading to best-in-class financial performance. And as a circular metals business, we're uniquely positioned to offer lower carbon supply chain solutions, enhancing sustainability while helping to mitigate cash flow volatility through all market cycles. This positions us to deliver superior shareholder returns and create lasting value for us all. We look forward to creating even more new opportunities for everyone today and in the years ahead. And with that said, Holly, we would love to answer the questions of the group.

Your first question for today is from Carlos De Alba with Morgan Stanley.

Just on the aluminum business, congrats on producing and shipping the first coil. Just wanted to maybe get a little bit more color on what drove the slightly lower utilization rate in 2025 and 2026 and also the delta in the EBITDA profitability, which I think before it was said that in the second half of the year will be EBITDA positive, maybe just the semantics and it's still the same message, but it felt that now I felt that the EBITDA positive now is coming at the very back end of the year, whereas before, maybe it was my expectation that it will be more earlier in the second half of the year.

I don't think there's any significant change in our perspective, to be honest. Considering we’re in a start-up phase, estimating a specific percentage, around 40% to 50%, might be challenging, but there’s no fundamental shift in our thinking, our mill capability, or anything that would warrant such a change. I didn’t quite catch all of Theresa’s question.

No. Carlos, we still are confident that as we progress, we do believe that we're still going to be EBITDA positive in the second half of the year. I guess we got a little more specific in our notes saying in the fourth quarter, but whether that's September, October, November, December or October, November, I'm not sure that there's a significant difference. So I think the takeaway should be that we still have full confidence in the aluminum operation. The team is doing an incredible job, and we weren't trying to message anything specifically otherwise.

Your next question for today is from Katja Jancic with BMO Capital Markets.

Maybe on Sinton, can you disclose how much of EBITDA the mill generated in 2Q?

Katja, I'm sorry. I believe that starting at the beginning of this year, we are not providing specific financial metrics for Sinton. However, it performed significantly better than the first quarter. That said, we are still expecting a substantial increase in the second half of the year.

And when we do look at the second half of the year, is the mill now at a point where it could generate closer to that $500 million annualized rate? Or are there any lingering issues still?

That's a good question, Katja. So they're still not operating at that pace given that they need to continue with the product development. As Barry mentioned, we're really excited because they're doing automotive grades now, API grades, but we need to be able to get the facility with the proper mix of that value-added opportunity, and that will take some time. So that will likely take through the second half of the year. So I would view 2026 as that opportunity for Sinton to be at the, what we say, through cycle run rate, to your point, of around $500 million.

Your next question for today is from Tristan Gresser with Exane BNP Paribas.

Maybe just a follow-up on the aluminum venture, if you can discuss the market environment in which you'll be ramping up your new aluminum facility. I mean it looks very different from what was the initial base case or initial market environment. So from a trade, from a demand perspective, where do you see the new opportunities and also maybe the risk associated?

I believe the environment has become even more favorable. The supply deficit is definitely present and will continue to expand. We are seeing these deficits being addressed through imports, which come with significant tariffs. Increasing our volume in this context is highly advantageous for us and beneficial for our customers as well. I foresee no issues in this area. Our discussions with clients have been exceptionally positive. We've begun to showcase our facility to larger customers, and they are genuinely impressed by what we have to offer. They appreciate our approach during discussions about supply agreements and product capabilities, and they recognize that we genuinely partner with them, which they find refreshing. Overall, we are excited and perhaps more enthusiastic now than we have ever been.

And Tristan, to add to what Mark just described as a more positive environment, when we modeled and projected the $650 million to $700 million of through-cycle EBITDA associated with our aluminum investments, the spreads that we actually used from a product set are more conservative than what we're seeing in the market environment today. So there is a lot of upside opportunity.

I understand your point. I was perhaps referring to the possibility of reduced demand, particularly in the can and beverage sectors, where price elasticity could be significant. However, based on your discussions with customers, it appears that there is no risk in that area, if I understood you correctly.

Again, talking to the end consumer, not the can makers themselves, but they do not see that. There's still an overwhelming desire from a societal and environmental perspective to eliminate plastic bottles. And there is a clear desire from the can makers and from the bottlers and from the Coca-Colas, the Pepsis, and the beer guys, they're all wanting aluminum right now.

Okay. I wanted to ask a follow-up regarding the tariff situation. I know you discussed this in Q1, but I would like to know if there have been any changes concerning your exposure to pig iron. How much do you source from Brazil? I understand the 10% increase wasn't significant, but if we face a 50% tariff on pig iron imports from Brazil starting in August, what actions could you take to mitigate those effects? I have another question after this.

Yes. Tristan, this is Barry Schneider. The pig iron topic is one that we're watching closely. I want to make it clear that our long products mills do not use any iron substitutes or pig iron. So this is a flat-rolled issue. In our three flat-rolled producing plants, our Butler facility has an iron producing facility where we use waste oxides and recycled iron content to generate our pig iron. So the Butler mill is largely independent of the merchant trade, which brings us to the products we do purchase. The tariff is concerning. Historically, the United States government has not looked at raw materials as something that would be tariff going way back to the founding of our country. The 201, the 301 and the 232 previously did not tariff pig iron coming into the country. We maintain a supply chain that has been under quite a bit of duress in the past five years. Historically, pig iron was produced in Russia and Ukraine. Since Russia launched the war against Ukraine, those materials have been severely reduced. We still maintain a relationship with Ukrainian producers. To the extent that they can supply, we're happy to buy from them. But we have shifted a lot of our production to Brazil. So as we look at the tariff landscape, we balance our metallic spreads. One of the things we talk about a lot is being able to get more value out of the scrap recycled supply chain. It's one of the powerful benefits of having Omni as a captive scrap supplier to us that we can bring in the highest quality materials and continuously balance based on cost, productivity, and quality. So we'll manage as we always do. There are alternatives we can explore, and we'll continue to work with the government and hope that there is some kind of relief when it comes to raw materials and the tariff strategy. So to that point, the specifics are always changing based on the various cost inputs. It's literally a model our people can work every day, depending on what scrap assets and iron assets they have at their disposal. So we continue to look at it as a challenge for us to thrive in. Our culture has developed a good competency, and we attack it every day.

All right. That's very clear. And if you allow me a last one, just the big pictures on tariffs on Section 232 tariffs and do you think this time is different versus 2018? Are you confident we won't see a dilution in the tariffs and that those sectoral tariffs are going to stay? And I'm talking about steel, but also obviously now aluminum.

This is Mark. I believe the situation will change, but we are certain that tariffs will continue to be a key part of trade agreements moving forward. Looking back at the early days of the administration, the renegotiation of NAFTA into the USMCA marked a significant improvement in our relationship with Canada and Mexico. The boost in domestic content and other provisions really benefited the U.S. and, more importantly, North America as a whole. The USMCA is scheduled for renegotiation again in 2026, and we think that the ongoing tariff and trade policy discussions among the three countries are a precursor to that. We are optimistic that it will lead to a better agreement for the U.S., particularly in terms of preventing language in the supply agreement that could allow for the bypassing of tariffs through Canada and Mexico from China and other regions. Overall, I do not expect the current levels to remain, but I believe this will ultimately foster a much improved trade environment in the long run.

Your next question is from Phil Gibbs with KeyBanc.

Can you explain the benefit of biocarbon and the potential ability to replace other materials? I think I just wanted a better understanding of what it brings to the table.

Good morning, Phil. What we initially planned for biocarbon is that it will enable us to replace a significant portion of our carbon site usage in steelmaking. We intend to send this to our own steel mills to help reduce our carbon footprint by as much as 35%. Additionally, the process allows us to produce some hydrogen, making it quite unique. We will have more details as we start ramping up the facility, which is designed to be modular, allowing for growth. In the long term, this could lead to several opportunities. We've mentioned in the past the potential for pig iron, and if we secure more biocarbon, we could possibly have our own supply of pig iron in the U.S. that would be considered low carbon. This points to a long-term investment strategy surrounding the biocarbon product for us. Furthermore, we've found that certain OEM customers believe there may be additional opportunities for carbon credits that would enhance the value of our product in the flat-rolled steel market. We will keep you updated on the biocarbon progress as we begin this quarter.

Yes. To add to that, it's important to consider our overall sustainability strategy and our journey towards carbon neutrality. There is no doubt that European automakers are maintaining a strong focus in this area. As Barry mentioned, the domestic auto sector has faced some challenges. Our primary volume comes from Mercedes, BMW, and Volkswagen, with some contributions from Volvo. Regardless, we are very committed to European supply. They continue to prioritize reducing carbon footprints and sustainability initiatives. The progress our team has made in the automotive sector is largely driven by our sustainability efforts. We are capitalizing on the fact that we have some of the lowest carbon footprint mills globally, as recognized by European manufacturers. This distinction is setting us apart in the market. Additionally, the recognition from Volkswagen for our sustainability efforts, which Barry went to Europe to receive, was remarkable.

Thanks, Mark and Theresa. Regarding expectations for Sinton in the third quarter, is there an anticipated sequential profit improvement? If so, what are the drivers behind it? Additionally, what is the estimated dollar impact related to the lost production in the second quarter at Sinton?

So Phil, again, I know everyone is interested in the profitability of Sinton specifically. I would say what we believe will drive the significant increase in third and then fourth quarter earnings from Sinton will be, one, volume, volume, volume, volume. So we do believe that we're going to have higher volume, but also higher value-added product mix, which is key to the profitability at Sinton. And we won't have had the curtailment of the oxygen, and we also had a maintenance outage in April. So there are some key things high level that we have confidence in that will drive that increased profitability.

And Theresa, I'd like to add to that. The value-added lines, with two galvanizing facilities and two paint lines now, have high startup costs, but as we ramp up production and deliver more product to the marketplace, it significantly lowers the cost associated with producing high quality. We are very enthusiastic about the yields and the percentage of prime products being shipped. We are also optimistic regarding the antidumping countervailing duties, as we've been competing with inventory that came from various countries before the rulings. Those inventories are still being processed. The expectation of final rulings by September indicates that the markets will return to more normal profit levels. We are pleased with the cost of quality. While it was ambitious to establish two lines simultaneously, we are starting to benefit from our team developing their skills as painters and coaters. We look forward to a positive future due to the ongoing improvements made by the team each day.

Your next question is from Alex Hacking with Citi.

You mentioned that you expect fab to see an inflection point. Is that being driven by price or volume or both?

Alex, the primary driver of the inflection point for fabrication in coming up here in the third quarter is volume, but there's also stability in the price, which is very supportive.

Okay. Can I ask a follow-up or just stick to one.

Go ahead. Everyone else's.

So, Barry, you mentioned some of the enhanced sorting technology available for aluminum scrap and the potential to source more for your rolling mill. Given that Canada has a 50% tariff on primary material, it's uncertain going forward, but we’ll see. Can you quantify or discuss the opportunity for Steel Dynamics, and more broadly for the U.S., to use more of the scrap that we currently export due to sorting limitations or other reasons? Could this be significant for Steel Dynamics?

The investments that Omni have made have really been focused on the existing scrap supply streams. In the United States, over 70% of the steel generated is from arc furnaces and recycled scrap. So the more value we can extract, the more those products can find their way back into a high-quality application. So our teams are very focused on all of the different technologies together. We continue to see value with partnering with our customers to be able to segregate that scrap at the very beginning of the supply chain. Those are all products that the American steel producers are very good at getting. Omni source separates us from the rest because it's such a captive loop that we provide real-time benefit from the scrap yards, the suppliers right into our melt shops. So the secret of getting that value is having a system that allows you to know when you can get the best products into the furnace, 24 hours a day, 7 days a week. And that's the competency our teams have worked very hard together and having a scrap and steel company that are so closely partnered has really allowed us that benefit. So we'll continue to do that. That's where value is. Any time we can find higher value recycled content, that's what we're all about.

Additionally, P1020 is reflecting an increased cost due to the appreciating tariff. The rise in recycled content is certainly compounding this effect. UBCs are currently being sold at approximately a 58% discount, which is similar to where they were a year ago, but it’s a discount on a larger number now. Therefore, we believe the spread opportunity is significantly improved.

Your next question for today is from Lawson Winder with Bank of America Securities.

Thank you, operator. Mark, Theresa, Barry. Nice to hear from you, and thank you for the update. On the coated steel overhang that you discussed, are you seeing this overhang dissipate at all now into Q3? And could this potentially mean a sales flow-through benefit into Q3 '25? So could we be potentially modeling an unusual pickup in sales in Q3?

I wouldn't call it unusual. I would think it's more returning to levels that we would historically have seen with spreads between coated and hot-rolled products. We do see the inventories winding down. And more importantly, we don't see more material coming in behind that. And I think that's the significance of the antidumping CVD cases. Those are based on existing trade law and have a long-term window where we look at sunset reviews to watch behavior of certain countries and companies within those countries. So to establish these precedents now in and amongst the 232 discussions, this creates a level playing field where we can do what we do best. And we see it as returning to the normal profitability levels you would see with these value-added products.

Okay. Sure. And if I could just add one follow-up. On the oxygen availability, can you elaborate on what was driving the suppliers' decision to limit that supply? And then just like stepping back and looking at this from like a sourcing point of view, is that market particularly tight in the Southwest that it somehow prevented you from finding a backup supply?

Well, I think when you think about the Texas community, the petroleum industry is very large down there, as we all know. So we had the opportunity to actually receive the oxygen through a pipeline agreement, whereas sometimes we would more typically have an air separation plant on our site. So this provided us with a good alternative, we believe. We believe it is a good long-term alternative. But when there was a maintenance problem at the supply facility, the entire region to some extent, actually backed off of what they consumed. So we are definitely evaluating whether or not we can invest other technologies on site that make it more reliable. This isn't something we would anticipate being a regular event. Quite surprised that it happened, but happy how we worked through it. And so we'll always look at supply chain problems, but we think we have a good supply chain solution here. And going forward, we don't expect it to be an issue.

Your next question is from Mike Harris with Goldman Sachs.

Just one for me here. You guys highlighted that your steel and aluminum products have overlapping customer bases. But what about the internal sales organization? Is that the same? Or is it a separate sales force? And if the latter, how should we think about the potential SG&A impact as you ramp up on aluminum?

Well, actually, we have independent sales teams. There are certain markets where our people will overlap for sure, because we have such good relationships. So there are some construction areas and in automotive where our teams will work closer together. But the materials are quite different, particularly in automotive where the product has to be developed. So we believe it will be positive, but it doesn't allow us to have just one sales team. It will be unique.

So, Mike, to your specific question around ramp-up of SG&A, you actually are going to see the opposite uniquely because up until this point, because we were in construction, all the costs that weren't capitalizable related to the project actually had to be recorded in SG&A. Now that we're in startup, you're going to start to see those operational costs be appropriately in cost of goods sold. So you're going to see a decline overall in SG&A on the income statement.

Your next question for today is from Andrew Jones with UBS.

I have a couple. Just firstly, on the fab side, you're talking about stable prices into 3Q. I mean, obviously, post-tariffs, the substrate prices obviously moved up quite a bit when those were first introduced. I mean, do you expect to pass on those higher substrate prices like into 4Q later in the year? Or have we sort of met buyer resistance given current demand levels? And I've got a second one and then I'll follow up afterwards.

Andrew, related to the substrate costs, yes, steel prices, as they go up, we only keep around 8 to 10 weeks of steel substrate on the ground in our fabrication operations. So it will go up. But one has to remember is that volume has a significant cost compression in fabrication. There's not a lot of fixed asset investment. It's more manpower. And so with that, as we have incremental volume, really that profitability drops very quickly to the bottom line. And that's the main driver for what we expect to see for improved profitability in the second half of the year.

But you don't see any scope for really increasing price in the current environment?

No, I didn't say that, but we don't really talk about pricing commercial aspects or my commercial team is going to get excited with me. So no, that shouldn't be your takeaway.

Yes, sure. Can you provide a rough estimate of the utilization in the second quarter or an approximation of the proportion of value added during that time? As we look ahead to the third and fourth quarters, how much do you expect that to increase, so we can better understand the potential for profitability improvement?

I don't have a specific percentage in mind, Andrew. What I would recommend is to look at the coated volumes for flat-rolled products. If you examine the coated volumes over the last four quarters, you'll see they've decreased due to the inventory import situation we've faced in flat roll. Taking that into account, along with our view that most of the structural and engineered bars are value-add, you can get a good sense of the potential for volume growth in the second half of this year. Unfortunately, I just don't have those metrics readily available.

And this is a question just on the AI business. I mean you obviously flagged the more supportive market conditions that we're seeing now. I mean, it might be difficult to answer it, but that $650 million to $700 million, I mean, what would that look like if we put everything on spot today? I mean do you have any sort of ballpark for how profitable that operation could be at full capacity?

Andrew, I'm sorry, that's not something that we would share at this point. We're still leaning in. We like to talk through cycle. That's how we make our investment decisions, both from an acquisition perspective and from greenfield. So we'll stick with the $650 million to $700 million on a through-cycle basis and then let our results speak for themselves in the coming months.

Your next question is from John Tumazos, a private investor.

First, you mentioned some aluminum alloy numbers in your presentation, and they were unfamiliar to me. Maybe if David could circulate a message afterward repeating the alloy numbers and maybe what their chemistries are that would help to educate us on aluminum. More important, in terms of qualifying for can sheet and auto sheet in aluminum, what are the dimensions of qualification or the theaters the customer scrutinizes? Do you have to separately qualify the cleanliness of the scrap, the slab metallurgy, gauge and shape, ductility, surface, coatings? Teach us what the hurdles are.

It's always great to speak with you, John, especially since you often have the final question. Regarding the series, 3,000, 5,000, and 6,000 are the main grade groups. The 3,000 series, which includes grades like 3104 and 3103, primarily consists of industrial and can sheet grades. The 5,000 series is more oriented towards heat-treated applications, while the 6,000 series is mainly used in the automotive sector. In terms of qualification, it's quite similar to the process of qualifying steel. In the automotive industry, there's typically more detail involved, as they evaluate the entire process from beginning to end and adhere to ISO and automotive quality standards. The qualification for can sheet is somewhat different and focuses more on in-use conditions. Cleanliness is particularly vital for can sheet, considering it is thin and designed to hold beer under pressure. Overall, I don't see a significant difference between qualifying steel and aluminum.

Your next question is from Bill Peterson with JPMorgan.

A lot of my questions have been asked, but I wanted to ask about utilization for the mill. So I guess outside of the normalization of Sinton coming off the oxygen supply issue, how should we think about mill shipments in the third quarter? Does the demand environment you see today support a return of utilization approaching or exceeding 90% in the third quarter?

Yes. I think if you look at overall utilization quarter-over-quarter, it was a little disappointing for us, but it was a confluence principally of the oxygen issue in Sinton. And then we had our scheduled maintenance outages actually all three mills in the quarter. So, Butler, Columbus and Sinton. So I think a large portion of that will turn into the third quarter.

Okay. And I know you don't like to get precise on pricing in the downstream fab business, but I wanted to see if there's anything you wanted to call out in terms of mix impacts, mix between joist and deck as it may relate to some of the projects you're expecting in the third quarter. Just anything just that we should be mindful of?

Thanks for the question, Bill. That shift, I know you know fairly well that we started to get more and more into deck. But consistently now, probably for at least the last year, it's basically about 50% deck and 50% joist, and I don't see that changing in the second half of the year.

That concludes our question-and-answer session. I'd now like to turn the floor back over to Mr. Millett for any closing remarks.

Super. Thank you, Holly. And just quickly, thank you to everyone on the call today. Thank you for listening in for your time. For those that are investing in us, thank you for your direct support. I would love to have everyone else that does not join the family and talking to family team members, SDI folks out there. Thank you. Thank you. Thank you for a phenomenal job each and every day. And remember to be absolutely safe for yourselves, for your colleagues and for your family in general. And to the new members or joiners and partners to SDI through aluminum, we look forward to working with you in the future. And hopefully, we'll show that we are a totally differentiated company for you to work with. So thank you, everybody. Have a good day. Be safe.

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