Good day and welcome to the Steel Dynamics Second Quarter 2019 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 be following at that time. Please be advised this call is being recorded today, July 23rd, 2019 and your participation implies consent to our recording the call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to Tricia Meyers, Investor Relations Manager. Please go ahead.

Thank you, Christine. Good morning everyone and welcome to Steel Dynamics second quarter 2019 earnings conference call. As a reminder, today's call is being recorded and will be available on the company's website for replay later today. Leading today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and Theresa Wagler, Executive Vice President and Chief Financial Officer. We also have leaders for our operating platforms including our Metals Recycling Operations; Russ Rinn, Executive Vice President; Steel Operations; Chris Graham Senior, Vice President of the Long Products Steel Group; Barry Schneider Senior Vice President, Flat Roll Steel Group; for our new flat roll mill and Southwest strategy we have Glenn Pushis, Senior Vice President, Special Projects; and Miguel Alvarez, Senior Vice President Southwest U.S. and Mexico; and for our fabrication operations; Jim Anderson, Vice President Steel Fabrication. Some of today's statements, which speak only as of this date, may be forward-looking and predictive, typically preceded by believe, expect, anticipate or words of similar meaning. They are intended to be protected by the Private Securities Litigation Reform Act of 1995 should actual results turn out differently. Such statements involve risks and uncertainties related to our steel, metals recycling, and fabrication businesses, as well as the general business and economic conditions. Examples of these are described 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 is applicable on any later SEC Form 10-K. You will also find any reference to non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Second Quarter 2019 Results. And now, I’m pleased to turn the call over to Mark.

Thank you, Tricia. Good morning everyone. Welcome to our second quarter 2019 earnings call. As always, we appreciate and value your time with us this morning. But first I'd like to thank the SDI team for delivering a solid quarter, despite a challenging pricing environment and congratulate them for their continued innovative passionate spirit that continues to drive this phenomenal company toward excellence. It is gratifying to see our teams continue to break records, create new products, and find new ways to be even more productive, cost-efficient, and safe. But first, to begin the morning, Theresa will provide insights regarding our second quarter results.

Thank you, Mark. Good morning. Our second quarter 2019 net income was $194 million or $0.87 per diluted share within our guidance range of $0.86 to $0.90. Second quarter 2019 revenues were $2.8 billion, 10% lower than second quarter 2018 sales and 2% lower than the first quarter sequential results as average flat roll realized steel prices decline. Our second quarter 2019 operating income was $285 million, 43% lower than prior year second quarter earnings driven by flat-rolled steel metal margin compression and 2% lower than sequential first quarter results, primarily due to lower shipments and product pricing within our long product steel operation. To take this moment to level set, our financial results are quite strong. They're just lower relative to our record high 2018 results. And as we discuss our business this morning, you'll find we are constructive concerning underlying steel demand and optimistic concerning our unique earnings catalog. Within our steel operations, second quarter shipments increased 3% sequentially to 2.8 million tons, a result of the continued ramp-up of our Heartland facility and the recent addition of United Steel Supply. Our average quarterly realized steel sales prices across all operations decreased $23 per ton to $879 in the second quarter. However, if you exclude our steel processing location sales, the average sales price for our steel mills declined $41 per ton as averaged scrap cost only declined $22 compressing our steel metal margin. The result was second quarter steel operating income of $295 million and although lower than prior year results, historically, a very good performance. I want to take a moment to mention additional information we provided related to our steel production volumes versus our steel processing volumes. It's important to note the change in our steel mix from almost purely steel production economics to the…

Super. Thank you, Theresa. Safety is and will always be our number one value and first priority. There's nothing more important. While our performance remains significantly better than industry averages, it's clearly not enough. It's not good enough. We must all remain vigilant both at work and at home, to be continuously aware of our surroundings and those around us. I challenge all of us to remain focused and strive toward our ultimate goal of zero incidents. The fabrication platform delivered a strong performance, with earnings increasing almost 50%. Despite continued wet weather hindering the pace of construction projects, volumes increased based on a steady underlying demand environment. Profit margins also expanded as raw material steel input costs decreased meaningfully. Our order backlog remained strong to slightly ahead of where we were at this time last year. Project backlogs are expanding as contractors struggle with the construction labor shortage, which should prolong this non-residential construction cycle. The ongoing strength of this business and continued customer optimism bodes well for non-residential construction demand well into next year. Ferrous scrap pricing trended down through the quarter, with both prime and obsolete scrap indices falling almost $90 per gross ton in three months. Our metals recycling profitability decreased as a result of the lower ferrous selling values and lower non-ferrous shipments. Scrap pricing appears to have stabilized in July. Scrap flows began to slow later in the quarter and manifested by lower procurement values thereby reducing dealer and the odd inventories, and export volumes remain weak. Although muted, we would expect some firming of the scrap price over the next four to eight weeks by perhaps $20 a ton. The manufacturing base is still generating an ample supply of prime scrap. We anticipate export volumes to remain constrained throughout the rest of the…

Thank you. [Operator Instructions] Our first question comes from the line of Chris Terry with Deutsche Bank. Please proceed with your question.

Hi, Mark, and thanks for taking my question. Just around the new mills, just wondering if you could talk a little bit about the incentives, how they play out and over what time line and the sort of things the discussions you had on that side. And then, around the galvanizing just on the CapEx side the extra 100,000 ton expansion there. Can you just talk a little bit about customer feedback, and how you came to the decision on that? Thank you.

So Chris, related to the incentives, there's approximately $150 million to $155 million worth of incentives. Some of that probably 10% to 15% of that would be more in the immediate time frame over the two to three-year time frame. The rest of it is a little bit longer on half of the property taxes, so more of a 10-year time frame. And we'll be getting more specific with that as time goes on.

It is in -- relative to the galvanizing expanded volumes, I think we said 450,000 tons in the past to 550,000 tons. Obviously, our past commentary was way before the real detailed conversations with equipment suppliers, and also just internal debate with design -- with our own talent, and we just believe that 550,000 tons for the anticipated line is reality for that line, and certainly going to be absorbed by the market play.

Okay. Thanks a lot.

Our next question comes from the line of Matthew Korn with Goldman Sachs. Please proceed with your question.

Hi. Good morning, everybody. Thanks for taking my questions. So we spent so many months watching sheet prices fall and focusing on supply ramp-ups. It's exciting to see prices start to gain some traction and some bullishness appear in the scrap markets. Now back in February, it looked like the market had also had a little bit of a turn. You saw favorable seasonality anticipated, iron ores is popped in, some price hikes were announced. But that turned out to be a head fake. So, a question for you is, what do you think is different this time around with where we are in the cycle?

Well, I think obviously the principal pressure has been the destocking of the supply chain. And to be honest, as I talked with customers over the past six to seven months, some of them since December, people have been a little surprised in all honesty that the pricing dropped as far as it did in the first place, because underlying demand we believe and I think all our customers believe, is generally intact, and as we said it’s very, very constructive. So, you're seeing a couple of sort of boiled down the price increases. I think you probably saw the public price increased again -- the additional price increase again yesterday. The indices have come up to around about $550-ish today from a low of $505 in June. The future -- September future is around the $605. I do believe that the recent price increases will certainly achieve, if not exceed, that future level.

Got it. Then let me ask on the new site in Texas. So, first, in terms of timing of permitting your final incentives, when should we see that all summed up and cleared for construction? And then, second, with the aim for the mid-2021 operations just to start up? How active are you and can you be today in actually building out the book of business? Do you have a target in terms of how much you expect to be under a firm contract? How much you'd earmark for on-site buyers as you described? Any detail there and the strategy would be very helpful.

Okay. Well, firstly, we would anticipate obviously firms' on-site work occurring later this year, but true construction not occurring until early next year after a permit has been put in place. We're expecting technically that we'd get a permit first quarter of 2020, give or take a little bit. And relative to the market for Butler, I think, if I could kind of expand a little bit on that, there's been some criticism lately that, I guess, as to the expansionary plans of the -- in general. I just want to clearly sort of state that this project, this opportunity is really differentiated. It certainly brings a combination of technologies and dimensional capabilities that is unsurpassed and largely unavailable in the U.S. today, that the energy pipe producers -- a lot of material through a necessity is being imported, because we just don't have the quality and capability within the United States. So I would tell you that the mill isn't just adding domestic capacity. It's more of an import killer. The substantial amount of material flowing through the Port of Houston. And it's going to allow the pipe producers in the area for the first time in a long time a competitive supplier of scrap or hot-rolled coil to compete with the Korean and other pipe importers. And as I said earlier, there's about -- in 2018, there's about 2.4 million tons of OCTG and about 1.5 million tons of land pipe came in, competing with our American pipe producers. That's because they just have -- they didn't have a substrate to use, competitively priced substrate. We think that we're going to compete admirably, to be honest, on the import side of the business. As I suggested, the rearrangement or redirection of the product of Columbus is going to…

Got it. Good luck to you Mark. Thank you.

Our next question comes from the line of Timna Tanners with Bank of America Merrill Lynch. Please proceed with your question.

Yes, hey, good morning, guys.

Good morning.

On Nucor's call, they talked a little bit about third quarter being affected by the sharp decline in price in the second quarter on a lag basis to contract customers. So, I was wondering if you could expand on how that can affect your operations and that if you've either seen the same phenomenon?

Timna, yes. As a reminder to everyone for the Flat Roll Group, we have about 50% of our volume that's contractual and so it will have the lag effect as well. It's tied in some form or fashion with CRU Index. So, we'll have that same phenomenon that Nucor mentioned on their call.

Okay. And it would be the interesting to hear if there's other facets that could offset that especially because you've been expanding more to downstream but I wanted to ask my second question on the new mill. Just wondering if you could expand on a few things. One is you say incredibly quick ramp-up which it sounds like, but when you talk about middle of 2021, when would you expect to get to a full run rate? And at what point would that convert to from hot roll to including more of a galvanized like how quickly can you expand on your value add paint line et cetera? And how much could be plate, because that was intriguing with the capability to go up to 5.5 inches. Thanks.

I'll take the plate one first before I forget. The 5.5 inches, it's the cast section we're going with a much thicker section than any other electric-arc-furnace space mill in The States today if not the world to be honest. And that allows you to do sort of metallurgical things, thermal mechanical rolling, greater reductions to have better surfaces. The actual finished product maximum thickness is 1-inch, so 1-inch hot-rolled coil. So, it's not 5.5-inch plate.

Got you. Okay.

So, it's the 1-inch coil plate that we could process or have processed into sort of cut-to-length then plate. And maybe if you look at the plate market there's an 84-inch range. We should be able to supply 100,000 tons, 200,000 tons of plate I would think at least one would hope. On the ramp-up, again, starting up in mid-2021, I would hope to be in 2022 around about 75% 80% of its rated capacity. And then relative to the value add given that we have hot-rolled coil substrate available at Columbus throughout our organization, we will attempt to accelerate the galvanizing line and pre-paint line and that -- Glenn's want to fringe, but I would imagine that's going to be the first half of 2021 as a start-up.

Okay. Thank you very much.

Our next question comes from the line of Matthew Fields with Bank of America Merrill Lynch. Please proceed with your question.

Hey everybody. I just wanted to ask a probably more boring question on the balance sheet here. But you've basically been at about $2.4 billion of debt for the last two and a half years. Heading into especially next year where you're going to ramp-up the capital spending, is $2.4 billion kind of the right level of dollar amount of debt for your balance sheet? Or do you think that there is a lower or higher level that you're more comfortable with?

Yes. No. We absolutely have more debt capacity for the balance sheet as we execute on both organic and potential transactional opportunity. You'll see it utilize the balance sheet in that way when it's necessary. So, there's still room.

Okay. So, does that mean that investment-grade rating is a little bit less important than it was in the past if you're willing to borrow more on the balance sheet to fund these growth opportunities?

I wouldn't say that because today our metrics are actually far superior to just entry level investment-grade metrics. So there's still room to have that on the balance sheet and have investment grade ratings as well. But that's something that will happen when the time comes.

Okay. But the focus is on the new Southwest mill and then potentially other M&A opportunities for the shorter term.

Correct.

Okay. Thanks very much and good luck.

Thank you.

Our next question comes from the line of Alex Hacking with Citi Investment Research. Please proceed with your question.

Hi, good morning. Thanks Mark and Theresa. I just wanted to follow up on the Texas mill quickly. If I synthesize what I think you said Mark, just looking at the U.S. piece of this mill which is going to be about 2 million tons of supply or 70% heading for Texas-West Coast which in your view is about an 11 million-ton market. You said 400,000 tons will substitute Butler, 30% is targeted for energy which is largely going to displace imports something like 600,000 tons that's about 1 million tons. Of the other million tons that the mill is going to sell, do you have a sense of what the opportunity is to displace imports of that versus how much will be taken up with market growth and displacing other domestic supply?

Let's try, our color really matter, but I believe other areas would be the --the prepaint Galvalume that's been a market that has been highly pressured by imports particularly Vietnam and that iron circumvention action here recently was certainly holding that the rest of 250,000 tons of new product in that area. You have directly about 1 million tons down to Mexico through automotive HVAC and appliance. Now that's today a 15 million ton, 16 million ton market about 7.5 million tons are currently imported. And even with the increased capacity announcements there, that market is kind of dislocated, but they just don't have the product capabilities for the [indiscernible] today. So even with their internal expansions, we see considerable opportunity of the years ahead for that one million tons.

Okay, thanks. And then just following up on the current market conditions, you mentioned as Nucor and others have done that we're seeing kind of a destocking for the industrial supply chain. Do you guys have any sense about when that destocking and as you talked to your customers, did you get any sense that it's already ending in June versus what you are seeing in April and May? Thanks.

I guess one has to assume that it's coming to an end because the customers are back in the marketplace as pricing is appreciating today, the order activity input rates are increasing and lead times are extending. And if you consider that with the destocking imports will continue to erode for the rest of the year and we believe the second half demand will be modestly above into the beginning half of the year. So I think that will pressure the market into upward price momentum and increased order rate.

Thanks.

Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

Hey, good morning.

Good morning, Phil.

Mark what are you seeing on the consumable side? I know that electrodes and refractories and alloys have been pressure points over the last 12 to 18 months. But are we seeing any reprieve and any of those inputs?

I think the -- any one of the significance or materiality would be electrodes Phil. And as Barry laids out...

20%, 25%.

20%, 25%? So that's the...

From the peak.

From the peak. And obviously, there is the contracted volume, so that doesn't happen overnight, but it happens through the rest of this year. So that's a positive move. I don't think we're seeing any major issues with alloys or refractories or on the outside so...

Well, Mark, when you talk about electrodes being down I guess from peak or on the spot side, I know there's some contract commitments at least in the U.S. market. So how does that all blend together in terms of what you all actually realize?

There's -- with the electrodes, if you look at the cost side that we did in the presentation, you can see that they moved kind of from 2017, 2018 levels of about 1% of our cost to about 2%. Year-to-date, they're up probably around $25 million for the first half of the year compared to the first half of last year.

That's very helpful. And then just a question, as I bridge cash flow for this year. Theresa, what are you envision for working capital change in the second half? And then also please just remind us again what your CapEx guidance is for this year? Thank you.

So the CapEx guidance for the second half of this year excluding the new mill is about $150 million. For the new mill, we're expecting to spend approximately $275 million in 2019. And as it relates to working capital, I would expect it to not likely be drawn in the second half. It's likely to be even to maybe slightly ascending as we worked on some of the within finished goods inventory that grew a bit in the second quarter.

Thank you.

You're welcome.

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

Thank you, Christine. Once again, thank you everyone that is remaining on the call. Thank you for your time today. It continues to be an incredibly exciting time for SDI. We've had a very positive growth curve over the last 25 years and I believe with Heartland, with U.S. Steel Supply and now with the New Mill, we will continue to maintain if not exceed that trajectory. And just want to thank our customers for allowing us to do that and for our employees, thank you seriously for everything you do each and every day and continue to work safe. Thank you all. Bye-bye.

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