Good day. And welcome to the Steel Dynamics Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s remarks, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised this call is being recorded today, July 21, 2020, 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 Ms. Tricia Meyers, Investor Relations Manager. Please go ahead.

Thank you, Laura. Good morning. And welcome to Steel Dynamics second quarter 2020 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, 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 as we are all following appropriate social distancing guidelines. 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 the related press release, as well as in our annually filed SEC Form 10-K under the headings Forward-Looking Statements and risk factors found on the Internet at www.sec.gov and if applicable in any later SEC Form 10-Q. You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Second Quarter 2020 Results. And now, I am pleased to turn the call over to Mark.

Well, thank you, Tricia. Good morning. Welcome to our second quarter 2020 earnings call. We certainly appreciate and value your time with us this morning, especially during these uncharted circumstances. Leaders are tasked to make decisions today that have not been required in recent history, regarding the health and the safety of our people, their families and our communities. We are closely monitoring the COVID-19 situation and are continuing to operate safely. None of our operations have been impacted to-date. As always, protecting the health and welfare of our teams is our highest priority. I want to thank each of our 8,400 team members for their passion and continued dedication to excellence. I am incredibly proud to work alongside each of them during this unprecedented time. They are a special group, accomplishing extraordinary things and we are committed to them, their families, and our communities, all while supporting our suppliers and meeting the needs of our customers. But before I continue, Theresa, will you provide insights into our outstanding second quarter performance?

Absolutely. Thank you, Mark. Good morning, everyone. Thank you for being here. Our second quarter 2020 net income was $75 million or $0.36 per diluted share, above our guidance of $0.29 per share to $0.33 per share due to stronger than anticipated flat-rolled steel shipments. Our second quarter results were reduced by the following two items, costs related to our June 2020 refinancing activities of approximately $0.08 per diluted share, and costs net of capitalized interest associated with the construction of our new Sinton Texas Flat Roll Steel Mill of approximately $0.03 per diluted share. Excluding these two items, second quarter 2020 adjusted net income was $0.47 per diluted share above our adjusted guidance of $0.40 per share to $0.44 per share. One comment before proceeding, yes, the comparability of second quarter 2020 financial results to sequential or prior year amount is unfavorable, but to achieve what our teams have achieved in this unchartered environment, as Mark mentioned, is simply incredible. Steel and ferrous scrap demand declined significantly in the second quarter of 2020 due to the COVID-19 pandemic and the resulting temporary closures of numerous steel consuming businesses. As a result, our second quarter 2020 revenues were $2.1 billion, 19% lower than first quarter sequential results and 24% lower than prior year sales. Our second quarter 2020 operating income was $159 million, over 40% lower than those sequential first quarter and prior year results. From an operating platform perspective, our steel operations delivered an outstanding performance during this challenging time. Second quarter steel shipments of 2.5 million tons were only 12% lower than the record 2.8 million tons achieved in the sequential first quarter of this year and only 9% lower than prior year’s second quarter. Our steel mills operated almost 80% of their capability, while the rest of…

Well, thank you, Theresa. As I have mentioned many times in the past, safety is and is always going to be our number one value because nothing is more important. Our safety performance continues to be significantly better than industry averages. But as I have said also many times before, it’s not enough, our goal is to have zero injuries across the company and we will continue to strive for that. Our safety performance has further improved during the last 12 months, with our second quarter results continuing the positive trend. We all must be continuously aware of our surroundings and our fellow team members. I challenge all of us to be focused both in the traditional sense, but even more so now, as it relates to keeping one another in good health. The steel fabrication platform delivered a strong second quarter performance. Our fabrication order backlog remains strong and is higher than it was at this time last year. Customers remain constructive concerning non-residential construction projects. We have had some jobs delayed or postponed, but it’s not been widespread or material. We anticipate the strength remaining through the rest of this year and expect second half 2020 volume is being equal if not higher than the first half performance. In contrast, as states issued shelter-in-place mandates and domestic manufacturing slowed, scrap supply and collection declined. In particular, prime scrap flow decreased considerably as automotive production ground to an abrupt halt. In addition, significantly lower second quarter domestic steel production utilization, which was estimated at 55% across the industry, resulted in weak ferrous scrap demand. As a result, our metals recycling operations were cash flow positive in the second quarter, but incurred losses at the operating level. As states have started to reopen, scrap flows have improved and we expect…

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

Hi, Mark and Theresa, and thanks for taking my question. The main thing I wanted to talk about was the market share gains in 2Q, just wanted if you could talk about that on a more granular level, obviously, you had high utilization rates with some of the blast furnaces offline. Just thinking about it though on a sort of a customer basis, is it the broader offerings, the better service, just because the blast furnaces are offline. I just wondered if you could talk about that and then further opportunities, just thinking about it whether it’s sort of step changes or gradual improvements and other opportunities there, obviously, you have got Sinton, which you can get more gains in a year or so, but just thinking about the next couple of quarters?

I guess that, obviously, that you just, sorry. I got to unmute myself there. You missed the best part. No. I think, as we have always demonstrated in the past, in moments of inflection down and tough markets, we continue to gain market share. And again, I want to emphasize, yeah, our shipments were down 12%. The 12% from a record, record production level in Q1. So it’s an absolutely incredible performance by the team and I think that the fact that we are fully engaged, fully operational, obviously, allows our customer base to access products, particularly when they are constrained in their own inventories. We just allow them to continue and they have got confidence in us. What we are here to deliver and we will deliver a product. We are fortunate, as we have said before, particularly in Columbus, we have been expanding our automotive presence. A lot of our automotive customer base is actually European, so BMW, VW and Mercedes. They have tended not to be as hard hit in Q2 as some of the domestic producers and we certainly benefited from that.

Yeah. I think I would just complement to what Mark said in that, where we saw the most market share gains was in the flat roll group, as well as structural steels, railroad rail. And then we have a bit of a niche in the solar products with the solar customers as well both within the hot rolled side of the business and within the specialty steel, the Steel of West Virginia. And in addition to that, with the advent of the Columbus teams starting up with the third galvanizing line, it will be nice to see that getting into the market and actually increasing the value add portion of their capabilities in the second half of this year. So I think there’s a lot of opportunity for us to both enrich the mix and then to continue in that market share gain.

And just to emphasize that…

Okay.

Just like anecdotally because we continue to say that part of our strength as a company through-cycle, generating strong through-cycle cash is the diversity of our product mix. And just as an example, Steal of West Virginia, small metal for us, but they were impacted pretty dramatically by the reduction in truck and trailer. That industry is off about 50%. But because of their expansion into solar, they are going to ship about 100,000 tons of solar product, as compared to 30,000 tons last year. And so it’s the diversification both the product and market sector allows us to outperform our competition quarter in, quarter out.

Thanks. Thanks for the comment. And just a follow-up question on some of your comments around construction specifically, obviously, this is a market where it’s pretty hotly debated where it’s all trending with different indicators, suggesting a slowdown and some concern in that market. Can -- you commented, I think, that there’s been no broad brush cancellation, but some changes in the market on an individual level. Has there been a change in your backlog, your total backlog in that market?

Well, on a -- from a loan product standpoint, Structural and Rail Division, their backlog is actually up quarter-over-quarter. We see continued strength there that the fabricators are remaining very busy. The large projects remained strong and constructively some of the smaller product -- projects that were kind of delayed or put on hold earlier in the year because of COVID, we are starting to see those projects now getting released. So we are very, very constructive, obviously, we get insight or visibility through our New Millennium Building Systems, our Fabrication business. There, again, very, very strong backlog. No widespread push backs or project postponements. A little softness up in the Northeast, that’s not a big market for us, but some of the construction sites were closed down and have been closed down, but seriously, we see very, very positive strength through the rest of the year.

Thanks, Mark. Appreciate it.

Our next question comes from the line of Dave Gagliano with BMO Capital Markets. You may proceed with your question.

Great. Thanks for asking my questions. I -- first of all, I just have one quick clarification question and I did look at the EBITDA reconciliation tables before asking this. But does the second quarter adjusted EBITDA, the $217 million number, does that include or exclude those $10 million of costs tied to the startup at Sinton and also does that include or exclude some or all of the $25 million at one-time refinancing costs called out in the adjusted EPS?

Yeah. So, Dave, whatever is in the EBITDA on adjusted basis is -- are non-cash items only. So at Sinton, those are cash items, so there’s nothing that’s been excluded. So they are deducted from the adjusted EBITDA, and from a financing perspective only, I think, about $4 million were actually added back, because they were non-cash write-offs. Otherwise, if it’s cash related, we are not adding that back.

Okay. Great. So it’s consistent. I just want to make sure consistent with the adjusted EPS. Thanks. And then just on the market, you mentioned, obviously, quite a bit of idled sheet capacity. It sounds like at least 5 million of that is coming back very soon or in the process of coming back annual capacity and arguably, perhaps, closer to 7 million to 8 million tons if those reduced utilization rates ramp up. And it seems to be happening when the time -- at a time when lead times are actually still pretty low for the industry overall and then you also flagged obviously prime scrap supplies are coming back as well. So my questions are, do you believe that the demand environment is strong enough to absorb these near-term restarts, and likewise, do you believe that scrap demand will be strong enough to absorb the incremental prime scrap supplies or do you see weakness beyond August for prime scrap prices as well?

Well, taking your last question on -- from a scrap perspective, we certainly see no issues with the scrap flow. Obviously, there was a month that got a little tight when you had all the automotive or -- virtually all the automotive production and their associated support facilities and the staff was down, prime scrap absolutely ground to a halt. But we are seeing that come back quite dramatically and that’s going to continue to come back. And I think that the scrap market was -- has been over baked for the last few months and that the recent downtick kind of normalized at some. I think you will see a little more -- a bit more softness in August on scrap, I mean, on prime scrap in particular and then stabilize at a more normalized value for the rest of the year. So -- but supply should not be an issue whatsoever.

Yeah. Dave, I have -- Mark and I are looking into a little bit, because from a capacity standpoint, I guess, maybe you heard things that we haven’t. We are not -- you seemed to suggest that there’s somewhere between 5 million and 7 million tons of capacity coming back online in the near-term and then that’s not a number that we would ascribe to.

What numbers you ascribe -- subscribe to us as far as the capacity of coming back. We just added up the ones that we have heard about in various trade publications…

We are more…

… that kind of thing?

Yeah. We actually -- there’s some capacity that we believe is coming offline and I am not sure if that’s been made public or not. But we would say that is likely to be in the 1.5 million to 2 million tons of capacity that we see coming back on line in the near-term. So, from that perspective, I guess, our answer will be that, yes, we believe that that can be satisfied if you will. I mean we are not seeing a big reaction to that. But, again, I -- maybe we are behind on the announcement.

And obviously it is…

No. That’s helpful. Thanks.

Obviously, David, it’s a balance between what may come back, and obviously, the increase in demand. There’s absolutely no doubt demand is increasing, obviously, as automotive ramps back up. They are -- there’s some little dislocations here or there in the supply chain, but the demand is picking up, I think, relatively substantially. And if you look at least the conversations I have had out there with some of the large dealerships and if you look at the cars, automotive information and that sort of thing, there is a tightness in inventory, in the dealerships, particularly on pickup, SUV, crossover type vehicles and that’s going to help support at least the output of the automotives. So the automotives I do believe are going to be in good shape, constrained only by, perhaps, regional issues from COVID and making sure they have the employees in their plants. What we are also seeing on the sheet product side of things, the white goods, HVAC appliance, they are coming back very, very strong as well from a potential output sort of demand perspective. In fact, we had one HVAC customer just call us this week making damn sure that we had the material in the pipeline, because they are running at an excessive or above normal volume, and again, only constrained by possible local issues with the sort of manning their plant. So underlying demand we see, and again, those that know don’t predict and those that don’t know predict. All we can go on is what we see in our order book, our order input rate and the commentary from our customers. We see a very healthy underlying economy there, steel consuming economy. We came into this incredibly strong in the first quarter and I think now you have got a little bit of a pent-up demand. Lean -- you have got inventories that are generally lean, particularly in the distributor space as they don’t want to take any speculative risk right now. Imports are going to be constrained for the rest of the year. You have iron ore pricing, raw material pricing actually for the integrated mills is very, very strong, which is going to support the global cost curve. So you have got general dynamics within or general drivers within our industry that I would suggest bode well for the rest of the year.

Okay. That’s helpful. Thanks very much for the additional color.

Our next question comes from the line of Seth Rosenfeld with Exane BNP Paribas. You may proceed with your question.

Good morning. Thank you for taking the questions today. If I can, I have a couple of questions with regards to the outlook for the Fabrication business, please and the margin there. Can you just comment on how you viewed sustainability at least in healthy fab margins as you look ahead to the second half? In light of the current steel price weakness, is there potential for some upside going into Q3 or do you view the recent run rate being more sustainable in the longer term, I recognize we are already below where we were back in 2019? And then secondly with regards to fab, I wonder if you can comment a little bit with regards to some of the end markets you are serving there with regard potentially any shift between, say, public or private sector activity for fab? Thank you.

Yeah. Seth, so from the perspective of the fabrication -- the business margin, so as Mark mentioned, the teams are forecasting a pretty strong volume for the second half of this year based on the order backlog that they have and the order inquiry rates that we are seeing, which is great. You asked about specific end markets and they are very much into the, we are going to call the big box buildings, the warehouses. We have a large market share in that. So if you can think about the advent of online ordering, people not going to retail locations, that business right now is fairly strong, because there is needed warehouse space. As far as whether or not we are seeing it more in the public versus private sector, I think, we are seeing it right now still more to the private than to the public sector, but maybe that could change depending upon what stimulus looks like, I don’t think anybody knows what that is at this point in time. Regarding margins, they tend to have anywhere between maybe around even six weeks to eight weeks or more weeks of steel inventory on the ground. So as we work through the lower priced steel environment they will benefit from that. So you could see some margin expansion in the second half of the year related to that. It’s just -- it’s a little bit difficult to predict, but I would suggest, that the margins that they have been able to sustain are not extraordinary from the level of being able to be sustainable into the future.

Very clear. Thank you very much.

And I am not sure if I hit all your points or not. Okay. Great. Thanks.

That’s great. Thanks.

Our next question comes from the line of Andreas Bokkenheuser with UBS. You may proceed with your question.

Thank you. Just one question from me and just following up on when you are talking about the scrap price coming down obviously and where you on spread. This is typically an environment where we have historically seen you capture market share and you are obviously doing that at the moment. So, I guess, just trying to get a little bit of a stent. How comfortable do you feel about the current spreads as they are at the moment, I mean, we have obviously seen steel prices coming down and scraps coming down as well, and the falling steel price, obviously, effectively prevent some of the integrators on restarting capacity. So do you feel comfortable with spreads at the current level, I guess, the question?

Again, it’s interesting times to predict and when you said in an environment you used the word typical. I don’t think there is anything typical about the environment that we are in. All I can say is, I do believe we have reached a trough point. Second quarter was the trough for volumes for sure, particularly on the sheet side of our business, and I think, there is an inflection point in pricing in the next few weeks. So I think that that’s a positive direction or a momentum for pricing, and as I suggested, you are likely to see a little softness on prime scrap here in August and then kind of stable for the rest of the year. So you can make your own predictions as to where spreads might go. I need to emphasize that some of you recognize this, but you have got to recognize that some of our business, our flat-rolled business is related to sort of the CRU index-type pricing and so there is a lag impact in the third quarter.

I am smiling, Andreas, because I don’t know if we are comfortable with spreads. We always like as high a spread as we possibly can have. But to Mark’s point, I think, on a spot basis there is an opportunity to see spreads expand. Is it fair, Mark?

Yeah.

That’s clear. Thank you very much for taking my question.

You are welcome.

[Operator Instructions] Our next question comes from the line of John Tumazos with Very Independent Research. You may proceed with your question.

Congratulations on all of the good work in a tough time. Your steel…

Thank you, John. Yeah. We have got a great team.

Your steel scrap collections fell 2 times or 3 times more than the steel shipments. Were you deliberately reducing mill inventories of scrap or inventories in the recycling system or did the opportunities to collect scrap decline with the economy or did outside brokers gain share and if a business doesn’t earn good returns, maybe it’s okay thing if you let the other guys do more business at a loss?

Well, I think, a little bit of all of the above. Obviously, scrap flow dropped dramatically because of automotive business. Prime scrap pretty well dried up, so that impacted flows. Flows from OmniSource to our mills was strong, it went up. But at the same time, our competition had their own problems. They weren’t producing as much and so we had less homes to broker scrap to.

Thank you very much.

You are welcome.

This concludes your question-and-answer session. I would like to turn the call back over to Mr. Millett for closing remarks.

Well, thank you, Laura. And for those that remain on the call, again, thank you for your attention today, joining us. I just would like to emphasize what an absolutely phenomenal performance our team demonstrated this past quarter. They say when conditions get tough, the tough get going, that’s our team. They did a tremendous, tremendous job and I think it clearly demonstrates the passion, the commitment and the innovation of our team, but also the strength of our business model, because, again, we generated a very, very, very strong cash flow for the quarter under the circumstances. And we would also like to thank our customer base because you folks on the call, you certainly unload us, you certainly supported our ability to perform our peers. So thank you for that. And to all the employees on the call, thank you, thank you, thank you, you did a great job, be safe. Make it a great day. Bye-bye.

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