Steel Dynamics, Inc. (STLD) Earnings Call Transcript & Summary

Thank you. Good day to everybody. My case study today is about 2 aspects that Steel Dynamics does very well, first is unlocking full potential, full value, from an acquisition, and then the second part is execution of the strategy. Let's first get the standard disclosures out of the way. There are many attendees. Some of you might not be familiar with Steel Dynamics, so here is a brief introduction. Steel Dynamics is an American steel company based in Fort Wayne, Indiana. It's a Fortune 500 company with a stock symbol of STLD. In 2020, the net sales were $9.6 billion. And in this pandemic year, EBITDA was $1.2 billion, along with net income of about $550 million. Fortune Magazine has named Steel Dynamics for 3 consecutive years, one of the world's most admired companies, #1 in metal's industry. Also, American Metal Market and Fast Markets has named Steel Dynamics, 2020 Global Steel Producer of the Year. We are committed to sustainability. The energy intensity for our steel mills is about 25% of what integrated blast furnace BOF route consumes. Our carbon emissions are also very small, so in that sense, we are green steelmakers. Our scope on carbon emissions are only 12% of typical integrated route. People also talk about, or ask about, scope 2 emissions, and those are also low for Steel Dynamics electric furnace operations. And that's because the energy sources we use are primarily reliant on natural gas and hydro and much less on coal. We are also one of the largest recyclers, largest recyclers for non-ferrous as well as second largest recyclers for ferrous. As far as scrap is concerned, Steel Dynamics consumes about 11 million tons of scrap and converts it into brand-new steel for applications. Let's take a look at our operations. We have 4 long product mills operations; and then 2 flat product sheet mills, one in Butler, Indiana, where it all started, and second one in Columbus, Mississippi, which is what we are going to talk about today. There are also 2 steel processing operations, 1 in Terre Haute, Indiana, which is a cold rolling and galvanizing mill, and in Pittsburgh, Pennsylvania, which are pre-galvanizing lines. With these operations, Steel Dynamics has shipping capacity of about 13 million tons. And very soon, our new mill in Sinton, Texas, will be joining the family. Our electric furnace thin slab caster route is used in all of our steel mills. Here is a brief flow sheet, which shows that we use about 75% scrap and 25% pig iron and HBI in electric furnace to produce liquid steel. Precise chemistry is adjusted with the [indiscernible] Butler [indiscernible] furnace. And then if we need to produce ultra-low carbon steel, we use a vacuum steel degasser. The steel then goes to 2 thin slab casters, and cast into slabs that are 2 to 3 inches thick. One of the interesting feature of the process is the caster discharges hot slabs into a tunnel furnace and that tunnel furnace homogenizes the temperature of the slab and also boosts it and then directly processes into the hot strip mill to produce hot rolled coil. So the hot slabs are never cooled. Many of the integrated clients cool these slabs and you end up with about 150,000 to 300,000 tons of slab inventory in each plant. For Steel Dynamics, that slab inventory is 0. Also going from scrap to hot-roll coil, it takes only 2 hours. So it's a very fast, flexible and energy-efficient process. Let's take more look at Columbus. Steel Dynamics was acquired -- Steel Dynamics acquired Columbus in September of 2014 and this operation has a site that is 1,400 acres, with 2 million square foot area under roof. And the mill has produced 3.2 million tons of hot-rolled sheet in a year. The entire operation is strategically located very close to the growing businesses for construction, automotive, industrial manufacturing and pipe and tube markets in [ South ] and Mexico. We have access to all 3 modes of shipping operations by road, by rail and by water, and also a direct rail connection on Kansas City Railroad to Mantra in Mexico and also onwards to Southern part of Mexico. We also have an alternate means of shipping to central and Southern part of Mexico by a combination of rail and barge, which is very, very conticent. The plant has 830 employees, and that includes everybody. It's not just the actual operations and maintenance, but also supporting departments like finance, sales, HR and so on. It's a very lean structure with only 3 management levels and highly skilled, strongly motivated workforce. We serve all important steel markets, construction market, automotive, distribution, appliance, agriculture, pipe and tube and HVAC. And recently, we have introduced Galvalume, painted and aluminized products. Galvalume is used in roof and sides, provides excellent corrosion resistance. Painted products are used in residential applications as well as industrial applications, anywhere from garage doors, roof, ceilings, all the way to light fixtures. Last year, we introduced aluminized steel products which are used in burner tips in like your central heating furnace, automotive exhaust pipes, heat shields, also barbecue grills, lawn equipment, sprinkler heads, many different applications that we supply. SDI Columbus has a unique advantage. We have the minimal efficiency and then our facilities downstream for finishing, our high-end facilities. So this is an ideal combination to provide tremendous value to the customer for value-added products. Steel Dynamics, Columbus, had one of the first continuous pickle tandem mill that was built in a mini-mill that provides very tight dimensional tolerances and head-to-tail uniformity [ and gauge. ] We also have 3 coating lines and a state-of-the-art paint line. The transformation of Columbus to unlock the value took place in 3 stages. The first page is what you hear all the time whenever a new acquisition takes place, which is using synergies, best practices, utilizing the capacity. That was rapidly completed in 2015 and 2016. That was followed by exploiting Steel Dynamics' market leadership, and then finally, the Vision 2020 investments to restore some of the galvanized capacity, which was transferred to other products. And then upgrading the product mix to what are new products for Steel Dynamics. And these products are not something that we hope to introduce to the market in a long-term future. But these are the products that are going to be in demand now and in the next 3 to 5 years. We'll talk more about it as we go forward. For the full stage, Steel Dynamics in Midwest had very good customer base, but they were unable to supply operations of those same customers in South. So by using customers' roller backs from Steel Dynamics Midwest operations, Columbus was able to provide freight advantage supply of steel products to these customers in South. Using best practices, Columbus also improved the product capability and quality and secured additional business from existing as well as new customers. To support this additional production in downstream area, employees were highly incentivized using a very successful incentive system that steel dynamics has using the right metrics. And then crewing was improved in downstream units to support the additional production. As a result, galvanized product sales increased by 40% and pickle and oil sales increased by 30% in a very short time frame. The second phase consisted of a $100 million investment and this exploited the market leadership Steel Dynamics has in Galvalume and painted products. As a result of that, in 2019, about 300,000 tons of these high-value products were produced, about 265,000 tons of painted products and 40,000 tons of Galvalume products. Also, intensive product development led to development of 200,000 tons of direct sales to OEMs and Tier 1 suppliers for automotive industry. So if you total this all up, about 500,000 tons of sales in stage 2 moved upmarket. And we still wanted to continue to supply our loyal customers. So this led to stage 3, which we call Vision 2020, with the intention of restoring this 500,000 tons of galvanized capacity and then also developing new products for Steel Dynamics, which would meet the needs of the customers in now and near future. So this stage 3, which I'll describe in some more detail, about 500,000 tons of production will be transferred to higher-value products in hot-rolled pickle, galvanized, advanced [indiscernible] string steels for automotive and other specialized coatings such as aluminized. These 500,000 tons are incidentally close to Texas and our Sinton operations, and so those customers will be served out of our Sinton, Texas mills. And that's great for the customers because they would be able to get this deal with lower freight, and that's a true value to the customer. And at the same time, Columbus will be able to have more profitable mix going into next year. So these projects were accomplished first by restoring galvanized capacity that included increasing the line speed for #2 galvanizing line, building a brand-new 400,000 tons per year continuous-coating line, I'll talk a little bit more about that. And then at #1 galvanizing line, overcoming some limitations to expand our product mix, supplied to the automotive industry. So how does this upgraded product mix looks like? First of all, we now have capability to produce multiple coatings, Galvalume as well as aluminize in addition to hot-rolled and cold rolled galvanized products. We can make advanced high-strength steels, the dual phase steels up to 980,000 NPA, and possibly higher wide gauge, heavier interstitial free products or IF steels, which are highly formable, and then also complex face deals which also fall into the family of advanced high-strength steels with superior flatness. And these will be both for hot-rolled pickle products as well as galvanized products. When we were developing this strategy, it was also recognized that in order to produce these products, we also have to make upstream improvements. So this was planned ahead of time, and these projects were synchronized with the downstream improvements, so we could hit the ground running. These upstream improvement consisted of increasing capacity of our pickle tandem operation. This is because now they have to supply 3 coating lines instead of 2 coating lines. So a dual entry pass line was installed and a laser water was installed to minimize basically, the laser will reduce capability to build any type of steel chemistry and grade, and that limitation is totally eliminated from the PLTCM now. Tape correction equipment was introduced on push-pull pickle line. These high-strength steels are more difficult to roll so we increased the force capacity in the first 2 scans of the hot mill. And on the caster, we introduced liquid core reduction, which allows slab to be produced with the thickness of 2 to 3 inches. There are some additional projects introduced under casters like HD mold and anti-bulging equipment, which improves efficiency and safety. So for this generation of mini-mills, Steel Dynamics, Columbus now is state-of-the-art minimal with versatile equipment, we produce multiple products that are demanded by the current and near future markets, and it's a one-stop shop for our customers. More importantly, it accomplishes what our CEO, Mark Millett, calls higher highs and higher lows in profitability throughout the business cycle, and this was demonstrated by Steel Dynamics results in last year in 2020. Let's take a look at these projects. This explains how steel dynamics does execution of projects. There were 6 projects altogether. And you can see 5 of these were executed in less than 20 to 22 months. The red portion here explains basically the time that is needed for preliminary engineering, justification of the project and getting approval from Board of Directors. The blue portion represents detailed engineering and procurement. The yellow portion represents installation and commissioning, and then the green portion represents a normal operation start. So as you can see, there was only 1 project, the #1 CGL upgrade that has gone longer, and that was simply because of the urging of our customers. We -- the project required 2 outages, 1 smaller outage was already completed. However, our customers wanted us to continue production and ask us to delay our second outage. So that second outage is now going to take place later in the year in order to maintain continuous supply to our customers. I would like to draw your attention to the #3 continuous-coating line. This project, for a 400,000 ton brand-new coating line was completed in 19 months from signing of the contract to production of the prime coil. Steel Dynamics worked as a general contractor and project manager. We had 31 subcontractors working, along with 145 suppliers, and at the peak of construction, there were 455 workers working on the project. An interesting tidbit, 98% of the steel that was used in building and structural parts was produced by SDI Columbus and our sister clients. Another thing to note, this project was carried out during COVID-19 pandemic and all strict protocols were followed on the campus. So as a result, there was no COVID-19 transmission on the campus, including all the construction projects, and we did not have to stop any of the projects due to COVID-19. There were some difficulties, but because of the ingenuity of the team, they were overcome, and we were able to start the project on time. So let's talk a little bit more about this #3 continuous-coating line, which is kind of the centerpiece of our Vision 2020. This galvanizing line was built at the cost of $160 million in investment. It's a horizontal line, you see 2 diagrams. The top diagram is a side view. From left-hand side is the entry side and you go towards the right, which is the exit side. The bottom view is looking at the operation from top. One thing that is striking is all of the auxiliary equipment the turquoise blue color that you see is on the operator side or up -- I'm sorry, on the drive side or up part of that diagram. And on the bottom side, where you see a blue bar going across is the operator side, and that provides full access from all the way from entry to the exit line of the project. You can drive a large forklift or a truck, and that way you're able to transfer all the materials or parts that would be needed to the line very easily. I want to highlight that the operators and maintenance personnel were involved in this project from day 1. So the line is designed for operational and maintenance efficiency, safety as well as low conversion costs. The line has state-of-the-art OEM equipment, postured air knives for coating weight gauge control and part equipment, GFG coaters for coating the final strip, Ajax induction parts and Primetal's laser welder. Again, the laser welder was installed. So any future development grades and chemistries can be easily welded. [indiscernible] from France supplied the design, engineering and equipment as well as commissioning and advisory services. One very interesting feature of this line is it has several provisions made for future advancement. As the box on the top right shows there is a space available for second tension rail. There is space available for a side trimmer. Already, a space is opened up for a third coating part in case we want to have another coating. And as seen in the top diagram, the roof in the center portion is already elevated. So if at some future date, if it is necessary to put a vertical furnace to produce new and advanced grades that can be installed. Again, this project was completed in 19 months, and is in operation. So what did this Vision 2020 achieve for Columbus? First of all, it has unlocked full potential of Columbus. There are state of the art upgrades throughout the mill, new product capability on all production units, the efficiency and safety of the plant has been improved. Now this is the state-of-the-art mini-mill for this generation. 500,000 tons of value-added products were developed. And this particular set of customers will be served out of Sinton, where they will be able to acquire that steel with lower freight. There is going to be a significant increase in profitability throughout the business cycle for Columbus. And this $200 million -- $240 million purpose-driven investment with a very fast payback was implemented with really the innovation and ingenuity of the team at Columbus, which overcome all the obstacles that they face during the pandemic. Thank you. I'll be happy to answer any questions.

Madhu, thank you for that presentation. Hopefully, everyone is able to hear me now. I think it was very eye-opening to see the transformation from the acquisition back from Severstal to see the changes made throughout that mill. We do have 1 question from the audience that maybe you should be able to answer. But during the presentation, you said the mill uses 75% scrap. Are there any operational limitations on the raw material side for bending a higher mix of HBI or pig iron? Or is it a raw material mix based purely off economics?

It's actually determined by 2 factors. First is the customer requirement, particularly for the chemistry, and then the efficiency of the operation. We see having the ability to use different grades of scrap, HBI and pig iron as an advantage. It provides us the optionality to use the type of material we need to meet our customers' requirement at the lowest possible cost, so it's a terrific advantage.

And also, I was just wondering to -- you went through the time lines of all the different projects. And I think you said almost -- there's almost 500 people at one point working on these different projects. Could you just talk a little bit about the challenges that you faced during COVID-19, which began a little over a year ago at this point?

Yes, it was quite difficult. COVID-19, nobody had expected it, especially when we developed the strategy in late 2018, early 2019. But the team really rose up to the challenge. And the difficulties we faced, starting with, first of all, the equipment delivery was an issue. And even before COVID-19, it started with the bridge collapse in Italy, which required a different routing for some of the heavy equipment that we were going to receive. Then because of the COVID-19, we received several force majeures. We had to look for alternate transportation routes, and basically, involve close monitoring. So we were tracking all the ships that were bringing in any equipment from outside of United States, particularly from Europe. We did not have any equipment coming in from China. And earlier, in the pandemic, Europe went in lockdown first and then USA went under lockdown. So we had to take very stringent precautions during the construction phase that introduced some inefficiency required some overtime, but we were able to find a way around to save some money in other parts of the project and still end up with a very nice galvanizing line, as you can see in this photograph. Another difficulty we faced was during commissioning, the European experts could not come to the line. So we were using Zoom, FaceTime. We even used helmet cams to assist with the installation and commissioning. We used local resources as well as convincing the OEMs [Audio Gap] in a different fashion. We cannot do sequential commissioning, but we had to commission different parts of the line simultaneously as long as the equipment gets delivered and insured, and that happened to come out pretty well.

Thanks. And I think we had another question in the audience regarding the ability to make the third-generation of AHS steel. Is that possible with the new upgrades?

As the line stands now, we are not planning on producing Gen 3 steels. These sales have some special properties. I call them prestige products. Certainly, they get you the bragging rights. When we looked at the market demand, though, there is not that much market demand for these products over next 5 to 7 years. And there are already 3 or 4 mills, when we were developing this strategy in 2018 and '19, that are capable of producing those products. So our line is focused on producing what would be the bread and butter products as far as advanced high strength steels are concerned. And at the same time, there is enough flexibility built in the line so that it can be upgraded in the future to produce those Gen 3 steels if the market truly needs them. Right now, there are some technical issues as well, such as spring-back and dimensional stability, which is limiting the use of those Gen 3 steels in automotive industry. So we are well situated to supply what automotive industry needs as far as advanced high strength steels are concerned in -- as of now and in the next 3 to 5 years. I hope that answers your question.

Yes. Thank you, Madhu. I know there are a few other questions still in the queue, but just for the sake of time right now, we're 12:30. I would like to give everybody a little bit of break, perhaps some lunch, recharge here before a trade tariffs and infrastructure panel coming up here is the next sessions. So I'd like to thank all of our speakers, all the industry analysts that we had on earlier with Phill Gibbs, Timna Tanners and Andreas Bokkenheuser. And also Madhu Ranade, it was a pleasure listening to you talk. Sorry for the technical difficulties earlier. And I look forward to the follow-up presentation here coming up a little bit later here this afternoon. Thank you, everyone.

Thank you, Michael. Bye-bye.