Tricia Meyers - IR Mark Millett - President & CEO Theresa Wagler - EVP & CFO Russel Rinn - EVP, Metals Recycling Operations Chris Graham - Steel Fabrication Operations, SVP, Downstream Manufacturing Group Glenn Pushis - Steel Operations, SVP, Long Private Steel Group Barry Schneider - SVP, Flat Roll Steel Group.

Brett Levy - Loop Capital Matthew Korn - Barclays Timna Tanners - Bank of America Jorge Beristain - Deutsche Bank Alessandro Abate - Berenberg Sean Wondrack - Deutsche Bank Novid Rassouli - Cowen and Company Phil Gibbs - KeyBanc Capital Markets Alex Hacking - Citi Investment Research David Gagliano - BMO Capital Markets.

Good day and welcome to the Steel Dynamics Second Quarter 2017 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 that this call is being recorded today, July 20, 2017, 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 Tricia Meyers, Investor Relations Manager. Please go ahead..

Thank you, Melissa. Good morning, everyone and welcome to the Steel Dynamics Second Quarter 2017 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 our leaders for the Company's operating platforms, including our Metals Recycling Operations' Russ Rinn, Executive Vice President; our Steel Fabrication Operations' Chris Graham, Senior Vice President, Downstream Manufacturing Group; and our Steel Operations, Glenn Pushis, Senior Vice President, Long Private Steel Group; and Barry Schneider, Senior Vice President, Flat Roll Steel Group.

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 relating 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-Q.

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 2017 Results. And now, I'm pleased to turn the call over to Mark..

Thank you, Tricia, and good morning everybody. Welcome to our second quarter 2017 earnings conference call and thank you for sharing your time with us today. I'd first like to thank the entire rest of my team for strong performance this past quarter and also express my sincere appreciation to our customers for their continued loyalty and support.

We wouldn’t be who we are without you. As usual, I'd ask Theresa to begin with the comments related to our financial results..

Thank you. Good morning everyone. I'd also like to recognize the efforts across the Company, delivering a really solid performance in the second quarter. Our net income was $154 million or $0.63 per diluted share which is squarely within our range between $0.60 and $0.64.

This compares to net income of $142 million or $0.58 per diluted share in the second quarter of 2016 and $201 million or $0.82 per diluted share in the sequential quarter. Second quarter 2017 revenues were on par with sequential first quarter sales at $2.4 billion, based on higher average steel selling value making up for a lower shipment.

Our operating income for the second quarter decreased 21% to $265 million compared to the sequential first quarter. The decrease in earnings was primarily driven by our flat roll operations, as increased average scrap cost outpaced average sales price growth.

Additionally, as mentioned in our mid-quarter guidance, we upgraded and expanded one of our galvanizing mines at our Butler Flat Roll Division, which required a three week average in May, increasing expenses and reducing value added shipments.

The Columbus Flat Roll Division experienced some startup issues as well in the paint line, which also increased expenses and decreased value-added flat roll shipments in the quarter. Combined these two events, reduced potential second quarter of 2017 pretax earnings by an estimated $30 million.

For the second quarter, operating income from our steel operations declined $79 million or 22% to $274 million, a result of metal spread compression and some mixed shift within the Flat Roll Group, coupled with lower long product shipment. Our average quarterly steel selling price increased $36 per ton to $779 in the second quarter.

However, our average scrap cost increased $39 per ton to $303. For the second quarter 2017, total steel shipments decreased to 2.4 million tons about 2%. Flat roll shipment stayed steady, however, the mixed shift is a rough value-added sales based on the galvanizing added.

Long product steel volumes declined 8%, primarily driven by lower structural and merchant steel shipment, as increased imports continued to pressure domestic buyers. Our metals recycling platform bears scrap shipment decreased 9% and metal spread also compressed.

Demand was down slightly in the quarter, but primarily that driver of lower volume was in March 2017 sale of some of our non-core Southeastern U.S. location.

Despite the metal spread compression, the team did a great job continuing to optimize costs throughout the business, resulting in a second quarter 2017 operating income of $20 million well aligned with the strong first quarter performance of 21 million.

The team continues to effectively lever the strength of our vertically integrated model, benefiting both steel mills and the scrap operations. Metal recycling continues to maintain a higher-than-historical percentage of total internal ferrous shipments to support SDI steel mills at 62% in the second quarter.

Our fabrication operations achieved record shipments for the second consecutive quarter, a continued indicator that the non-residential construction market is improving. Order backlog also remains very robust.

Part of the second 2017 operating income from our fabrication operations decreased sequentially to $20 million, a decline of 15% due to metal spread compression only the higher average steel input cost, which obviously benefited our average.

During the second quarter 2017, we generated cash flows and operations of $81 million, lower than the 240 during the first quarter, primarily related to acquire $152 million estimated tax payment that was related to the entire first half of the year.

During the first half of '17, we generated cash flow from operations of $321 million with operational working capital growing by 234 million, based on market improvement.

We maintained our cash dividend for the second quarter at $0.155 per share and we repurchased a $138 million of our common stock during the first half of the year pursuant to our board-authorized program. We believe these assets reflect the strength of our capital structure and the continued optimism and confidence in our future.

At June 30, 2017, we maintained liquidity of $2.1 million comprised of our undrawn revolver and available cash of $909 million. Second quarter 2017 adjusted EBITDA was $350 million of trailing 12 months adjusted EBITDA at a record $1.4 billion.

The strength of our through-cycle cash generation coupled with strong profile capital structure, provides great opportunity for our continued organic and inorganic growth. We’re squarely focused on the continuation of sustainable optimized value creation.

And before I pass it back to Mark, I know there are few of you that view some different categories of shipment for flat roll in your model. So for the second quarter, our hot roll and P&L shipments were 940,000 tons, our cold roll shipments were 138,000 tons and our total shipments were 685,000 tones.

Mark?.

Super. Thank you, Theresa. Thanks for articulating especially some phenomenal financial results there. I think the team has done incredibly well. As I said in the past, the welfare of our employees remains our number one priority and nothing surpasses the importance of creating and maintaining a safe work environment.

Our safety performance remains significantly better than the industry averages, and we continue to work toward a zero incident environment. And I would tell you that the team is doing a phenomenal outstanding job. So for this year, we reduced our total recordable injury rate by 22% and 79% of our locations there incidents-free.

I applaud the entire SDI team for their dedication and continued focus. They truly are an outstanding growth. The steel platform performed well in the second quarter.

Our production utilization was 91%, once again markedly better than the estimated domestic industry rate of 74% and in large part due to having one of the most diversified and value-added product profiles in the industry. The demand from the automotive sector remains steady, and the construction and energy sector continues to improve.

Energy still has a long way to go, but we're definitely seeing a very positive demand trend. In May, we upgraded the hot roll organizing line at both of the double flat roll division, adding 180,000 tons of value-added coating capability for a capital investment of only $15 million. The additional capacity will benefit the second half of this year.

We also continue to ramp up with production of a new paint line of the Columbus Flat Roll Division, which initiated prime shipment in the first quarter of this year. The new line provides 250,000 tons of annual coating capability and further diversification into some our highest margin products.

We have two existing paint lines in Indiana, but this new line fully state-of-the-art facility, allowing for high quality in HVAC in our clients products, double-wide steel and facilitate access to the Southern U.S. and Mexican markets.

The team did experience some quality related issues with aid to an equipment failure in the second quarter, which is quickly identified and is temporary contained with the final solution being planned to September. Columbus continues to be a significant earnings catalyst.

The changes that the team has already made are transformational and I believe there is still more to come. The success for market and product diversification that was achieved over the last two years is one of the key differentiators for our improved profitability and we will continue to benefit coming year as well.

Domestically, flat roll steel production utilization remained much higher than long product utilization. Flat roll steel benefitted from steady demand, coupled with an improved supply dynamics. Customers inventory levels remained at historical lows, however, value-added flat roll imports continue to increase.

And compared to last year, cold roll and galvanized flat roll steel imports at 32% higher. Additionally, pipe and tube import continues to grow up 75% year-to-date.

The slight continued numbers residential construction growth, structural emerging steel shipments declined in the quarter, driven by elevated input levels of both structural beam and prefabricated steel products.

Although, our total quarterly production utilization rate was 91%, our long product divisions operated though at run rate 70% while meaning section structural beam only operated at 50% to 55% of its capacity.

In coverage length, the Engineered Bar Products Division continues to see excellent momentum and operate at 70% of its current capacity, compare to just over 50% in '15 and '16, not only that we see improved demand for managing general instruments, but the division is also benefitting from internal supply to our recently acquired Vulcan bar operations.

In aggregate, we still have over 1 million tons of unused steel shipping capability, but most of the late in capacity and construction related that could potentially be consumed by infrastructure and large civil engineering products. Our steel platform has several other earnings catalyst.

Our recently announced 75% expansion of our Structural and Rail Division will utilize existing access metal and casting capability and further diversifying our product portfolio and market sector exposure. This project provides for the annual production of 240,000 tons of reinforcing bar including coil, custom cut to length and smooth bar.

Our internal business model should substantially enhance the current supply-chain, providing meaningful time, yield loss and working capital benefits for the customers. In addition, it will be the largest independent rebar supplier in the Midwest region.

Additionally, our Vulcan operation will also provide pull-through volume opportunity for this project. Vulcan currently consumes between 30,000 to 40,000 tons of smooth coil by annually. In aggregate, we should see a material improvement in future through cycle utilization at our structural division.

We expect to be in operations with this new line by the end of 2018. We're also investing $28 million to utilize excess smelting and casting capability at our Roanoke Bar Division. We're adding equivalent that will allow to multi-strand slitting and rebar finishing of 200,000 tons.

Similar to our Midwest investment, we expect to have strong market penetration as we will be the only independent producer reinforcing bar in the Virginia area as well. We expect to begin operations of this line at the end of 2017.

The profitability of our metals recycling platform remain well aligned with strong first quarter results, quite low fair scrap shipments and metal spread in the second quarter, as the team continues to optimize administrative and operating cost.

Even though, we have realigned some of the scrap assets after the March 2017 sale of some Southeastern U.S. locations, we're still reorganizing and expect some additional cost savings during 2017. We anticipate a continuation of the relatively strong U.S.

dollar and good scrap flows, supporting ample scrap supply and more stabilized scrap price environment through the second half of the year. The fabrication platform continues strong performance, achieving a second consecutive quarter of record shipments and ending the quarter with a record high in order backlog.

The team continues to achieve great market penetration in both choice and depth. Our fabrication operations purchased 330,000 tons of steel from SDI mills in 2016 and are on track to continue to purchase meaningful quantities in 2017.

The power pull-through volume and fabrication sources steel from our own mills is a significant advantage to keeping our steel platform utilization rates higher through in weaker demand environments. The new millennium team continues to perform exceptionally well, levering our national footprint and providing quality product.

The ongoing strength of this business and continued customer optimism also provides a very positive insight into the continued strength in non-residential construction activity. The steady growing steel demand, low supply chain inventories and a current trade cases in place the flat roll supply demand environment is positive.

However, unfairly traded steel imports remains to be a concern, as certain foreign producers circumvent the existing trade laws as evidenced by recent increased import volume Despite imports, we continue to have a positive beyond the domestic steel consumption.

Domestic automotive production may be edging off record levels, but we believe total net production will grow as Mexico continues to grow production with the current assets in place. This is obviously and very highly complementary to our Columbus division's automotive strategy.

We believe it will be continued to growth from the construction center especially for the large public sector infrastructure projects, which would greatly benefit our long products group. We also anticipate continued improvement within the energy sector.

I think our results say it all, but our business model and execution of our long-term strategy continues to strengthen our financial position through strong cash flow generation, demonstrating our sustainability and differentiating us from our industry competition.

Customer focus coupled with market diversification and low cost operating platforms, supports our ability to maintain our best-in-class financial performance and differentiation. The Company and the team are poised for continued growth and are incredibly excited.

The strong character and determination of our employees provides the foundation for our success. And I thank each and every one of them for their hard work and dedication and remind them safety is always our first priority.

We seem to focus on providing superior value for our company, our customers, employees and shareholders alike and look forward to creating new opportunities for all in the years ahead. So, again, thank you for your time today and Melissa, we love to open the call up for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Brett Levy with Loop Capital. Please proceed with your question..

You guys have mentioned energy on a couple of different occasion, how much you'd substrate, in terms of sheet goes into the welded pipe business? And I mean you mentioned that sort of extra million tons.

It sounds like construction and energy are the targets there, talk about kind of what you're seeing in demand for both of those end markets?.

I think our exposure to energy is lot lower today than it was when we first bought Columbus in end of 201. Obviously, as we said in the past and did today, the team has done a tremendous job of transforming that product mix away from energy. That being said we’re still participating in the pipe and tube arena.

Barry and his team were focused on the higher grades there, not just the basic line pipe, but the highest strength grades that will accrue us greater margin.

But Theresa, where are we actually, percentagewise? Do you know?.

Got it. All right. And then, let’s see, we put our report in July on a competitor of yours who has exact same rating since yours, I am a bond guy, BA to BB plus. If you look at the credit states, even the ratings are same and they are very strong, they are much stronger and then we look against the largest competitor you have.

Your credit states tend to look more like BA1 single and minus, which is their rating. And I'm thinking, if you look at cash debt net debt EBITDA interest equity market cap and how all them relate to each other.

Isn’t it time for you guys to be investment-grade because you look like it?.

Worth smiling in handing over to me, Brett..

I'm sorry..

No worries. No, you're fully correct with that credit metric, I mean, we're very proud of those. We’re also in a unique environment where growth is still very much as a forefront, not just all unique but transactional as well.

So I think that as we move in we've always said that we were very happy being where we were because we were treated very much like IG, but we actually were progressed to IG just because of our business model and I think we’re probably approaching that time line..

Thank you. Our next question comes from line of Matthew Korn with Barclays. Please proceed with your question..

So, it sounds like you anticipating fairly, steady maybe modestly improving demand environment on the net, over the second half. So first, is that a fair read? And then second, it seems like consensus thinking right now the market is that no matter what may or may not be announced policy-wise.

It's being kind of an anticipatory freezing out of the import orders now that could drive a tighter market and the supply side, as we get into late summer and early fall.

I wonder that's your expectation too and if that gets you even on its own excited about the pricing prospects over the second half?.

To answer your first question, absolutely, we're excited and very, very optimistic to the second half and not just the second half or going into 2018. I think the environment has turned and we are going to continue to see growth. If you look at flat roll and just thinking about the markets a part a little bit to answer your second question.

The flat roll arena, I think remains very strong despite a slight turning of automotive. As we look internally, auto rate is absolutely solid and strong there. Our lead times are right where we want them to be, right about 3 weeks to 4 weeks for coil and 5 weeks and 6 weeks for value-add.

And it is just a very positive environment there, obviously, makeover came like with some of the $25 uptick in pricing, and I think the industry will likely hold at and the environment will admit to lower that at this state.

The input numbers, obviously, inputs continue to come in and these are the inputs that have been ordered month, two months, three months and prior. The new input offerings I think through drive some event and then most for those in hold offerings in fact like the maturity of those offerings.

The trade is the shifting the risk of any particular two actions to the customer. And I don't think to be honest that there are too many customers as they are wondering to take on any potential liability for the tariffs.

So I think end of Q3 going to Q4, the actual input arrivals are going to drive that, I don't know whether they're going to drive that totally, but they are going to be substantially back. So, generally a very, very, very I think positive pricing environment.

Construction continues to its incremental growth and I do believe and we can certainly take the advantage of that and we feel obviously is a very, very positive tailwind. So I think I agree with you. It's a very positive environment relative to just the sheet. You should look at the environment now you've got rising prices in Asia.

We are appreciating all and kind of an appreciating a global cost curve. We've got positive demand trends in the U.S. It was incredibly lower inventory. It's almost astonishing, but the inventory is low as they are given the potential tightness that it's right there on the horizon.

And I think that's a positive environment onto itself than on top of that and you create action from Section 232 or any implementation of the trade restraint is just a icing on the cake to drive that higher. So a very, very positive outlook, I would suggest. We are excited..

Thanks Mark. Can you us give us any color at all on what you're looking to have to do on the permanent fix versus the temporary fix for the new lines there at Columbus? And then I'll hand over it, thanks..

Essentially, the issue was in this, what we call the snout that delivers the -- and protects the strip, the heating strip going into the galvanizing part, and we need to keep that in a very special, at a special temperature and also in a protected environment.

The failure related to just bad design and bad construction of that snout, but the guys got in there, they fixed it. So, temporarily, there is not an issue. The problems have gone away and a brand new, I mean, Barry is delivering in September..

In the near future, it should be here for installation in September..

In September..

But Matt, there shouldn't be any incremental costs or outages related to that. So we're trying to think about whether or not that would isolate to second quarter. That was isolated in the second quarter..

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

Just wanted to be completely clear that the 30 million impact, you talked about in as a result of some of the upgrades that you did in the first half are entirely behind you, and like run rate wise to exclude those is a reasonable way to look into the second half?.

Timna, yes, absent any differential market changes those were the things -- the $30 million for both Butler and Columbus is isolated the second quarter..

Okay super. And then just wanted to take a step back and ask you a little bit more philosophical question about capital allocation. I think Steel Dynamics has a great track record for organic growth and investing first in projects internally, but it just has me a little bit concerned seeing the capacity growth, in rebar capacity growth, in galvanized.

You know, you're not the only one that's adding right, CMC's adding rebar, and Nucor is adding galvanized. And I'm just concerned, why the build over by at this point in the cycle, we've seen this play out with SBQ before where everybody added at the top of the market.

Can you just give us a little bit more explanation as kind of why you're approaching the market in build versus buy?.

Well, the first and foremost, these projects are incredibly -- they're incredible users of capital, effective use of capital. If you talk about, how we're galvanizing line, we're adding 180,000 tons of new capability of $15 million.

You compare that efficiency or effectiveness against building a new line or any other competition out there, I mean, it's just the right thing to do. Relative to rebar and maybe those ones a little bit wide, I'll share your thoughts, but again it's incredibly constructive use of capital, it's effective.

Getting 200,000 tons or utilizing 200,000 tons of the excess smelt capacity at Roanoke is just the compression of the additional volume across all fronts. That's concerned onto itself.

And similarly for the Structural and Rail Division, in aggregate, we're looking at roughly 400,000 - 450,000 tons rebar which is probably only 5% of the domestic market.

But as we've done in the past, if you look at our paint line investments, rail investments, those investments were made in markets that won’t necessarily supply short, but we ended those markets differentiating ourselves, differentiating with the supply chain. And I believe we're doing same thing here.

Firstly, we're the -- we'll be the only principal independent manufacturer of rebar of notes. And so, there are massive numbers of what they call independent rebar fabricators that don’t necessarily like buying the input material from their competition. Obviously, you get there CMC, Nucor are large producers of rebar.

They are also large fabricators, competing with that their independent ways. So, we think we're going to be received well imports of that 2 million tons of that 9 million ton market today. And that’s ample opportunity to penetrate the market wise.

And in the Midwest, rebar is efficient on a supply side, so there is a trade advantage that we believe we have there. And more importantly, we'll be producing spooled, straight and spooled rebar.

Spooled rebar, if you got to Europe, spooled rebar is the product of choice because of the effectiveness and efficiency of its use and reduction of yield loss. So, we -- some folks utilize spooled rebar in the states at a lower premium, but more importantly this we're hopefully going to change the supply chain somewhat.

We got inventory of that spooled bar and actually give the customers kind of a customized cut length short or quick sheet order-ability. That takes a lot of time, takes a lot of working capital and takes a huge amount of yield loss out of the supply chain for that.

And we believe, we'll create sufficient value to allow us to penetrate that market without too much flow..

Okay. That’s a really helpful explanation. Just last one, just a follow-up if you wouldn’t mind on this Section 232 not ask you to speculate, but assuming, but there are some sort of prohibitive traffic and some sort of reduction particularly on the flat roll side, and the mini mills are already running pretty full out there.

What kind of response do you think Steel Dynamics could contemplate, if there were more restrictions and ability gain market share? We’re going to see just the integrated free start capacity. Do you think there is any ability for mini mills to also respond with more capacity? Thanks..

I think our utilization right now is pretty good, as you indicate, but the product mix that we have today is not necessary ideal or doesn't necessary maximize our margin opportunity. Part of the issues has been the sort of the whack-a-mole effect out there.

The principal problem is the massive excess capacity in China and hope that drives the just imports in general. Good work was done in 2015 to come up with a trade cases particularly on cover sheet and coated, but since then and after those cases were implemented, we did see a drop off in volume.

It did diminish yet it's picked up, in the first half of this year as we said. You've seen greater cover sheet and coated imports than you did prior to the trade cases being implemented, and that's countries like Vietnam, for instance. In 2015, they shift about 50,000 tons of coated into the America and 16 that was closure to 700,000 and 800,000 tons.

A lot of that product was galvanneal paint, which totally impacts or directly impacts our line adjustment deal and our new line in Columbus. So for us, it may or it may not be a massive increase in volume, but certainly it will allow us to maximize our margin opportunity as to which products we take the market..

Thank you. Our next question comes from the line of Jorge Beristain with Deutsche Bank. Please proceed with your question..

On 232 to beat a dead horse, I was just wondering, if given that the steel industries again have recent meetings with, Ross.

If you guys could comment about what is the hold up in getting this thing out?.

Well, I think we will be as you said, we're beating a dead horse maybe and I think it's -- there is a lot of speculation either as what's the cases, what the recommendations might be and when it's going to come out. Having spent some time in Washington and spent time with the decision makers.

There is obviously politics to play and a lot of things we've got to satisfy. And I think the very encouraging aspect is you got the administration or the players. Secretary Ross, in particular, is incredibly engaged. I would tell you he absolutely understands the issues, all the issues, very broadly.

And he's going to take a very prudent approach, a very strong approach in this recommendation to the President. I'm encouraged. So, it takes an extra week or two to get it done.

Again, I think they're right there wanting to present a case that it's going to be positive and successful, and gain some support on the hill, such that we don’t keep listening to that than dilute the strength of it.

But, I again, I'm in personally met with them very, very encouraged that action is going to be taken, and it's going to be benefit in the industry..

Okay. And just at a company level for you guys.

Could you comment on your $36 quarter-on-quarter increase in average realizations, in your steel ups and that's despite the fact that you had lower value-added in flat roll due to your outrages at Butler and the quality issues at Columbus? Could you just kind of comment what's happened with product mix that you did so well quarter-on-quarter despite those issues?.

Right, if you look at the product pricing or the product mix, what you do is you see some of the shifts more to the longer, long product side, and you see that the mix related to I believe, SBQ was higher as well.

And so with that, you just have higher pricing on a long product side, and so that's why were they were offset some of the galvanized from lower end from Columbus..

Okay, I think just to add more color there because as I talked about the markets, I fail to mention our Engineered Bar Division. That's an arena, as I said before at least as a -- and it gives me a sense of the broader market that it's in or especially every single sector of the marketplace. There things have taken off.

The order input rate is absolutely dramatically improved to a point where we're almost, perhaps we're almost on a right orders to some degree. So that arena is incredibly strong. Energy is very, very strong. We're into the same skewed markets there in energy.

Automotive for us is actually despite the tail off in -- slight tail off in production maybe in north U.S. We're gaining market share there. The caterpillars, off-road equipment guys, their forecasts or -- their forecasts or actual order rates, they're exceeding the forecast by an appreciable amount, coat finishes strong.

That's just manufacturing slowdown. So that gives me a very-very positive outlook as to just fuel consuming economy is general..

Thank you. Our next question comes from the line of Alessandro Abate with Berenberg. Please proceed with your question..

Mark and Theresa, good morning, and there was decent set of results, I mean, I just have one question that's either related to we just said before hand, related to your deal product mix.

If you assume the current utilization rates across your mills, could you be able to give me -- to give a little more color by how long it will take you to achieve this ideal mix with current market conditions.

By how much, if you can of course disclose, would you able to increase your operating margin relative to today's point of view? And the second one, I mean, since all my colleagues have asked about the Section 232, what is your perception that the steel used for, for example, the all oil sector that is a strategic, considered strategic in the U.S.

may be benefited from this Section 232? Thank you..

Related to the optimal product mix, I'm not sure I can equate to an actual margin improvement and I stated the optimal mix is going to be, as we start to see the improvement in Engineered Bar, which Mark mentioned, and which I've been fairly extraordinary.

That's obviously very helpful, but we still have a value-added improvement that we need to make down at Columbus. They're continuing to get certified on new products, more difficult products by enlarging value-added products. They're also still ramping up in the paint line.

Pain line likely because some of those products need to be certified, likely not to get to full capacity, yet in 2017 we'll see that, I'll say probably first half of 2018 with their continuing to do great things there. So, there's still quite a value-added shift at Columbus.

There's still room at Engineered Bar and what we do at our specialty shapes mill in steel West Virginia, they're actually adding some new value-added galvanizing, just galvanizing capacity as well, which will come online in September.

So, there's still quite a bit of room for us to move, but I would suggest you probably don’t see that until sometime next year. And in addition to that, I think we keep talking about 232, and Mark will answer your last question.

But I think sometimes, we're missing the fact that it could also impact more products and while product is where we're seeing a lot of the imports from the structural or prefabricated sites.

And if you were to see that come through in 232, that can be hugely impactful in a positive way for structural beams and for merchants shapes and for those things that, right now, the industry is, has not added a high utilization for it..

I didn’t catch quite the question on the two, Theresa..

Could you hear me?.

Yes, please go Alexander..

Yes, basically related to the Section 232, I mean, there is still a little bit of uncertainty and lack of clarity related to what kind of sectors beyond probably the most likely, Navy and Army. But how do you think that’s -- about the chance that the steel used, for example, for the oil industry which is strategic anyway for the U.S.

could be subject to the Section 232. What’s your expectation about it/.

I think there one can automatically expect with this because you don’t know what recommendations will finally be made and acted upon. There are three principal areas that of concerned and focused for us and for the industry.

Two mostly the industry in generally we've been putting one and particular recently, but those two obviously, the first is to bring broad kind of resistance to imports on sheet side to prevent the circumvention issues, the whack-a-mole issues.

And the issues is not to eliminate imports, the issue is just to curve them to kind of historic level of 21% to 22% of demand. At that level the industry can and should prosper and be able to earn its cost of capital. So, we're not proposing at least SDI, Mark know it. It's not proposed.

We eliminate the imports because the manufacturing base doesn’t have to be supportive. So, sheet is the one focus. The second focus and its related to energy and that’s the pipe, as energy has come back or even before energy was coming back, 60% of pipe imports were or 60% of demand was satisfied by imports, largely from Korea.

And as the energy is trended up, that percentage of that volume is only increased. And so that I think is going to be a focus. That is obviously to the benefit of the domestic industry in energy pipe used to be about 8%, 9%, 10% of the demand.

So that will help the hot roll coil sector of our business, which is probably the one that there is challenged of weakness, that’s the area. The third focus and something that we've been working on very, very strongly, as Theresa mentioned is actually structural's.

In 2016, there were million tons of what I call straight stick, just basic long, heavy structural beams imported, but a growing factor is prefabricated beam that is grown dramatically over last four years. And again it's kind of the whack-a-mole thing where China and other sort of going down stream.

But there is about 1.8 million tons of prefabricated structurals that come in to our shores, we have to add to together, we got about two point, about 2.5 million to 3 million tons of imports and in that market is probably 6 million to 7 million tons in round numbers. That's a huge, huge percentage of demand being satisfied by those inputs.

As we've seen it, seen non-residential construction growth, the past two or three years, I think as much of that has been absorbed by the inputs. And we haven't seen the increased utilization within our beam heavy structural analysis and that's not just SDI. I believe that's Gerdau and also Nucor.

So that is a conservative focus for us and I believe that is being addressed or likely to be addressed by the 232..

Thank you. Our next question comes from the line of Sean Wondrack with Deutsche Bank. Please proceed with your question..

So firstly I just like to reiterate the first gentleman said about your company is having closer to hygiene metrics than higher yield. Given your lack of secured debt in terms interest coverage, it seems a little silly at this point.

But more than that, have you guys actually been in discussion with the ratings agencies about improving your credit rating, your outlook?.

We aren’t always -- we have a very open dialogue with both agencies, and it's a quite constructive dialogue, and up until it is very strong. We really told that we've told that you as a investor as well and we've been very happy with where we're rating for different regions because of our growth profile.

But again as I said earlier on the call given where we are, we also view that eventually we would grow into just naturally being investment grade we kind of our business model and the strength of the cash flow generation. And so, I'd just say that there is something that we're constantly looking at and having dialogue with the agency in the past..

Great. And then just one comment, that you made earlier, Theresa, about transactional versus organic growth, I mean, for any other measure it would like you guys could potentially be considering an acquisition, you guys have been very acquisitive in the past. You have latent capacity that you can put to use.

Are you seeing more M&A opportunities kind of rise in the market? I know you've seems some transactions recently, but is that's been something that's been coming more to the forefront recently?.

So, it's always been the forefront of our focus internally here at Steel Dynamics. And I think I've said on previous calls, we have had a plethora of opportunities that we looked at over the last 12 months to 18 months, at all different sizes, but some very, very meaningful size type acquisitions. And that pipeline continues to be full.

Opportunities continue to present themselves to us..

Okay. That's helpful and then quick follow-up.

Should you undertake an acquisition, is there a ceiling above which you would want to keep a leverage below? And is there you know would you potentially is equity or would you consider earnings all with debt?.

Our preference is still to be using at a considerable amount of caution our balance sheet and taxes revolver. So, with that and with our choice to achieve debt and cash as much as possible and not some a little bit shareholder base.

No, it's necessary or whether it makes sense or not from that leverage perspective where we're today or even saying that we'd like to keep that leverage at three times or less. And obviously, we have a lot of room for an acquisition given that we're about one time of that..

And given that you generate like 750 million in free cash flow. That's very helpful, thank you very much, I appreciate you answering my questions..

Thank you. Our next question comes from the line of Novid Rassouli with Cowen and Company. Please proceed with your question..

Hey, Mark and Theresa, it's Novid. So with customer inventory levels as low as they are, as you mentioned early in the call Mark, and if essential Section 232 proposal being imminent in a couple of weeks out.

Are you seeing any change in behavior from your customers?.

Historically no, to be honest, and again, we're not a nice face, we're here to sell products to everyone and not control the business. But it seems amazing that, if you look at the probability and that's all you can do is, look at the probability of where markets are going and whether they will or will not be tight.

The probability to me is sideways to up. And you would think there would be some form of restocking or inventory growth, but we've not seen it..

Okay, and so given these very-very low inventory levels.

Do you see the potential for you know some serious pricing dislocation happening on a Section 232 proposal that is you know materially prohibitive to imports?.

I think that there will be some initial emotional response. It may not be just emotional. It'd be just I think fairly tight supply when everyone rushes back into the market place, which will give you the spike. I do think that would then sort of reflect back to a more normalized number. That number is likely to be higher than what it is today.

But I would hope not extreme to just sort of dislocated markets, yet again and go into a cycle..

Right, but as you mentioned to Timna's question, it's not really additional volume that you guys will be targeting. It’s going to be a mix. So there won’t be much relief from a volume standpoint for you guys to help the market..

Look, Novid, but now you're just talking about flat roll again. And so when look at 232 given the value of 1 million tons and more than 0.5 million tons of capacity, we're not meeting today that's on the long product side. What I would say, piece is in place today that could be quite significant. So I think you need to look at it.

We look at it more broadly in just flat roll..

But to answer your point, it's reasonable to think that some capacity might come back to offset with the losses because again the sheet will -- flat roll utilization stays today is probably 90% plus.

And so if you take you know a few million tons of imports off the table then you're going to likely see a little additional mix, new lines like, cutting lines, like the Nucor's announcement and big revenues going to be ramping their production up. We obviously have got 180,000 tons that we will bring into the market place.

I think that can be observed into the market without any sort of downward disruption..

Right and then my last question, the switching gears.

The 70% utilization on Engineering Bar, is that on the like one to three inch diameter or given that you mentioned energy and general industry, are there some wider diameters that are helping push that utilization rate higher?.

I think the utilization is across both lines. The large bar line is full and then small bar is where we're having the large utilization..

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

So a question on volume momentum into the third quarter and what's your preliminarily anticipating for volumes in 3Q versus the second quarter?.

Not to be specific, so the directionally through the second half, Phil, I would suggest that the volumes should improve over the second quarter. I think the pricing environment that I kind of try to articulate would suggest positive momentum, so only support for pricing.

And as we seen in the past, there will be some noise on scrap here up and down a little bit, but we see that being relatively stable through the second half of the year..

I appreciate that. And you made a lot of internal investments and a lot of announcements here in the last several months.

Can you give us an update on your capital expenditures for this year and perhaps next?.

For this year's total, Phil, we still think it's going to be probably around that $200 million Mark. And I think year-to-date so far, we are about 85. Next year, we haven’t gone through all those details planning yet, but I would factor it to be probably through $200 million to $215 million range based on the project we've announced so far..

Okay.

And with these investments or management of your order book right now, you planning on taking any downtime for routine or the plant maintenance in the third quarter and in the add newer facilities?.

There is nothing like that, that's significant, right, that would rise the occasions to bring it forward, no..

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

The steel industry has been, I guess, very engaged with the Trump Administration regarding a trade. Are you engaged with them on other issues around U.S.

manufacturing competitiveness, increasing steel demand by upgrading infrastructure and things like that? And I guess where is your confidence level that, we will see some kind of improved infrastructure spending on infrastructure bill have compared to where you're confidence level was six months ago? Thanks..

On our sort of personal involvement or company involvement, we’re a lot -- we work with the, with our peers. We also work through the trade group of steel manufacturers association, on the steel trade issues in particular. On other issues, we tend just to work through or have the steel manufacturers, sort of work with us..

Okay, thanks. And you mentioned….

Sorry. And on the infrastructure, I guess, Alex, I'm still positive and optimistic that somebody is going to come, coming back -- the country certainly needs it. There is no doubt about it. And as we said earlier, general construction continues to be positive.

I think anecdotally, as I travel to New York and to Boston and to Washington and to big cities, the number of cranes in the air and the number of woodworks that screws up, travelling from A to B is just incredible. And I mean there is a lot of activity out there.

The states have already, whatever it's called the fact act or infrastructure spending is kind of in place. In Indiana locally where we've seen a lot of announcements on road improvement and infrastructure improvement. So, even without the federal spend, states are coming in and increasing their construction activity.

And I'm optimistic that the Trump Administration is just going to follow through on its promises..

And then just a follow-up. In the press release, you talk about some hesitancy in customers in terms of order entry, hesitancy driven by volatility in scrap prices. Do you still see that hesitancy today as we're entering into the third quarter? Or are you seeing some behavioral change in the last few weeks? Thanks..

We are certainly not seeing the hesitancy today. That hesitancy I think we were kind of suggesting despite of the three weeks, four weeks period.

And Barry, I can't remember if that was April or?.

I think in April, early May, we saw some hesitancy because of the uncertainties. That's been firmer lately, but not under the unreasonable rate as we addressed earlier with the 232 speculation. It's just healthy..

Thank you. Our next question comes from the line of David Gagliano with BMO Capital Markets. Please proceed with your question..

These are primarily clarification questions from previous questions that were asked. First of all on the volume commentary, I was wondering if you could just give us a little more color on the magnitude of the recovery expect. I think second quarter was down about 2.5% or something like that versus the first quarter.

Should we expect that volume to be above the first quarter number, as we get into the third quarter and fourth quarter, of the first quarter number?.

I would hope we recover the quarter-over-quarter sort of production there..

It's helpful. And then just regarding metal spreads, obviously, I appreciate the commentary on the scrap market, given the mix changes, given what's happen within Steel Dynamics.

Should we expect your metal spreads to improve in the third quarter versus the second quarter after adjusting for the lack of a $30 million hit?.

Dave, you guys are making me a difficult spot here, Mark's laughing. And as we specifically just comment on the metal spread direction, specifically, I would say that I am going to quote back to what Mark said, the expectations for scrap for the rest of year remain pretty steady and we feel like the pricing increases are very much warranted.

And we think that the market demand is there, absent any 232 to support that. So, you can read into that whatever you'd like, but I think the dynamics are positive..

Actually that's actually helpful, thank you. And then the last question is a longer term, but it ties into a lot of the questions that have been asked, generating still a lot of cash. Historically, preference has been you know buy over build versus return the cash.

Obviously, a lot of moving parts here, you've got some capacity limitations on the flat roll, but still opportunities on long side internally.

My question is given all those pieces, are you changing your view in terms of your preference of buy versus build? First, and secondly, where those cash return fit into the mix?.

I think we have a strong desire to continue to build where is organic and we can have that sort of capital effectiveness or efficiency that I suggested earlier. Those kind of projects are just phenomenal from a payback and from a return perspective.

A brand new greenfield mill is not necessary a focus of ours given the supply demand matrix domestically and globally. We feel and it's been amazing how many opportunities are out there in the M&A world that seem to come to and I wouldn’t say come to market necessarily, probably.

It's a not necessarily process out there, but we've been approached several times with interesting opportunities, none of which over the larger scale ones, check the all our boxes. I think you've seen in the past that we’ve been disciplined or we're not going to be emotional.

We recognize the cash generation capability of the Company and the cash build, understand that fully. But we see opportunities come before us and we will continue to assess those and one ticks the right boxes we will move forward..

From the capital allocation perspective just generally, we're really in the same spot and our first and foremost focus is to pull growth, both organic and inorganic.

And then in the meanwhile, we increased the dividend in the first quarter and we'll continue to highly positive dividend profile as we see our cash flow structurally and continue to be sustainable at a much higher level.

And then we use the lever of the buyback onto give additional value to shareholders, as appropriate as we generate free cash flow in front or behind the acquisitions, but not that you see us doing it basically, tend to continue to do..

Thank you. Ladies and gentlemen that concludes our question-and-answer session. I'd like to turn the floor back over to Mr. Millett for any closing comments..

Thank you, Melisa, and thank you for spending the time with us today, those still on the call. Thank you to all our employees whether they are on the call or not, you done a phenomenal job continue to do phenomenal job.

Customers; thank you for your support, and as I said earlier, we're working diligently and hard to create value for all of us and we're excited. We're excited as to how the Company is positioned for the next two, three, four, five years. So, thank you and have a good day and be safe..

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