Steel Dynamics - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good day and Welcome to the Steel Dynamics Q1 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, April 21st, 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 Tricia Meyers, Investor Relations Manager. Please go ahead.

Tricia Meyers (Investor Relations Manager)

Thank you, Michelle. Good morning and welcome to Steel Dynamics Q1 2020 earnings conference call. As a reminder, today's call is being recorded and will be available on your website for replay later today. Sorry, on our website for replay later today. Leading today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics, and Tricia 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 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 reference non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Q1 2020 Results. Now I'm pleased to turn the call over to Mark.

Mark Millett (President and CEO)

Thank you, Tricia. Good morning, everybody. Welcome to our Q1 2020 earnings call. We certainly appreciate and value your time in these unprecedented circumstances. Steelmaking is designated a critical infrastructure industry by the U.S. Department of Homeland Security. We're deemed essential to our nation's defense, infrastructure, transportation, and overall economy. As such, all our operations have been operating. Protecting the health and well-being of our teams is our most critical priority. We are closely monitoring the COVID-19 situation and have implemented numerous additional practices throughout the company to protect each of us. I want to thank our more than 8,400 team members for remaining steadfast and passionate. We continue to operate safely with a spirit of excellence, and I'm incredibly proud to work alongside each of them during this unparalleled time.

We are committed to the health and safety of our people, their families, and our communities, all while supporting our suppliers and meeting the needs of our customers. But before I continue, Tricia, will you please provide insights regarding the team's recent incredible performance during the Q1 that should not go understated despite these present environmental issues, along with our strong financial foundation?

Tricia Wagler (EVP and CFO)

Thank you. Good morning, everyone. Our Q1 2020 net income was $187 million or $0.88 per diluted share, above our guidance of $0.83-$0.87 due to stronger-than-anticipated March flat-rolled steel shipments. Q1 2020 revenues were $2.6 billion, somewhat lower than prior year Q1 sales, but 10% higher than Q4 sequential results driven by improved steel pricing and shipments. Our Q1 2020 operating income was $274 million, $18 million lower than prior year Q1, but notably 50% higher than sequential Q4 results due to record steel shipments driven by solid Q1 underlying demand. From a platform perspective, our steel operations Q1 shipments increased 7% sequentially to a record 2.8 million tons with increased volumes experienced across the platform.

Our average quarterly realized sales price increased $10 per ton to $774 in the Q1, and average scrap costs increased $24 per ton, causing steel metal margin compression. The result was Q1 steel operating income of $293 million, 45% higher than the sequential Q4 results. For our metals recycling platform, Q1 operating income was $8 million compared to a loss of $5 million sequentially, a result of higher ferrous and non-ferrous selling values and shipments, with prime scrap indices rising to almost $3 per gross ton during the Q1. About 65% of our metals recycling ferrous shipments serve our own steel mills, increasing our scrap quality, our melting efficiency, and reducing our company-wide working capital requirements. Our vertically connected operating model benefits both platforms.

For our steel fabrication business, Q1 2020 operating income remained strong at $29 million compared to near-record sequential results of $33 million, primarily due to seasonally lower Q1 shipments. We experienced record order inquiry and bookings in the Q1, ending March with a record backlog. We're still experiencing strong order inquiry and are entering the traditional construction season on a good footing. Our cash generation continues to be strong. During the Q1 of 2020, we generated $211 million of cash flow from operations, offset by operational working capital growth related to higher steel selling values and the $74 million distribution of our annual company-wide profit sharing to our teams. We spent $218 million in fixed asset investments during the Q1, of which $130 million related to our new Sinton Texas flat-rolled steel mill investment.

To date, we have funded $335 million of the $1.9 billion project. Regarding shareholder distributions, we increased our cash dividends 4% in the Q1 of this year to $0.25 per common share. This follows increases of over 20% in both 2018 and 2019. The board also authorized an additional $500 million for stock repurchases in February of this year. We repurchased $170 million of our common stock during the Q1, and $444 million remains available under the new authorization. Since 2016, we've invested $1.3 billion in our common stock, representing over 15% of our outstanding shares. These actions reflect the strength of our capital foundation, consistent cash flow capability, and strong liquidity profile, demonstrating our confidence in our sustainable through-cycle strong cash generation. Part of that confidence is based on the high variability of our cost structure within our operating platforms.

During market weakness, working capital becomes a funding source. 2015 is a great example. Working capital provided over $500 million to cash flow that year. For the coming months, we expect working capital to also be a source of cash flow for us. For the remainder of the year, we currently are planning for capital investments to be roughly $1.2 billion, of which the new Sinton Texas steel mill represents $1 billion. This spending for Sinton is heavily weighted to the second half of 2020. Over $700 million of that $1 billion spend is actually meant to be in the second half of this year. As we gain more visibility into the extent of the disruption in 2020 related to the coronavirus, we could shift some of the 2020 investment into 2021 if we believed it was necessary.

Based on current timelines, we estimate capital investments for 2021 to be in the range of $700 million-$750 million, of which Sinton represents $600 million. We entered the coronavirus crisis in a position of strength with a strong cash position and liquidity profile. Entering 2020, we had over $1.6 billion of cash and short-term investments. At the end of the Q1, we have almost $1.5 billion. Combined with our $1.2 billion undrawn, unsecured revolving credit facility, we have available liquidity of over $2.6 billion. One can't look historically at our financial performance to determine either a trough or a peak future performance. We've grown significantly, transformed our Columbus flat division, further diversified our steel product offerings, and incorporated even more levers to increase our through-cycle financial performance.

Since 2015, we've increased our total shipping capacity from 11 million tons to over 13 million tons, while increasing our value-added revenues from just over 55% in 2015 to almost 70% last year. Since 2015, we've transformed Columbus's through-cycle earnings capability by reducing their operating costs, dramatically increasing their value-added product capabilities, and diversifying their customer base in end market sectors. We've expanded our Structural and Rail and Roanoke bar steel Divisions to include reinforcing bar production capabilities, further diversifying the location's product offerings in order to sustain higher through-cycle utilization. We've also added new manufacturing businesses to our portfolio that use steel as a raw material, providing additional opportunities to sustain our own steel mills' utilization throughout market cycles. Since 2015, we've increased the possible internal volume by over 1.5 million tons through acquisitions and growing our steel fabrication platform.

This is an incredibly powerful tool during weak demand environments. In addition, collectively, our primary, recent, and planned strategic growth investments provide an estimated incremental annual future EBITDA of over $425 million on a through-cycle historical spread basis. This estimate includes our Sinton Steel Mill and Third Columbus Galvanizing Line, as well as our two operational reinforcing bar expansions. We're simply even more agile today than ever before. We're also dedicated to preserving our investment-grade credit rating. Our capital allocation strategy prioritizes responsible strategic growth with appropriate shareholder distributions comprised of a base positive dividend profile that is complemented with a variable share of purchase program during periods of excess cash generation. We are squarely positioned for the continuation of sustainable, optimized, long-term value creation. And on a personal note, I want to take just a moment. I want to wish my dad a very happy birthday.

He's not listened to one of these calls in 25 years, and he's listening this morning. And I also want to thank our teams truly for their passion and generosity and the care that they're showing for each other's health and safety. God bless. Mark.

Mark Millett (President and CEO)

Thank you, Tricia. As I stated, safety is and always will be our number one value and priority. Nothing is more important. During the Q1 of this year, our safety performance improved from the previous quarter's outcomes with meaningful improvement in the severity of incidents. Our safety performance continues to be significantly better than industry averages. As I said many times before, it's not enough. It will never be enough until we reach our goal of zero. We all need to be continuously aware of our surroundings and our fellow team members. I challenge all of us to be focused, both as we think traditionally of safety, but even more so now as it relates to keeping each other in good health. The steel fabrication platform delivered a strong Q1 performance.

Construction is also deemed an essential business, and as such, almost all the states allow construction projects to remain open. We've had some jobs delayed or postponed, but at this time, it has not been widespread or meaningful. This should perhaps be expected, as in previous market downturns, construction has lagged the rest of the market by four to six months due to pre-funded ongoing projects. We experienced a record number of inquiries and bookings in the Q1. Our fabrication order backlog remains very strong, over 15% higher than at this time last year. Our metals recycling team performed well in the quarter, returning to profitability. During the Q1, prime scrap appreciated about $25 or $30 per gross ton. However, with lower domestic steel production, April prime scrap prices retracted about $30 and shredded $45 per gross ton.

Lower industrial prime scrap flow related to the temporary idling of the automotive sector in April was offset by reduced demand due to lower steel mill utilization, maintaining sufficient prime scrap availability. As the announced staggered automotive plant restarts begin in late April and throughout May, we expect to see prime scrap flow return to good levels prior to a ramp-up in steel mill utilization and thus, in turn, stable scrap prices. In general, the steel teams had a phenomenal performance in the quarter, hitting record volumes in a tough environment. We saw underlying steel demand strength and increased steel selling values in both flat-roll and long steel products through substantially all the Q1 before the Russia-Saudi Arabia oil price war and state COVID-19 stay-at-home directives. Since mid-March, the landscape has shifted rapidly.

A severe decline in energy prices related to oversupply has significantly reduced steel demand from the pipe and tube manufacturers. And the temporary closure of automotive production and the related supply chain closures will meaningfully impact flat-roll steel demand for this upcoming Q2. Since mid-March, hot-rolled coil index pricing has declined over $100 to about $485 per ton according to Platts. As a result of reduced flat-roll demand and reduced pricing, a considerable number of higher-cost flat-roll steel operations have been indefinitely idled. Since the end of 2019, we believe it represents a reduction of between 12-14 million tons of annual flat-roll sheet steel capacity, approaching some 20%-30% of total domestic capability. In contrast, the construction sector continues to be steady, which, as mentioned, is a critical steel consumer, representing 40%-45% of total domestic consumption in normal markets.

The order activity from our construction-related customers, in addition to current strength in our steel fabrication order backlog, supports the sentiment. We believe the coming months will be difficult. Yet in these environments, the strength of our people and our differentiated business model becomes even more evident and more impactful. As demonstrated historically during times of market inflection, we will likely gain market share based on our uninterrupted low-cost operations providing the greatest customer optionality, product and market diversification, the value-added market niches, and the additional internal steel sourcing from our captive manufacturing businesses. To put that in perspective, our steel fabrication platform, The Techs, Heartland, and Vulcan purchased 2.3 million tons of steel in 2019 and only sourced about half that from SDI-owned steel mills. This provides additional opportunity for internal purchasing to keep our steel mills running at higher utilization rates, even in a weaker demand environment.

The U.S. administration's recent guidance for states to begin a staged reopening is positive. As they begin this critical process, improved steel demand will follow from pent-up demand and already low steel inventories. We've provided a summary of our recent growth investments on a slide in our investor deck posted on the website. In the last 12-18 months, we've executed several strategic investments that will benefit our through-cycle earnings and cash flow position. We've expanded two steel mills by the combined addition of 440,000 tons of steel rebar production capability, providing product diversification and a differentiated supply chain for the customer. Our model provides meaningful customer optionality and flexibility with significant logistics, yield, and working capital benefits. The end market diversification provides for higher through-cycle utilization for our structural and Roanoke steel divisions.

Heartland Steel, an 800,000-ton value-add flat-roll steel processor that sells primarily cold-roll and galvanized products, has been ramping up nicely, providing additional order support and operational flexibility for our Butler flat-roll division. It has increased the through-cycle utilization of our steel assets and broadened our value-added product mix. The acquisition of 75% of United Steel Supply has been another excellent investment. As flat-roll galvanized and pre-painted steel distribution company, it has provided a meaningful distribution channel to new customers. As a consumer of our internal steel products, they also increase the power of our through-cycle steel utilization. Since our acquisition of Columbus Flat Roll Division, the transformation of its product portfolio through the expansion of its value-added steel capability, diversification of its customer base, and the addition of a paint line has meaningfully increased its through-cycle earnings capability, which will be clearly demonstrated during this downturn.

We're now close to completing a $140 million, 400,000-ton value-added third galvanizing line, which we expect to begin operating mid-2020. The value-added product increase will decrease Columbus's hot-rolled coil exposure and provide a ready and waiting hot-band customer base in the south for our new Texas steel mill. As such, we continue to be excited about the material growth the construction of our new next-generation flat-rolled steel mill will deliver. As Tricia explained, our financial strategy focused on entering 2020 providing for the required investment associated with this transformational project. Our team has an incredible depth of experience in the construction, startup, and operation of large steel manufacturing assets. Collectively, we believe they have more experience than exists in any company in the industry, and their performance and momentum has been remarkable.

In January, we received the required environmental permitting to allow for full construction efforts, and we currently anticipate a mid-2021 startup. That said, as Tricia mentioned, we will be reassessing our timeline throughout the Q2 as we gain more visibility into the impact of COVID-19. Additionally, even though we intentionally did not purchase equipment from China, some of our equipment is being manufactured in other countries where the coronavirus is also active. We're having weekly conversations with these manufacturers, and we currently do not believe our planned schedule has been meaningfully impacted. The new state-of-the-art three million-ton steel mill will include a value-added coating line comprised of a 550,000-ton galvanizing line and a 250,000-ton paint line with galvanizing capability. It will follow the same stringent sustainability model as our other steel-making facilities with state-of-the-art environmental processes.

Our existing steel mills have a fraction of the greenhouse gas emission intensity, actually about 12% of average world steel-making technology. With an 84-inch coil width, one-inch thick, 100 KSI product capability, the Texas mill will have capabilities beyond existing electric arc furnace flat-roll steel producers, competing even more effectively with the integrated steel model for foreign competition. As you know, the steel mill is strategically located in Texas, near Corpus Christi. We have targeted three regional sales markets for the mill, representing over 27 million tons of relevant flat-roll steel consumption in the Southern and West Coast United States and Mexico. We also plan to effectively compete with heavy imports in Houston and the West Coast. Our customers are excited to have a regional flat-roll steel supplier. We have several customers in discussions, with one already committed to locate on-site with us and a second close behind.

These two customers alone will represent over 800,000 tons of local steel processing and consumption capability. The Sinton location provides a significant freight benefit to most of our intended customers relative to their current supply chain options. We believe the potential customer savings related to freight alone are a minimum of $20-$30 per ton and for some much higher. This freight advantage, along with much shorter lead times, provides a differentiated supply chain solution, allowing us to not only be the preferred domestic steel supplier in the southern and western U.S., but also to effectively compete with imports, which inherently have long lead times and speculative pricing risk. From a raw material perspective, our metals recycling operations already control significant and growing scrap volume in Mexico through scrap management agreements, much of which is prime.

As announced in March, we are also planning to acquire a Mexican scrap company as part of our raw material strategy for Sinton. Their primary operations are strategically located near high-volume industrial scrap sources throughout central and northern Mexico. The company currently ships approximately 500,000 gross tons of scrap annually, but has an estimated annual processing capability of about two million tons. After closing, we plan to ramp up volume fairly quickly. We are currently waiting for Mexican regulatory approval, as well as other closing requirements to expect to close in the coming months. We believe our unique operating culture, coupled with our considerable experience in successfully constructing and operating cost-effective and highly profitable EAF steel mills, positions us incredibly well to successfully execute the Sinton project. As I've said before, we're not simply adding flat-roll production capability.

We have a differentiated product offering, a significant geographic freight and lead time advantage, and an import alternative to a region in need of options. Our unique culture and the execution of a long-term strategy continue to strengthen our financial position through consistent, strong cash flow generation and long-term value creation, differentiating us from our competition and demonstrating our sustainability. Again, our commitment is to the health and safety of our people, our families, and our communities, all while supporting our vendors, serving our customers, and sustaining our value creation journey. Our team is simply incredible. I'd like to thank each of them for their patience, resilience, and commitment during these tough times. They have an indomitable spirit that drives us to excellence. And also, a very special thank you to the healthcare providers and their families within Steel Dynamics and those serving individuals across the globe. Thank you.

Be safe. Be well. So Michelle, please open the call for questions. Thank you.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you pressed star one earlier during today's call, please press star one again to ensure our equipment has captured your signal. Also, we ask that you please limit yourself to one question to facilitate time for everyone. Any additional questions can be addressed upon re-entering the queue. Our first question comes from the line of Chris Kerry with Deutsche Bank. Please proceed with your question.

Hi, Mark and Tricia, and thanks for the comments. Just interested in the outlook or what you've seen so far in April. Obviously, the chart you provided in your presentation had utilizations in the 80% mark. You're above the average. That's fallen to the mid-50s in the last couple of weeks. Just wondered if you could comment on how Steel D is going so far in April, and maybe based on your order book, what you might expect that to be during 2Q. I know it's a difficult question, but just wondering if you can provide some color on the ground.

Mark Millett (President and CEO)

Certainly. I think, as you said, it's an incredibly difficult question. Not so sure our crystal ball is clearer than others, but I will say that it's positive looking through the lens of our order book and our order input rate. I read this morning an American Metal Market individual saying, "Well, nobody's buying out there." I guess perhaps they're not buying from other people, but they are buying from us. I believe that obviously energy is going to be very stagnant for the rest of this year into next year. Automotive is going to come back. Again, one doesn't necessarily know exactly when, but the expectation is late this month and through May. The bright spot certainly is construction. As I mentioned earlier, construction tends to lag a market downturn. We saw it in 2015. We saw it in 2008, 2009.

It tends to lag the downturn in the market by about four to six months because operations or projects tend to be pre-funded. We're seeing that in our New Millennium building fabrication business and our structural mill. As I said, New Millennium, extremely strong backlog despite some project pushbacks, but there's nothing real meaningful change yet. We are very, very strong, have a large market share in the distribution warehouse market. That obviously, given people staying at home and the expansion of Amazon's and the like, that remains a growth area, in all honesty. Structural Rail Division backlog is currently solid, certainly through May. It did see a $25 price decrease here just recently, but I do believe that people will recognize that we're troughing out at the bottom of the market. The scrap is going to be somewhat stable here in the next month or two.

Those that have been hanging in the sidelines, not buying, will likely come to market. In that arena, in the beam arena, heavy structural distribution has certainly slowed as they whittle down their inventories. They're now pretty damn tight, and we're starting to see them come back and buy as they need. The fabricators, that business still is strong as they supply the ongoing construction projects. Rail is actually very, very strong for us at the Structural Rail Division, and rebar is an addition for us. Compared to past downturns, the product portfolio of Structural Rail Division is much more diverse today, and we won't see the depth of lower utilization rate. If you remember back in 2009, 2010, that business went to 30%-35% utilization, still remaining somewhat profitable. That's not going to happen this time.

There's a much more diversified product mix than market mix, and so that should weather this along very, very well. Engineered bar, that is seeing a little softness right now. Obviously, automotive is down. Energy, seamless too is down there. And so that is one arena that is probably as soft as anything in our product portfolio. Flat roll remains relatively robust is probably too strong a word, but we're targeting those operations to run at around about 80% utilization. That for us seems to be a good balance between fixed cost absorption and pricing. And it appears that we should be able to sustain that targeted output certainly for April, certainly for May, and we're confident that we can do that in June as well. But generally, I think it's obviously quarter over quarter, it's going to be a tough couple of months for us, but we're positive.

Okay. Thanks for the call, Mark. I'll leave it there.

Operator (participant)

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

David Gagliano (Senior Analyst)

Hi. Thanks for taking my questions and congrats on a solid start to obviously a challenging year. I just wanted to follow up on the prior question. If we look at slide 11, 94% utilization rates in the Q1, what's that number today?

Tricia Wagler (EVP and CFO)

David, I think that's what Mark just really tried to address, so there's a couple of things that I think differentiates us. One is that we continue to operate 24/7, and so with that, we get the orders and we gain market share during environments like this, especially as other higher cost production is being shut down. Right now, we're still operating at a very good utilization rate across the platform. The most challenged division, frankly, is our engineered bar division, and that's because they're tied to both the energy market and to just general industrial. Once automotive comes back, and more specifically for engineered bar, when Caterpillar, John Deere, et cetera, start to operate again, and I think that schedule, the last charts that I've seen was toward the mid to the end of May, you should start to see that correct.

But that being said, it is a very difficult environment. It's just we're able to gain market share, and we're very nimble in the order entry and working with the customers, and that tends to make so that in very difficult environments, our utilization stays higher. The other point is the internal volume. That is not to be overlooked. So fabrication is still incredibly strong with a record backlog. They need steel. They'll be buying that steel from our own steel mills. The same thing regarding our internal processing divisions. So Heartland, United Steel Supply, et cetera, they need steel. They'll be buying that from our internal steel mills. So that helps our utilization profile, and most of our, if any of our competitors have that same lever to pull. So we can't give you an exact percentage number today.

Frankly, I don't know what the exact percentage would be overall, but I know that we feel good about where we are and that the teams are doing a great job.

David Gagliano (Senior Analyst)

Okay. Thanks for the additional color. The commentary was targeting 80% on the flat side. How about maybe is there a target for the remainder of the product mix?

Mark Millett (President and CEO)

I think structural should remain in that sort of 75%-80% range. Again, the merchant shapes probably less than that. Again, merchant shapes, Roanoke tends not to be a massive part of our earnings profile anyway. But three out of four of our principal mills, Butler, Columbus, and the Structural Rail Division are targeting that 75%-80% utilization rate. As Tricia said, engineered bar right now looks to be softer than that.

Tricia Wagler (EVP and CFO)

David, just as an example, if you go back to 2015, which I would suggest is the last weak steel environment that we've seen overall, generally, our operations, even at that time, were operating at over 70%. On the flat roll side, they were actually operating closer to 90%. It's always more challenging on the long product side because there's just extra capacity out in the system as it relates to long products and because they're all electric arc furnace based. But today, we would suggest that we just have more internal levers to pull. And so we wouldn't think that necessarily overall, when you include both the flat and long, has as much impact as it might have at one point in time.

David Gagliano (Senior Analyst)

Okay. I'll leave it at that. Thanks very much.

Operator (participant)

Thank you. Our next question comes from the line of Seth Rosenfeld with Exane BNP Paribas. Please proceed with your question.

Seth Rosenfeld (Research Analyst)

Good morning. Mark and Tricia, thank you for taking my questions. With regard to the cost performance that we've seen from the business, as you've continued to grow your processing volumes utilizing some internal and some third-party substrate, can you give us a sense of how that's impacting your overall fixed cost base for the business? Again, if we think about how your position in 2020 compared to past downturns, should we consider the growth in processing as essentially more variabilizing your cost base versus history, or should we think about this in a different way, perhaps? And then secondly, just one more follow-up with regards to Sinton. I wonder if you can please give a little bit of color with regards to the decision to continue with the same three million-ton target?

Given the weakness in oil and gas, you yourself highlighted that being weak through 2021 and planned for one million tons going into energy. How do we think about that three million-ton target in the current market environment for Steel Dynamics? Thank you.

Tricia Wagler (EVP and CFO)

Okay. Seth, good morning. I think I have all the questions written down. From the first questions about the adding of the manufacturing businesses or the processing businesses, there are two points that you should keep in mind. One is you're correct. It is increasing the variability of our cost structures. But again, as a reminder, each of our operating platforms is already over 85% variable cost, but this helps that as well. The other component to recognize is that because they're buying steel and using steel as a substrate, that is impacting our cost of goods sold by having steel run through cost of goods sold, which is higher priced. And so just anecdotally, in the Q1, we had about 15% of our cost of goods sold was associated with those steel purchases from the converting companies. From a Sinton perspective, Mark, I'll let you handle the energy question.

Mark Millett (President and CEO)

Yeah, for sure. I think, the mill is structured or designed for three million tons. It's not like a conventional thin-slab-based EAF where you have two casters. This has one caster with a three million-ton capability. And as such, it's not a matter of building half the plant or anything like that, nor do we anticipate doing so. Obviously, the output would be adjusted somewhat to demand. But again, yeah, the energy markets are pretty tough right this second. But as one or for those that have been in the industry for a significant amount of time, things do cycle that market will come back. But the advantage of the Sinton facility is its geographic location. We're not dependent on one single market or product.

We've got around about 27 million tons of market capability when you look at the Southwest, you look at the West Coast, and you look at Mexico. And we can shift that product between energy and automotive and construction. And we feel that the investment premise remains totally, totally intact.

Tricia Wagler (EVP and CFO)

And just as a quick point on that, from an energy perspective, last year, I think of our shipments, about 7% was related to energy, but that was primarily at our engineered bar division and at Columbus. But within that number, we also shipped quite a bit of volume from our Steel of West Virginia facility into solar. So our energy number also includes solar, and solar is still something that's actually increasing in demand during this time as well.

Seth Rosenfeld (Research Analyst)

Great. Thank you very much.

Operator (participant)

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

Timna Tanners (Equity Research Analyst)

Hey, good morning. I hope everyone's healthy and safe.

Mark Millett (President and CEO)

Likewise, Timna.

Timna Tanners (Equity Research Analyst)

Thank you. Wanted to just drill down a little bit into your cash flow philosophy. So I heard you maybe, Tricia, I misheard. Can you clarify? You said for the remainder of the year, CapEx is $1.2 billion, which sounds like your CapEx forecast is intact at $1.4 billion, or did I hear that wrong? And you also went on to say that you could adjust it if needed, but you're not adjusting it. And you also said that you could just authorized further buybacks and just completed, what is it, $170 million buybacks in the quarter.

So I kind of get the impression that for now, Steel Dynamics is operating as if the impact of reduced demand and COVID-19 impact is a shorter-term phenomenon and kind of getting back to normal later in the year. That's what I'm piecing together from your comments on the CapEx and the buybacks. But I just wanted a little bit more thought on how you're thinking philosophically about the rest of the year and CapEx and buybacks. Thanks.

Tricia Wagler (EVP and CFO)

Great. So let me clarify. You're right concerning the capital expenditures currently for 2020. We started the year saying we expected to spend about $1.4 billion. We spent a little over $200 million in the Q1. So for the remainder of the year, there's $1.2 billion left. Of that $1.2 billion, over $700 million of that is actually late in the second half of the year, and it's related to Sinton. As we progress, Timna, through the Q2, we believe we're going to gain a lot of visibility as the state, for lack of a better word, reopen on what that means for steel consumption and on our own operations for the remainder of 2020.

As we progress to the Q2, should we think that we want to potentially take some of that capital and push it into 2021, we can make that decision to do that at that time, but right now, from what we're seeing, as Mark mentioned, how the mills are operating and the market share and the activity that we're seeing, we don't believe that that decision is something that we're making today. As it relates to our share of purchases, we purchased $107 million in the Q1. Most of that was purchased within January and February timeframe.

But you should expect to see from us in the Q2 is that we will be watching the markets, watching the impact of the coronavirus, and you won't see us heavily into the share buyback market at that point in time, and then we'll reassess for the second half of the year. The reason the board authorized an additional $500 million in February of this year is simply because we think share of purchases during periods of excess cash flow is an important tool to have. And so we wanted to have that tool because we actually only had, I think, about $40 million-$50 million left on the previous program. Does that help clarify how we're thinking about things?

Timna Tanners (Equity Research Analyst)

Yeah, absolutely. Because I was having a difficult time squaring some of those comments with the market environment. Okay. So I guess just as a follow-up, if I could, can you just talk a little bit about when you think you'll have more visibility on construction? So like you said, construction's late cycle. You wouldn't see cancellations yet. But it sounds like that could start to flow through later in the year. And I just wanted to get a little bit more thought on when you would start to see any impact on your backlog or any commentary from what you're seeing on the ground level because we're hearing that private sector activity is kind of drying up. So I'm just wondering if that's in line with what you're hearing as well. Thanks.

Mark Millett (President and CEO)

Timna, I've seen the same commentary out there, and it seems to be a little disconnected to our actual order book and what we've seen. And as I've said quite consistently, our real lens for SDI is through that order book and through the inquiry rate, and all that remains quite strong. As an analogy, if you look at the 2008, 2009 downturn, which was pretty significant unto itself, we saw the Structural Rail Division operating pretty consistently into the summer of 2009. There's a good four, five, six months of strong sort of continuation from pre-funded projects, and we're seeing, as I said, a large part of our business is in the distribution warehouse arena, and that is, I would say, it's expanding more than contracting, so I think we see things optimistically. We're also very, very realistic.

I just want to go back to what you're saying about, is there a dichotomy between the markets and what we're saying relative to our strategy? I'm going to ramble a little bit, I think. Probably some of the members of the SDI team have been in the business probably longer than anyone on the call and probably most leadership in any of the steel companies. We've seen the 80/81. We lived through and managed through 2001, 2002, when 45% of the industry was in insolvency. We lived through 2008, 2009. We lived through 2015. We are very realistic and recognize the impact and the market change and manage to that. I think we've demonstrated through our 25, 26-year history that we're very intentional, we're very disciplined, and we're actually conservative.

At that same time, in periods like this, leaders, and you've got one of the best leadership teams in the world here, they need to lead. They shouldn't be seeking cover. We need to be seeking opportunity. And that's where we think Sinton is a very, very good investment, a very good opportunity, and we'll continue to go down that path. That being said, just to reemphasize what Tricia said, we'll continue to reassess our order books, the market, our cash flow generation, and we'll adjust as we see fit. But I think it's very, very important to recognize that, again, a lot of the CapEx for Sinton is sort of back-loaded toward the end of the year here. And it's a huge lever that we can pull if necessary.

Timna Tanners (Equity Research Analyst)

Okay. And by lever, you mean to delay, right? I don't envision you're talking about pulling it per se, right?

Tricia Wagler (EVP and CFO)

No. We're just talking about delaying it, Timna. And just one other point, and I didn't want to belabor it. You really can't forget the strength of the working capital for us and the funding source it can be if necessary.

Timna Tanners (Equity Research Analyst)

Okay. Really helpful, guys. Thank you.

Tricia Wagler (EVP and CFO)

Thank you.

Operator (participant)

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

Phil Gibbs (Managing Director and Metals Equity Research Analyst)

Hey, good morning.

Mark Millett (President and CEO)

Good morning.

Tricia Wagler (EVP and CFO)

Good morning.

Phil Gibbs (Managing Director and Metals Equity Research Analyst)

Mark, can you talk a little bit about the on-site customers that you're going to have on Sinton? I think it was part of your script on Sinton, but I just wanted to be sure because I think you'd said over 800,000 tons of local or on-site processing. And obviously, that's a big chunk of the three million tons that you're looking to get. So one, I just want to make sure I heard that correctly. And two, where do you think that that can go as this project evolves?

Mark Millett (President and CEO)

I think we've got one signed and a second very, very, very close to signing. There's a preference on their part not to submit names at this moment in time. But you're right, the two of them would amount to about 800,000 tons of consumption and processing capability. And we probably have another, not probably, we do have four other interested customers that have been given full packages, lease packages, and those sorts of things. They just slowed a little bit because of the situation we're in, but we're confident that we're going to get those folks too. But it is a very, I think, important part of the overall strategy at that mill.

Tricia Wagler (EVP and CFO)

Collectively, it's likely to be somewhere over a million tons of on-site capability.

Phil Gibbs (Managing Director and Metals Equity Research Analyst)

Okay. Well, that's helpful. So talking basically a third kind of built-in on-site there. I think that their tax benefits or deferrals and accelerated depreciation on years where new assets go into service, and let's just say 2021 is intact for Sinton, at least as it is today. What should we be thinking about the size of just the accelerated depreciation benefits in terms of tax avoidance in the years it goes into service? Because obviously, with $2 billion of spending, it could be pretty meaningful.

Tricia Wagler (EVP and CFO)

Yeah. So we don't have exact numbers, but I would estimate that of the $1.9 billion, you're likely to have accelerated depreciation on at least 80%-85% of that number.

Phil Gibbs (Managing Director and Metals Equity Research Analyst)

Okay. Would you take that all in year one, given, I guess, all the assets go into service in 2021?

Tricia Wagler (EVP and CFO)

Yes, Phil. That would all be recorded in 2021, year of service.

Phil Gibbs (Managing Director and Metals Equity Research Analyst)

Thanks very much.

Operator (participant)

Thank you. Our next question comes from the line of Andreas Bokkenheuser with UBS. Please proceed with your question.

Andreas Bokkenheuser (Senior Equity Analyst)

Well, thank you very much and good morning. I hope you guys are all well. Just two quick questions for me. First of all, on oil, obviously, this week's oil volatility, how do you guys think about that? Just aside from what it could do to investment in the energy sector and tubular steel and so on and so forth, when you kind of saw what happened yesterday to prices, what kind of went through your minds in terms of, are there any opportunities for Steel Dynamics that we should be thinking about? And what are the less obvious challenges as well? So maybe just give a little bit of framework, if you will, around how you're kind of thinking about the oil price move yesterday. And I guess the second question is more on construction. Can you give a little bit more granularity there?

When we look at the residential and non-residential construction numbers, there seems to be as much weakness as there is strength and has been for the last year or so. You guys seem to be exposed to the strength of it. So could you give a little bit more granularity as where you're seeing that strength in any particular areas? Is it res or non-res? Geographically, is it more south than north and so on? That would be very helpful. Thank you very much.

Mark Millett (President and CEO)

Certainly. Regarding the energy markets, I think yesterday was quite incredible. I'm not so sure we'll have time to digest. But just in general, obviously, the immediate impact is on the energy markets, pipe and tube. That's not just been a COVID thing. That obviously is Russia and Saudi Arabia doing their thing. The low energy prices will just extend the downturn there. That is 8%-10%, I guess, of the steel market in normal times. We look at that as a pretty stagnant market the rest of this year going into this year and next year, first half of next year anyway. I guess the positives, one is scrap tends to move down with oil. I'm not so sure that the physical market would allow that to occur in May.

Scrap shouldn't move down in May, but we think, given the physical market, it's probably a sideways market moving forward, but that may change here in the next week or two. What I do think is that the pressure on the energy market is going to, in turn, put pressure on the integrated mills. And I think that you've seen a pretty dramatic idling of integrated capacity, last-minute capacity here over the last four, five, six weeks. And if you look back over a longer period, the last couple of years, there's been a much more frequent turn-on, turn-off of some of that capacity as they suffer pretty strong economic pressure. And I think a sustained downturn in the energy markets will make some of those assets, it's going to be a tough decision to ever bring them back.

So I think it may, as a positive, may help rationalize the industry to some small degree.

Operator (participant)

Thank you. Our next question comes from.

Mark Millett (President and CEO)

Sorry. And then the second question on construction granularity. Again, there certainly has been weakness in the Northeast, but that's tended to be more projects or construction locations actually being shut down by the states. We certainly see strength in the South. We certainly, as I said, see strength in that distribution warehouse arena.

Operator (participant)

Thank you. Our next question comes from the line of Gordon Johnson with GLJ Research. Please proceed with your question.

Gordon Johnson (CEO and Founder)

Hey, guys. Thanks for taking the questions. This question may have been asked, but I was wondering if I could get a little bit more color on your shipments expected across some of the different lines. I know you said your utilization is going to drop to 75%-80%. But can we get maybe a little more color on kind of what you see in Q2 and maybe some of the green shoots you see in the second half?

Tricia Wagler (EVP and CFO)

Yeah. We're not going to get too specific for two different reasons. One is that we generally don't get that type of guidance. And the second reason is, especially going into the environment that we're in right now, there's not a lot of visibility. And so we want to make sure that we're being appropriate. But I think what Mark was suggesting is that we intend to see utilization, or at least we're planning for utilization at our flat roll operations somewhere in that 75%-80% range. And traditionally, even in 2015, we were actually operating at about 90%. So we generally gain market share in flat roll during periods of weakness. And we're seeing that today as well. And we don't see a driver for that to change throughout the quarter. The long product side is more difficult.

So in the Structural and Rail arena, we do expect to maintain higher utilization in that 75%-80% range because of the order backlog as it sets today and because construction is continuing for us in that arena. And with the addition of rail and rebar, that product diversification helps that facility. Across the other long product mills, it's more difficult. So you're going to see the most weakness in our mind in the special bar quality or the SBQ arena. And then that's distributed throughout. So that's probably about as much clarity or granularity as we can provide on volumes at this point.

Gordon Johnson (CEO and Founder)

Okay. That's helpful. And then one last one. In the checks we've done, it seems like you guys are doing quite well in the construction space, particularly against the integrated mills. Is there any, I guess, approach you guys have or color you can provide on, I guess, incremental attempts to take share in that space? And is that accurate that you guys are doing quite well in the construction space against your integrated peers? And thanks for the question.

Tricia Wagler (EVP and CFO)

Yeah. No, that's absolutely correct. And especially, I don't know if it wasn't just in periods like this. In the Q1, our Structural and Rail team did a fantastic job on the construction side in pulling in volume. And if you were speaking more specifically about our fabrication business, we have been gaining market share in that arena as well. And the teams do incredibly well. And Mark pointed out it's more specifically in that warehouse arena. But we have been taking market share, and we would expect to continue to do that.

Gordon Johnson (CEO and Founder)

Thanks again.

Tricia Wagler (EVP and CFO)

Thank you.

Operator (participant)

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

Hi, Mark and Tricia. And thank you very much for all the information today. Just to look at the auto market, I think you had mentioned that some of the auto manufacturers are looking to come back online in the next few weeks. Can you talk about, are you starting to hear from them more, like more order inquiry? And also, sort of for the industry, I realize you guys are a great operator and you're going to have the ability to potentially take share this year. What is sort of your baseline, if you have one yet, baseline forecast for auto production? Do you assume it's down 10% this year? Curious about that. Thank you.

Mark Millett (President and CEO)

I didn't hear the question.

Operator (participant)

Thank you. Our next question.

Tricia Wagler (EVP and CFO)

The question relates to automotive, and it relates to the perspective of, as they start to roll on, we've been taking market share, specifically with the European automakers, et cetera. Would we expect to continue to take that market share, and what are we thinking about from a volume perspective, so how much will steel consumption volumes or auto builds be another perspective? How much will that be down? I think it's 1 million-1.5 million units is what I'm seeing, and then the perspective just around, what do we feel about continuing to take that market share related to automotive?

Mark Millett (President and CEO)

Got it. Okay. Well, I would suggest that, as I said earlier, my crystal ball is probably no better than anyone else's on the call. And the whole recovery is subject to when folks get back into the marketplace and at what speed do they ramp up. From present information, it appears that the automotive will start rolling back starting the end of mid to end of next week and all the way through May, depending on which company. There's a backlog of vehicles right this second. So how quick the recovery is, it's difficult to gauge. You look at past troughs, it tends to replenish. They've been in a position to replenish inventory and pick up demand. I'm not so sure we will see that this time around. To quantify our gain in market share relative to times, it's a tough thing.

But all I can say is our abilities are sort of armed and ready to go. And it's our flexibility across all markets. It's not just auto, but all markets that allows us to take our opportunistic gains. Because it's going to be a while before the integrated mills just start turning on all their idled capacity. One would imagine that they need to see some visibility and transparency for a market that is on the up and has got positive momentum and that pricing also has positive momentum. And that's not going to happen just because the automotive and the other one and two stamping has not ramped up. So there's that time period, and it's a matter of months. It may be longer this time around. Who knows? But it's a matter of months where the flexibility of electric arc furnace operations can take advantage of the marketplace.

Operator (participant)

Thank you. Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Please proceed with your question.

John Tumazos (Principal)

Thank you very much. How much of the Butler and Columbus mill tonnage used to be scalped for welded tube for energy exploration and in the plan for Sinton? And should we just assume that those volumes become construction steels given the short-term crude oil outlook?

Mark Millett (President and CEO)

For John, I would say Butler, the energy slab is not a massive part of their portfolio. We tend to see hot-rolled coil dependence from that facility is not really related to oil and gas. Given the value-add diversification there, we don't really have a massive amount of hot band to sell, to be honest. Columbus certainly has greater exposure. If you remember when we purchased the mill in 2014, that was dominantly an energy pipe supplier. I think back then it was 30%, maybe 40% of its output.

Tricia Wagler (EVP and CFO)

It was over 40% with related energy.

Mark Millett (President and CEO)

Since then, the team, and really sort of catalyzed by the downturn in energy in 2015, the team has done a phenomenal job diversifying that asset, adding greater coating capabilities, adding a paint line, adding a variety of high-strength type great steels there, getting into automotive, getting into Mexico. So both the product and the market diversification there has totally transformed that energy. And so it's through site learnings today, there's nothing like 2015. It's much higher. That being said, it's probably 10%, maybe 15% energy related.

Tricia Wagler (EVP and CFO)

So John, just overall, to put a point on it, last year, our shipments, we only had 7% that were related across the company that were related to energy. And some of that included solar. Some of that was high premium grade OCTG, that sort of thing. So it's not that much of our business either last year or today at this point. And then as it relates to Sinton, we will also be competing, we think, very effectively with imports. And I think that's something that people should recognize as well.

John Tumazos (Principal)

Thank you. Congratulations on being the old man of the call, Mark. I turned 65 February 1 2020.

Mark Millett (President and CEO)

I'll be respectful, but you and I both mate, so.

Operator (participant)

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

Phil Gibbs (Managing Director and Metals Equity Research Analyst)

Hey, Tricia. Did you provide the mix of sheet products as typical?

Tricia Wagler (EVP and CFO)

I apologize, Phil. I didn't. I have it here, though. So for flat roll shipments, I know a lot of you use it for your models. Our hot-rolled coil and our pickled and oiled shipments were 891,000 tons. Our cold-roll shipments were 151,000 tons. And our coated shipments were 948,000 tons for a total of 1,990,000 tons. Apologies.

Phil Gibbs (Managing Director and Metals Equity Research Analyst)

Oh, no. No worries. That's all. Thanks very much.

Tricia Wagler (EVP and CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Charles Bradford with Bradford Research. Please proceed with your question.

Good morning. And I got both of you guys beat on age. But the question goes down to a little bit something maybe out of your bailiwick. But apparently, U.S. Steel has dropped out of membership of the AISI. That may impact the quality of the industry data that we get. Have you seen any change in the quality? I'm thinking especially of the usually pretty bad operating rate figure.

Mark Millett (President and CEO)

Chuck, I would say we've not seen any change, but nor have we analyzed it, to be honest.

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Tyler Kenyon with Cowen. Please proceed with your question.

Tyler Kenyon (VP and Metals & Mining Equity Research Analyst)

Hey, good morning, Mark and Tricia. I hope you're both doing well. Tricia, just a quick one for me. Do you anticipate any relief in 2020 from the recently passed CARES Act, payroll tax deferrals, enhanced deductibility of interest expense, etc., in any way to bracket what kind of cash relief they could provide in 2020?

Tricia Wagler (EVP and CFO)

Yeah. Given the analysis that we've done, I really can't put a great bracket around it. But at this point in time, Tyler, it's not something that we're viewing as will be significant for us. There's definitely the payroll tax relief would have an impact. But apart from that, given our expectations on operating in the different areas where they're helping either smaller companies or companies that are not doing as well as we are, I don't think it's going to be something that's meaningful at this point. If that changes, we'll be sure to let you know.

Tyler Kenyon (VP and Metals & Mining Equity Research Analyst)

Thank you.

Operator (participant)

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

Mark Millett (President and CEO)

Well, thank you, Michelle. And thank you, everyone on the call. I just would like to emphasize I'm a pretty optimistic guy. And if you were surrounded by the team we have at SDI, you would have that same optimism. And it's really based on SDI's position. And I would suggest even in these tough times, and the SDI team shines in moments of challenge. And we are in a position of strength. Our business model is built to be resilient in trough markets and tough markets. We have a high variable cost structure. 85% of our cost structure is variable. We've got a broad value-added product portfolio. And we have strong pull-through volume, as we've suggested from our internal downstream operations. All that builds a high utilization rate. We've demonstrated in every trough, higher utilization rates than our competition.

And when you have capital-intense steel assets, volume is absolutely critical. And that translates into better financial metrics through the cycle. So we're still confident in our cash generation capability. We're still confident in our financial foundation. And we are battling each and every day, but our orders continue to flow in. So we do remain positive. That being said, we're incredibly intentional. And we recognize that we need to be assessing markets and our position almost each and every day. We've demonstrated that in the past, and we will demonstrate that going forward. So for all of you, thank you for being on the call. Customers and employees, seriously, thank you. You make SDI who we are today. And everyone, be healthy and be safe. Bye-bye.

Operator (participant)

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