Steel Dynamics Inc

NASDAQ:STLD

Earnings Call Transcript 2019-Q3

[Operator]

Good day, and welcome to the Steel Dynamics Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

Please be advised that this call is being recorded today, October 17, 2019, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect.

At this time, I'd like to turn the conference over to Tricia Meyers, Investor Relations Manager. Please go ahead.

[Tricia Meyers, executive]

Thank you, Michelle. Good morning, everyone, and welcome to Steel Dynamics' First Quarter 2019 Earnings Conference Call.

As a reminder, today's call is being recorded and will be available on the company's website for replay later today.

Leading today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and Theresa Wagler, Executive Vice President and Chief Financial Officer. We also have leaders for our operating platforms, including our metals recycling operations, Russ Rinn, Executive Vice President; our steel operations, Chris Graham, Senior Vice President of Long Products Steel Group; Barry Schneider, Senior Vice President of Flat Roll Steel Group; and for Southwest Strategy, we have Miguel Alvarez, Senior Vice President, Southwest U.S. & Mexico; and for our Fabrication operations, Jim Anderson, Vice President, Steel Fabrication.

Some of today's call -- 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 a 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 general business and economic conditions. Examples of these are described in the relating press release as well as 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 if applicable, in any later SEC Form 10-Q.

You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics Reports Third Quarter 2019 Results.

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

[Mark Millett, executive]

Well, thank you, Tricia. Good morning, everyone. Welcome to our third quarter 2019 earnings call, and we certainly appreciate you spending some time with us this morning.

I'd like to thank the SDI team for delivering a solid quarter despite a challenging steel pricing environment. Their dedication, their drive and innovative spirit continues to propel us toward excellence that earn superior financial metrics and shareholder value. I'd like to thank each and every one of our 8,000 team for their input.

But to begin this morning, Theresa will provide insights into our third quarter performance.

[Theresa Wagler, executive]

Thank you. Good morning, everyone.

Our third quarter 2019 net income was $151 million or $0.69 per diluted share, within our guidance range of $0.66 to $0.70 per diluted share. Third quarter 2019 revenues were $2.5 billion, 22% lower than the third quarter 2018 sales and 9% lower than sequential second quarter results as average realized steel prices declined.

Our third quarter 2019 operating income was $228 million, 57% lower than the prior year record-high third quarter results and 20% lower than sequential second quarter earnings due to lower realized flat roll steel pricing, which more than offset the benefit of lower scrap costs.

As we discuss our business this morning, you'll find we are constructive concerning underlying steel demand and optimistic concerning our own unique earnings catalysts.

Within our steel operations, third quarter shipments declined modestly 2% to 2.7 million tons. Our average quarterly realized external steel sales price decreased $70 per ton to $809 in the third quarter, and average scrap cost only declined $41 per ton, causing lower steel metal margins. The result of third quarter steel operating income was $240 million, and although lower than record-high prior year results, historically a very good performance.

As I mentioned on last quarter's call, I want to take a moment to point out the continued mix shift of steel processing volume versus steel production volume. It's important to note the change in our steel mix from almost purely steel production economics to the higher percentage of steel processing or conversion economics that we have today.

We maintain a low and highly variable operating cost position, in fact, we would say best in class. But we now have a larger component of cost related to the raw material from the input used in our steel processing locations. It's a powerful strategic advantage to have processing capability to sustain higher steel mill utilization during weaker demand environments to create optionality and supply for our customers and to allow for value-added product upside in all markets.

For our metals recycling platform, third quarter operating income was $3 million, over a 70% decline sequentially primarily related to our non-ferrous operations as aluminum and copper demand continued to weaken. Ferrous shipments and selling values also were lower in the quarter with prime scrap indices falling almost $30 per gross ton in July to September. Approximately 65% of our non-recycling ferrous shipments serve our own steel mills, increasing scrap quality, melt efficiency and reducing company-wide working capital requirement. Our vertically connected operating model benefits both platforms.

Third quarter 2019 operating income for our fabrication business improved sequentially to $35 million, our second best quarterly performance. Congratulations to the team. Earnings improved based on near-record shipments and lower steel input costs. We continue to see strong order

[Audio Gap]

customer optimism coupled with a seasonally strong project backlog.

Our cash generation continues to be incredibly strong. During the third quarter of 2019, we generated $444 million of cash flow from operations and $987 million during the first 9 months of the year. This performance represents a trailing 12-months free cash flow of $1.2 billion equating to a cash flow conversion rate of 13%. Year-to-date, 2019 capital investments totaled $294 million, over half of which occurred in the third quarter as spending related to our new Sinton flat roll steel mill started.

We maintained our cash dividend in the third quarter at $0.24 per common share. We also repurchased $115 million of our common stock during the third quarter, totaling $292 million in the first 9 months of 2010, with $170 million remaining authorized for repurchase at the end of the quarter. Since 2016, we've repurchased 30.8 million shares representing 13% of our outstanding balance. We believe these actions reflect the strength of our capital structure and liquidity profile and the continued optimism and confidence in our future.

We achieved record liquidity of $2.4 billion at September 30, 2019, representing $1.2 billion in cash and short-term investments and an equal amount of available funding under our revolving credit facility.

Regarding our new Sinton, Texas flat roll steel mill, the total investment remains an estimated $1.9 billion. Assuming timely receipt of required environmental and operating permits, we expect to begin facility construction early in 2020 followed by starting operations midyear 2021.

Based on this time line, we estimate capital outlay to be approximately $225 million in 2019, of which we've already spent this year close to $120 million; approximately $1.2 billion in 2020; with the remainder in 2021. We've also been awarded state and local incentive benefits that will be received over time approximating $150 million to $155 million.

Collectively, our primary strategic growth investments provide an estimated incremental annual future EBITDA of over $425 million on a through-cycle historical spread basis. You'll find this specifically outlined in our slide deck on Slide 9. The estimate includes our planned Sinton, Texas steel mill and third Columbus galvanizing line as well as our 2 existing rebar expansions which are still in a ramp-up phase.

Last week, we also received updates to our credit ratings. We are pleased with our new investment-grade credit status achieved with the 3 rating agencies. This is a natural progression of our strategic growth and recognition of our strong balance sheet profile and sustainable through-cycle free cash flow generation capability.

Due to the strength and optionality within our capital structure and free cash flow-generating business model, we have the flexibility for continued growth and responsible shareholder distribution while also being dedicated to preserving investment-grade credit rating. We are committed to maintaining net leverage at 2x or less on a through-cycle basis.

Our capital allocation still prioritizes responsible strategic growth with appropriate shareholder distribution comprised of a base positive dividend profile that is complemented with a variable share repurchase program. We're squarely positioned for the continuation of sustainable, optimized long-term value creation.

Before I send the call back to Mark, for those of you that like to have the breakdown of our flat roll shipments, in the third quarter we had shipments of 800,000 tons of hot roll and P&O. We had 197,000 tons of cold roll, and we had 958,000 tons of coated products.

Mark?

[Mark Millett, executive]

Super. Well, thank you, Theresa.

Safety is and always will be our #1 value, our very, very first priority. Our safety performance year-to-date is generally in line with our excellent 2018 performance and the severity rate continues to decrease as the leading metric in our industry. While performance remained significantly better than industrial averages, it certainly is not enough though. We must all be continuously aware of our surroundings and our team members around us. Safety must always be top of mind and I challenge all of us to remain focused in the key movement toward our ultimate goal of 0 injuries.

As Theresa suggested, the fabrication platform delivered an outstanding performance with the team achieving near-record earnings in shipments. Profit margins expanded as raw material steel input costs continued to decline and underlying demand fundamentals remained steady. Our order backlog remained seasonally strong. Our customers remained positive regarding demand volume for 2020 despite the recent weakness in the ABI the last few months. Demand from the institutional and residential sectors has been outperforming the commercial construction sector with more domestic activity in the western and southern regions.

The total availability of construction labor and projects have been somewhat delayed and will effectively extend this construction cycle. This year has been particularly difficult in the metals recycling world. Not only have ferrous scrap prices declined 8 of the last 10 months, but the combination of trade and uncertainty around some of China's environmental policies have also pressured non-ferrous demand and prices.

Despite the team's continued focus on efficiency gains, our metals recycling numbers decreased in the quarter, primarily a result of the continued decline of aluminum and copper demand and associated selling values. Given that we're at the last few cycles of non-ferrous metals in the U.S., it has significant effect to the recycling platform lines. Ferrous scrap shipments declined with no utilization growth and inventories have gone down in anticipation of steel mill meeting the [indiscernible]. Concurrently, selling values also declined in the quarter due to diminished demand and lack of export market.

The GM strike contributed to decreased ferrous demand from our foundry customers as well as molten aluminum from our superior alloys division. Price scrap generation from GM and its suppliers has reduced price flat flow but had -- should have only marginal impact in the months ahead.

After October's saw the trend down in ferrous scrap prices, we anticipate scrap prices to stabilize moving into the winter months.

The steel platform performed well in a challenging environment, with continued weakening in scrap prices and reduced customer buying hesitancy in anticipation of further steel price declines compared to the second quarter and third quarter hot-rolled coil price indices at almost $80 per ton.

Long products pricing remains pressured from domestic and import competition. However, we're seeing the benefits from our recent investments in product and supply chain differentiation helping to offset some of these market pressures.

Underlying domestic steel demand appears principally intact in the prime steel consumer sectors, including automotive and construction. Steel consumed for the pipeline infrastructure for the collection and distribution of fracked natural gas and liquids continues to be strong, and we expect it to remain so as the U.S. continues its energy independence journey. We believe North American steel consumption will improve in the coming years, with maximum growth outpacing that of the U.S. based on meaningful increases in Mexico's manufacturing base.

Furthermore, we believe the U.S. trade decision will continue to erode imports, and the increased domestic steel content requirements for the automotive industry currently included in the anticipated USMCA should enhance domestic steel demand. However, global economic concerns and ongoing trade negotiations are certainly creating a negative atmosphere and buyers remain extremely cautious.

We continue to competitively position Steel Dynamics for the future through optimization of existing operations, organic investments and transactional growth. During the last 12 months, we acquired Heartland, invested $300 million in our steel platform, and early this year, acquired 75% controlling interest in United Steel Supply to further enhance our prepainted flat roll steel distribution network.

Specifically, we are ramping up our 200,000 ton rebar expansion in our Roanoke Bar Division. We're the only independent supplier in the region. The line has ramped up towards 8% reliance rate capability.

In the first quarter of 2019, we also completed the 240,000 ton rebar expansion in our Structural and Rail division. The ramp-up has been slower than planned and it's currently running at approximately a 50% rate. With the startup behind us, we fully expect to be at full capacity next year. This expansion includes cut-to-length and coil rebar capability. This unique rebar supply chain model is expected to meaningfully enhance customer optionality and flexibility, providing significant logistics, yield and working capital benefits for the customer. In addition, we will be the largest independent rebar supplier in the Midwest region.

Within the flat roll group, the acquisition of Heartland provided further product diversification through value-added wider- and lighter-gauge product capability. The team achieved record quarterly volumes which is 70% of planned 800,000 ton annual run rate. This geographic proximity to our flat roll operations allows for additional value creation. By allocating lighter-gauge production in Heartland, our Butler Flat Roll Division has increased its value-added production effort, setting new volume records. And it also creates significant pull-through volume for Butler, thereby providing additional mill utilization support through [ summer ].

We're also in the process of further value-added growth with the Columbus Flat Roll division. In the last 2 years, Columbus has transformed its product offering through the addition of a paint line and an introduction of more complex grades of flat roll steel. The diversion of the product to these diversified and value-added outlets has reduced the volume of product available to our existing galvanized steel customers. So to address the associated lack of sufficient galvanizing capacity, we are building a third galvanizing line at Columbus. The $140 million investment will further increase Columbus' value-added capability, decreasing its hot-rolled coil exposure. The 400,000 ton line is planned to begin operating in midyear 2020.

Additionally, we are investing approximately $90 million to further increase Columbus' range of complex-grade capabilities, including advanced high-strength steels for both the automotive and energy sectors. These upgrades are occurring in the coming months with planned completion by the end of 2020.

In aggregate, these upgrades will effectively reduce the availability of about 400,000 tons of Columbus' non-coated flat roll steel that is currently shipped to the Southern U.S. by 2021. This advantageously coincides with the startup of our new Sinton, Texas flat roll steel mill and will provide immediate support in the new year.

Our Southwest U.S. and Mexico growth strategy will provide expansive opportunities and long-term value creation to Steel Dynamics. Each of our operating platforms have an existing presence in the region, where we plan to meaningfully expand our influence there. At the core is the construction and startup of our new Sinton, Southwest U.S. flat roll division. We have purchased the land, the equipment is ordered and most of the service agreements have been negotiated, and we've already [ expelled the landlord ]. We have assembled a team of our veterans having incredible depth of experience in the construction side and operation of large steel assets, and they're already executing extremely well.

The facility is designed with an annual production capacity of 2 million tons, will include a 550,000 ton galvanizing line and a 250,000 ton paint line with Galvalume capability.

The new mill will have capabilities beyond existing electric-arc-furnace flat-rolled steel producers, competing even more effectively with the integrated steel model and foreign competition. The mill will have the capabilities to provide higher strength, tougher grades of flat roll steel for the energy and automotive markets. This is due to having a thicker cast section and a more conventional 2-stage hot rolling process which allows for thermal mechanical rolling.

The mill will be capable of 84-inch wide, 1-inch thick, 100 ksi of hot roll coil, product unavailable in the United States today. Additionally, heavier coil weights and heat size will provide energy pipe producers intrinsic cost and yield savings. The configuration will also allow us to ship certain plate products on a limited basis, providing further product diversification.

The steel mill site, as advertised, is located in Sinton, Texas, which is adjacent to Corpus Christi. The site has numerous significant competitive advantages compared to almost any other location along the Gulf Coast, including geographic market position, power accessibility, freight benefits, water availability and constructability. The people of Sinton have been very welcoming, and we thank them for their partnership and shared vision for this strategic investment.

A significant competitive advantage lies purely in the Sinton location given it's central to our targeted market regions. Sinton lies 190 miles from the large steel-consuming city of Houston and 300 miles from the growing Monterrey, Mexico region. It also provides an advantageous capability to access the West Coast.

The site will provide significant trade benefits to most of our intended customers relative to their current supply chain. We would expect the savings to be minimum of $20 to $30 per ton compared to their current closest domestic supplier.

In addition, customers will be able to order on much shorter lead time basis, providing significant delivery time and working capital advantage. We have the opportunity to provide steel in terms of weeks versus months.

These benefits provide a competitive supply chain, allowing our new mill to effectively compete with imports flying into Houston and the West Coast that inherently have long lead times and speculative pricing risk. This will give the American pipe producers the competitive supply chain to once again compete with foreign pipe producers that have dominated the markets. Customers are excited to have a regional flat roll steel supplier. We're also having a dialogue with many of them who have expressed interest in locating facilities on or near our site.

From a raw materials perspective, our metals recycling operations already control a significant and growing scrap volume in Mexico through our scrap management relationships, much of which is prime scrap. We also plan to cost-effectively source pig iron through the port system. Based on our current scrap relationships, both in Mexico and the Southern U.S., we are confident in our ability to procure high-quality scrap in the region.

We have 3 targeted regional sales markets representing over 27 million tons of relevant flat-roll steel consumption, and we believe this will increase in the coming years. The regions represent approximately 8 million tons from the 4-state region of Texas, Oklahoma, Louisiana and Arkansas, which has limited domestic regional supply and relies heavily on imports. Sinton lies in close proximity from both rail and truck deliveries in this region. Approximately 4 million ton of consumption from the underserved West Coast region, which also relies heavily on imports; and approximately 16 million tons from the growing Northern and Mid-Central Mexican regions.

In 2018, the Mexican market imported 7.5 million tons of flat roll steel. And given their growing manufacturing base, we believe Mexican demand growth will continue to outpace supply, making this an even more attractive underserved market in the coming years. Sinton will have the most trade advantaged shipments into this region from the U.S.

We've been developing a flat-rolled steel strategy for these regions in Mexico for several years. We've been cultivating both customer scrap relationships, and we are confident in the long-term strategic value and investment profile this project provides. We believe our unique operating culture, coupled with considerable experience in successfully constructing and operating cost-effective and highly profitable steel mills positions us well to execute this strategic initiative.

To be clear, we're not just adding conversion capacity, we have a differentiated product portfolio, we have a significant geographic freight and lead time advantage, and we have targeted regional markets.

In conclusion, I echo Theresa's earlier comments regarding our investment-grade achievement. This milestone recognizes our unique culture and the execution of our long-term strategy. We'll continue to strengthen our financial position and long-term value creation, demonstrating our sustainability and differentiating us from our competition.

Our exceptional team provides the foundation for our success. And I thank each and every one of you for your passion and commitment to excellence and remind each and every one of us that safety is always our first priority.

We're committed to providing exemplary long-term value to our fellow colleagues, communities, customers and shareholders, and I look forward to creating new opportunities for all.

So again, thank you for your time. Michelle, could you please open up the call for questions now?

[Operator]

[Operator Instructions] Our first question comes from the line of Martin Englert with Jefferies.

[Martin Englert, analyst]

Since 232 and related retaliatory tariffs were removed within NAFTA, are you seeing any notable changes in trade flows? More specifically, is there any greater export opportunity to Mexico today?

[Mark Millett, executive]

I'm not sure that there's greater capability. We continue to gain market share into Mexico. So we're not seeing any resistance for sure.

[Martin Englert, analyst]

Okay. I imagine it's probably a little bit easier to move material into Mexico versus with the tariffs in place, yes?

[Mark Millett, executive]

That's a yes.

[Martin Englert, analyst]

Okay. And then if I could, one other one there. Can you provide a brief update on the SBQ market, where you're seeing demand trend year-on-year and incrementally in today's market as well as some of the trade dynamics there and competition from North American peers there?

[Mark Millett, executive]

So I think the -- by sort of product sector, automotive remains very, very strong. The energy sector has come off, but that is mainly from seamless sort of pipe consumers, and that's more [ dairy involved ]. I would suggest that the pipe production side of things for the entity, yes the collection and distribution infrastructure on flat roll, that remains very strong. But we are seeing some weakness in energy, fuel is then off. Several of the industrial manufacturing, trailer and those sorts of things are off a little bit on the manufacturing side of the house.

[Martin Englert, analyst]

Okay. And if you had to guess from a manufacturing and truck trailer side of things, how much do you think demand might be trending off versus a year ago, say?

[Unknown Executive]

Well, I think the one comment would be that the disruption which we've experienced over the last 5, 6 years has been mitigated in 2019 so we see a normalization of that market. There's been quite a lot of catch up in the last few years, and we're just seeing that level off.

[Martin Englert, analyst]

Okay. Thanks for the incremental color there. That's helpful. Nice job navigating a difficult market.

[Operator]

Our next question comes from the line of David Gagliano with BMO Capital Markets.

[David Gagliano, analyst]

And I apologize if this was covered. I just didn't quite hear it if it was. In terms of a very short-term question, first of all, you did imply customer destocking appearing to subside. But I think a lot of us are seeing this recent sharp -- incremental, sharp drop in spot price quotes, and I think a lot of us are seeing some further declines in published lead times. So my question is why do you think there's this disconnect between this and the end of customer destocking in your view?

[Mark Millett, executive]

Well, I think that's a great question. So I would say we're not understanding it completely either. The so-called destocking, I think, is trailing off and coming to an end. So you have relatively low infill positions throughout the supply chain there. Imports have continued to erode. So I believe that given the underlying demand, for the moment, it's still strong. Construction is still very strong. Energy, pipe, very, very strong.

Yes, the kind of the industrial manufacturing arena has weakened to some degree. But the underlying demand or consumption of the product remains pretty well intact through the end of the year. And I would envision that we are going to see certain support at the pricing level we see today, if not a little bit of a pickup going into the first quarter as people start coming back to the marketplace.

[David Gagliano, analyst]

Okay. And then just a somewhat associated question. Given the drop we've seen in spot pricing, I know, obviously, Steel Dynamics has a decent amount of spot sheet exposure. And my question is at what price would Steel Dynamics start to scale it back a little bit and wait for -- kind of wait for a better day, so to speak?

[Mark Millett, executive]

David, scale back what?

[David Gagliano, analyst]

Production.

[Mark Millett, executive]

Production?

[David Gagliano, analyst]

Yes.

[Mark Millett, executive]

Currently, in general, we would rarely scale back production. Our cost position is still advantageous compared to any other producer out there. Utilization from our mills is critical to retain that cost structure. We're going to remain profitable and can remain profitable at these levels and even lower levels. So we have no intent of scaling back.

[Theresa Wagler, executive]

And remember, David, we have the benefit of the additional manufacturing businesses to utilize our steel as well, which is one of the key factors why, if you do enter or when we are in weaker periods, we can still keep that utilization higher to keep those costs compressed for the third-party sales as well.

[David Gagliano, analyst]

Okay, I understand.

[Mark Millett, executive]

Just to add to that, if you can break that, Heartland as we say, the team there has done an absolute phenomenal job on the production side. That facility is breaking records and I think has never produced at the rates that they're producing today. So when that's up and running at full tilt, that's going to be 800,000 tons of substrate. You have Texas, similarly, 700,000, 800,000 tons of substrate that allows us to get further away from other folks as needed.

So this is a -- and new milling systems have about 600,000 tons of requirements. So there's a lot of flexibility there for us to divert materials over to our own facilities to maintain that utilization rate. And as we've said in the past, steel mill assets are -- through that strong fixed cost and utilization is critical to outperform our peers.

[David Gagliano, analyst]

Understood. I appreciate the additional thoughts there. Just one more, I just want to add my name to the list of people asking the question you get asked all the time about the Texas project. Obviously, there is quite a bit of fear in the equity market now about oversupply risks, and obviously, the stocks are reflecting some of that.

So my question is are there any constraints that would prohibit Steel Dynamics from pushing that time line for the project out just a bit and instead using that free cash flow during that pause period to ramp up that buyback program or special dividend program again?

[Mark Millett, executive]

I would say we are firmly entrenched in pushing that project forward. I'm not sure how to articulate the investment premise and the incredible investment return that that facility is going to produce. It truly is a differentiated project. You can't get that material today in the U.S. The pipe producers are actually going offshore and bringing that in. So they'll be able to make 84-inch wide, 1-inch thick, 100 ksi materials. It's going to be just a new product and a huge advantage. The trade advantage is colossal for us and so the market penetration, we feel, will be quite rapid. And it's -- as we've described in the past, it's just a vacuum of reaching production there. So I don't see why we would even entertain the thought of slowing that down.

[Theresa Wagler, executive]

David, just to put a cap on that, actually, as demonstrated in the third quarter, we're actually still having a positive dividend profile as we established by increasing the dividend 20% in the first quarter of this year as well as repurchasing almost $300 million of stock during the year. And so we're actively involved in the shareholder distribution as well as being able to have a strong cash flow generation to pay for the Sinton flat roll mill through free cash flow if we would choose to do so while maintaining investment-grade credit metrics. So we have the optionality and the flexibility, and frankly, the intent to do all of the above.

[David Gagliano, analyst]

Okay, that's helpful. No doubt, there's quite a bit of underappreciated long-term value there. I was just more quizzing about the thought process regarding the timing, and I appreciate the additional color.

[Operator]

Our next question comes from the line of Seth Rosenfeld with Exane BNP.

[Seth Rosenfeld, analyst]

Seth Rosenfeld, Exane BNP. A couple of questions, if I may, on the fabrication business, please. Your prepared remarks noted continued strong order backlog in fab. Can you give us a bit more color on how the current backlog compares to that at the time of Q2 and perhaps this time last year, recognizing normal seasonal patterns?

And also on the fab margin side, you've obviously benefited from significant decline in raw materials cost of late. How do you think margins will develop as we head into Q4? And is there a risk given the current bidding environment, that if steel prices do recover a bit into 2020, you could see, once again, some margin weakness in this area?

[Theresa Wagler, executive]

Seth, so as it relates to the strong order backlog comment that I made on fabrication, as we look at this time last year, it's very similar. It might be just slightly less, but that's not abnormal as last year was pretty robust heading into the fall time frame. There's still a very strong order backlog from the fabrication perspective.

And you're correct on the margin side equation. Declining steel prices obviously benefits the fabrication side of the business, but there's also been really robust demand on the construction side, which is a lot of pricing, which remained pretty robust as well. Heading into 2020 based on the customer's commentary and I think, Jim, they just had a big sales meeting, and the customer base, correct me if I'm wrong, is very optimistic about 2020 as well.

[Jim Anderson, executive]

That's correct. There's still plenty of activity described in our sales meeting last month.

[Theresa Wagler, executive]

So we're feeling really good about the fabrication business, Seth.

[Seth Rosenfeld, analyst]

Just to follow up I guess. There's good sentiment from your construction customers. It's a great sign. But are they demanding kind of cut rate prices reflecting current steel price environment in the U.S., which, based on your current comment -- on your recent commentary, doesn't sound like you think is very sustainable into 2020. I guess the concern is, in order to get that backlog, is there some sacrifice on price? Or is ultimately the margin power still there?

[Theresa Wagler, executive]

We are not buying the backlog, if that's what you're asking. No. Pricing is holding up quite well in the fabrication arena. And so it's not a matter -- the words you used was -- I'm not sure I got it, because steel prices are going down that it's reflecting in the same amount of increase in the fabrication pricing. No, that's not happening.

[Operator]

Our next question comes from the line of Andrew Keches with Barclays.

[Andrew Keches, analyst]

A couple of quick ones on the balance sheet.

[Mark Millett, executive]

Andrew, sorry, but we're having a little bit of a noise problem. If you would, just speak a little slower and the other folks.

[Andrew Keches, analyst]

Sure. Can you hear me now?

[Mark Millett, executive]

Yes. That's good. Yes.

[Andrew Keches, analyst]

So just a clarification on the balance sheet. You -- looks like you lowered your leverage target from 3 to 2 turns. Can you just talk about the genesis of that? Is that a reflection of the market environment or potentially a reflection of investment opportunities? Or is there something else driving that?

[Theresa Wagler, executive]

Yes, absolutely. So last week, we were upgraded by all 3 rating agencies to investment grade, and so we are committed to maintaining investment-grade credit metrics. So in our mind, that target is a through-cycle net leverage of less than 2x. So that's the reason for the change in the investor deck. And you'll notice that even over the last 3 years, we've returned almost $1.6 billion of cash to investors, who are also investing over $1.2 billion in our own assets and acquisitions, and we maintained lower than net leverage of 2x. So we have that flexibility to still grow and make distributions and maintain that. We don't believe it's limiting at all. So that's the reason for the change.

[Andrew Keches, analyst]

Okay. And just to clarify and I guess follow up, so is the commitment now to investment-grade ratings? Or is it still investment-grade metrics, and the metric has been lowered?

[Theresa Wagler, executive]

It's -- we're committed to investment-grade ratings and so net leverage of less than 2x through-cycle.

[Andrew Keches, analyst]

Okay. And then just last one. You clearly have a lot of the capital structure that's callable in the near term. Have you given thought to opportunities to perhaps improve the capital structure?

[Theresa Wagler, executive]

So we are always assessing the capital deck per layout of maturities if you will, and we do have 3 tranches that are available or callable at this point in time. So we'll be assessing the market in the near term to determine what that opportunity set may look like.

[Operator]

Our next question comes from the line of Curt Woodworth with Crédit Suisse.

[Curtis Woodworth, analyst]

Theresa, just a question on thinking about modeling cash flow for 2020. Can -- I think you said that the new mill is $1.2 billion. Can you discuss other capital requirements, maintenance CapEx? And then would you anticipate a working capital build as you get raw materials, labor, whatnot to get the new mill in position to ramp in mid-'21?

[Theresa Wagler, executive]

Curt, I will give you preliminary thoughts, and then we'll round out with more detail as we have the fourth quarter conference call in January. We're still developing some of our capital requests for next year. But in totality, I would assume that next year with the $1.2 billion expected to be spent on Sinton, we're likely to spend another $100 million to $150 million. So probably looking at $1.3 billion to $1.4 billion of CapEx next year. Again, we'll be more specific on the call.

As it relates to working capital, you shouldn't see significant working capital changes in 2020. You start to see more of that in the first half of 2021. So aside from market dynamics, which obviously, you can model on what your expectations are for 2020, there's nothing that would be structurally different in my estimation for working capital.

[Curtis Woodworth, analyst]

Okay. And then just a question for Mark in terms of thinking about the cadence of the ramp at Sinton. Would you expect to sort of light both electric arcs at the same time? Is there any consideration in terms of environmental or operating permits that are going to be staggered? Just to get a sense for maybe kind of what your volume expectation is on how quickly you could ramp the new mill.

[Mark Millett, executive]

Well, there are no [ permanent ] or any sort of extraordinary reasons not to start the facility at its full rate. Typically, mills of that nature run around about -- after the first 6 months or so, in their first year, run around about 80% of their rated capacity, which in this case is 2 million tons.

[Operator]

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

[Matthew Korn, analyst]

Just following up on a couple of earlier questions. Clearly, supply side issues have been front of mind for many of us, number of quarters. Prices are weak. Demand outlook, optimistic, maybe a little fuzzy. What are your expectations, if any, for any serious capacity rationalization over the next year, over the next 2 years? Do you think the industry will need it? And do you think we're going to get it?

[Mark Millett, executive]

Well, that seems to be the topic du jour, I guess, and I think the -- in terms of the aggregate list of new capacity expansions that are being sort of discussed there is ever changing. And I think it's reducing. If you look at the -- on the long product side, you have Republic come off, [ Baker-Hansen ] come off. On the flat-rolled side, U.S. Steel is suggesting that they'll shut down 2 -- idle 2 blast furnaces. AK is coming off independently so that Ashland will never come back. JSW has changed its thoughts. So the total aggregate number of additional tons seems to keep decreasing.

The most recent news that U.S. Steel delivered suggested that there will be some rationalization there, meaningful rationalization. So I think that the industry will continue to evolve. We as a U.S. industry need to operate, need to be competitive on a global basis. And I think the industry has been responsible and moving in that direction.

Obviously, there is, on the flat-rolled side, some real capacity coming on. You could probably say about 6 million, 6.5 million tons of real capacity we'll be seeing in 2, 3 years' time in the marketplace. But between now and then, the market -- 2/3 of the market is going to continue to grow somewhat. And we are quite volatile on a longer term. The trade constraints, so the regionalism that is pervasive today, I think is going to erode imports or keep imports under control.

Our North American demand, particularly in Mexico, will continue to grow and for those like ourselves that are in a position to service that new market, it's going to be very valuable for us.

Sort of the U.S. energy independence that we're achieving now, I think has been understated. People are not talking about it, but that's going to be a huge economic driver, both of the economy and of fixed asset investment. We're seeing, just in Texas alone, the LNG plants, the permits, the $38 billion of infrastructure that is likely planned. So that is a -- I think that's an understated sort of growth opportunity there.

Now the USMCA domestic product is going to increase demand, I think, for us all. The tax reform, the fixed asset investment is going to continue. And there's going to be inevitably, at some point in time, infrastructure spend. Now, it may not be this year, but [ it will be going on ]. So in general, we're incredibly bullish, and the market is going to be able to support that increased capability.

[Matthew Korn, analyst]

Appreciate the comments. Let me ask -- let me follow up another one. Just clarifying, when I'm looking at your Long Products division, what in particular is driving the weakness we're seeing in the structurals and in the engineered bar, where you're seeing the volume declines year-over-year? Is this largely market conditions? Is this still some lingering operational issues? Do you see any chance of improvement on the volume side in the near term? And then I think I heard you correctly. It sounds like you do have confidence of achieving particularly more full utilization next year.

[Mark Millett, executive]

I think the -- on the engineered bar side of things, that is driven principally by market, but the sort of industrial manufacturing base, it's certainly softened. On the structural side, for us, actually, I'll start with rail and beams. Rail, we're actually increasing market share there. We'll probably ship 200,000 tons, I think, for 2019. Structural heavy beams certainly is under pressure, yes.

[Chris Graham, executive]

Yes. It continues to be an over-served market, Mark. I think that there is a definite switch from ordering out of rollings. This is the same story everywhere, whether it's destocking or they were overly aggressive in their buying habits at the end of last year. It's on the floor, and there isn't a day or 2 they're not getting into rollings. So we see steady demand, but we see that people are literally not buying a lot of steel that they don't need. Friday, they're not buying it on a Wednesday because the price may be different on Thursday. And it just seems to be the general trend in all of our markets.

[Mark Millett, executive]

On the structural side, scrap plays a critical role there. And when you have a market that has gone down 8 out of 10 months, the buyer is just hesitant. They expect lower prices the next month and the next month and the next month. And so I think when we'll see the scrap stabilizes here over the next couple of months, people will come back to the marketplace.

[Chris Graham, executive]

Yes, Mark, our structural share has actually increased in this slower market. And when we talk about the rig count [ striking things ], we've just been -- it has [ allegiance to the ] markets. We're continuing to set efficiency records and production records. [ Both ] facilities, there's the new rebar projects are starting to bear fruit, record production in September. I think given any market change, we're well positioned to capitalize.

[Operator]

Our next question comes from the line of Timna Tanners with Bank of America.

[Timna Tanners, analyst]

Wanted to just follow up on scrap. I think it's -- I don't know if it's never been seen before or very unusual to see, as you know, 8 months out of 10 falling prices. So I just wanted to see if you could give us a little bit more color on if there's been structural changes. Obviously, Turkey is buying less. But in the past, we said that at low prices, supply will just shrink and dry up, and it hasn't happened yet. I'm just wondering if there's something structural or how we should think about scrap going forward.

And along those same lines, if falling scrap keeps people from buying, at some point, they have to buy. So it can't be the only -- can't be the explanation for this whole year's softness, at least in long products like you were just saying. So I'm just wondering if you could give us a little bit more color on how you see the scrap market going forward and how it's gotten to where it is.

[Russ Rinn, executive]

Yes. Timna, this is Russ. Thanks for the question. I think scrap market, as you look forward, I think is -- again, for the balance of the year, it's probably flat, maybe could go up slightly. Again, if the Turkey situation was static as it was last month, we were starting to see the Turks come back in the marketplace more firmly. With the new imposition of tariffs, that may change. We don't know yet. But again, I think it's a very difficult thing. In defense of mill buyers, when they see the prices going down like that every month, they're just hesitant. So they're buying hand and mouth on their buys. And so we -- for our perspective, we would like to see a steady scrap market.

We have not seen a dramatic drop-off in flows of scrap. It has slowed down some, but it's not been dramatic. So I think people are just trying to ride it out and realizing just like in 2015, sometimes the market works against you and you just got to stay with it.

[Timna Tanners, analyst]

Okay. Got you. My only other question was I saw some language in your release, and I'm sorry I didn't go back and find it, the verbiage exactly. But I saw some language where you said you were still looking at growth options that could be organic or acquisitive and obviously, with your strong free cash flow even with Sinton. I'm just wondering if you could characterize what those look like. Any M&A that you might be looking at, just broad brushstrokes? It's interesting to see Bayou go bankrupt and nobody bid for them. So I'm just wondering what are the criteria that you might look for, if any, for M&A?

[Mark Millett, executive]

Well, Timna, obviously, with the Sinton project, we're being a lot more fickle I would suggest in looking at other opportunities. The pipeline continues to -- as you say, I think there continues to be opportunities out there. As we have been in the past, we've been incredibly sort of responsible and disciplined and are only going to move forward with something if the returns are extremely good and it provides strategic opportunity for us. Principal focus obviously is in that stream value-add and pull-through type opportunities.

[Operator]

Our next question comes from the line of Andreas Bokkenheuser with UBS.

[Andreas Bokkenheuser, analyst]

Yes. Just one question from me. There seems to be a lot of speculation over the next couple of years that some amount of U.S. steel capacity will kind of have to leave the market to make room for some of the incoming capacity that's entering the market. Is that how you see it? And if so, do you have a sense or an estimate or a guesstimate of how much capacity you would expect to see leave the U.S. market over the next 24 months or so?

[Mark Millett, executive]

I think that it's incredibly difficult to quantify that. Obviously, there are players out there that we will imagine are underwater at current market prices. I think you can read between the lines that there's some rationalization sort of planned or will take place, but the [ going to find out ] is -- would be a little speculative.

[Andreas Bokkenheuser, analyst]

Yes. No. I understand. I guess I'm just thinking about it from a market balance point of view. I've been speaking to a lot of investors. I think there's a lot of bearish people out there looking at steel price and expect the steel price to remain under pressure for quite some time just because demand seems to be flat. Obviously, we all know there's a lot of capacity coming. So one would kind of have to assume that a similar amount of capacity would have to leave the market in order for these prices to go back up unless demand all of a sudden recovers. But yes, I mean, look, I fully understand it's a difficult question to answer. It's just something we're grappling with.

[Operator]

Our next question comes from the line of Nick Jarmoszuk with Stifel.

[Nicholas Jarmoszuk, analyst]

First, Mark, it's really difficult to hear you. I was hoping if you'd get a little closer to the microphone. And then a question for you on -- one of the EAF competitors is talking about putting up a new mill in Brownsville. I was hoping you could talk about whether that changes how you think about the market opportunity and the ROI on the project.

[Mark Millett, executive]

Well, I guess there, it's what -- we're here to talk about SDI specifically and not hypothesize about the future 3 or 4 years out, to be honest. With our mill, all I can say is it's filling our portfolio. We continue to grow even more so in any day as we talk to prospective customers relative to our Sinton investment. And to be clear, we're not building just a new mill there but establishing a new business horizon for SDI in the Southwest U.S. and Mexico. And we've got an incredible team with probably the deepest breadth of talent to execute on a construction project of this size and start it up and operate it. And we have looked all along the Gulf Coast there and including Brownsville. And the Sinton location, I think will provide the least expensive freight to our targeted markets. It's got the best constructability and most importantly provides the lowest operating cost solution when all things are considered. You can't just look at freight alone or any one particular component. You have to look at all the services, the utilities, transportation, the scrap inbound, cold coil inbound. And so we're incredibly excited, to be honest, there's the team in Sinton.

And as I said earlier, we're not having more of the same, the technology and the process or anything. We'll provide a differentiated product that's unavailable in the U.S. market today. And our product is real. It's an expansion of a fully demonstrated growth profile that we've sustained through our 25-year history. And so the commentary out there, I think is unfortunate to be further asked of the rhetoric, the speculations, the sensationism that seems to dominate the steel space today. It's taken away the focus from real value growth performance of some steel companies, SDI is one of them.

[Nicholas Jarmoszuk, analyst]

Okay. The audio is still really difficult to hear. I'll follow-up after the call.

[Operator]

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

[Philip Gibbs, analyst]

Mark, you spoke a little bit about it in your prepared remarks, but I just wanted to see if you could review the rebar investments you've made in the market and where each of your respective projects stand right now. I think you talked about one of them but just if you could give the kind of state of affairs of both of those projects.

[Chris Graham, executive]

Yes. Phil, this is Chris. We did have a slow start on a couple of projects, as Mark has alluded to, but in my short time with the long products team, I've seen it heading in the right direction. The teams are debugging and commissioning. And they're good at it. We're just a new product. And so I would tell you, in the last 2 months, incredible strides are being made. We're actually ahead of where I thought we'd be 60 days ago, and the teams are taking it right to capacity, and we're looking forward to the rest of the year and 2020 as being [ locked in ] those regions.

I would tell you that our medium-section mill in Columbia City where we run the rebar had just -- last month really had their second greatest production month in their history. And that would not have been the case in this market without the rebar project. And so I think it was good vision to add these product lines in an over-served market, and it's providing benefits already. And there's a lot of upside there, Phil.

[Mark Millett, executive]

Yes. Specifically, Roanoke, as I said, I think was around about 70% to 80% of its rated capacity currently. Columbia City is way behind that. It's about 50% of its rate. The good thing is that Roanoke can't make enough. The market, particularly on the cut-to-length, the custom length business, we can sell all that we make. That's a good thing particularly when you look at the market in general.

[Chris Graham, executive]

And Mark, the thing with Columbia City, last year, I'd say that the recent performance is above that 50% range, and they're going to maintain it.

[Philip Gibbs, analyst]

So a couple of hundred -- it sounds like a couple of hundred thousand more tons to potentially get out on an annualized basis next year if I'm hearing you correctly. Okay.

And then 2 on Heartland, because that's obviously been a growth area for you all, where you acquired that business. Where do we see utilization right now? And then can you just describe how Heartland is being integrated with your legacy operations? Because I know you had to at least purchase a lot of hot-rolled on the open market before you started integrating that.

[Barry Schneider, executive]

Yes. Phil, this is Barry Schneider. And Heartland is fitting in really well. The galv line is actually running at a level much higher than what they had historically run. And that is -- has been the previous owner's main shipments are only galvanized. So we've increased that capacity to the team through some key investments, small investments in innovation. But the pickle line and the cold mill there are running very well. And what they're doing currently is taking product from our Butler operation and providing a good cold-rolled base to get to our Jeffersonville facility, which is allowing, as Theresa mentioned earlier, substantially more value-added products to be produced under the combination of Butler and Heartland working together. That's a very good cost alternative for us. It also allows for -- as the product mix gets very light on some of these products, it allows us to get a lot more footage out of these products, which not necessarily shows up as tons but the products are much lighter in gauge and narrower. So a lot more build time to make them. So at this point, that's running very well.

We do see advances in selling more cold-rolled product off of the mill. That's an area where we historically have not participated. So we do have good leads and good development streams to get more of those products out. And right now, I'm really happy to say that the Heartland team's doing all this with the same level of manning that they've had historically. So that team has really responded well to the challenge and the Steel Dynamics' approach to working and how they're engaged with their products and their owners of their other business. And they really take it to a [ great wall ].

[Philip Gibbs, analyst]

Appreciate the comments and congratulations on the formal achievement of the investment grade on the debt. Appreciate it.

[Operator]

Our next question comes from the line of Tyler Kenyon with Cowen.

[Tyler Kenyon, analyst]

I just wanted to go back to an earlier question on cash flow just moving into next year. I think you've identified $150 million to $155 million of property tax benefits associated with the Sinton investment, but I think it may take some time to realize the full extent of those. Are there any other cash tax savings we should be thinking about in 2020 as you spend this capital? And any way to quantify that?

[Theresa Wagler, executive]

The major benefit will come actually, Tyler, in 2021 as the facility starts up, and you will immediately be able to deduct the capital spent under the new tax rules, which other companies do as well. But as you're constructing, it's not that you're deducting it as you spend it. And you're correct. The $150 million to $155 million of tax benefit actually will accrue to us over, call it, a 5- to 10-year period.

[Tyler Kenyon, analyst]

Okay. Is there any way to think about what that cash tax savings could be in 2021, either on a cash tax rate basis or in terms of absolute dollars?

[Theresa Wagler, executive]

There is. I'm not prepared to give you that number today, but we'd be happy to do that in a later call.

[Tyler Kenyon, analyst]

Okay. And then just one last one for me. Wanted to just ask about the Vulcan business. We've seen some duties put in place on an outstanding trade case on threaded rod. I know a small market, but curious if you've seen any benefit from a pricing perspective since the trade case has been announced and since we've seen some duties put in place. And then if you could maybe perhaps help me with trying to quantify the actual size of that market.

[Chris Graham, executive]

This is Chris. We've definitely seen some assistance in the threaded rod arena because of the tariff discussions. Some of the largest consumers of threaded rod who are buying 100% offshore are coming to visit our team for the first time in decades. Now Vulcan does make several products, heat-treat and cold finish. Those are more directly related to scrap. And so they've had the same pressures. But you're right. It's a good point on low tariffs on threaded rod. We've not -- there's been a disconnect with the scrap pricing. It's been -- we've gotten some pricing power there.

One comment as you talk about the cases, I think it's interesting. Some of the products Vulcan make imports hold as much as 85% share. And so you're right. It's been an interesting case to follow. And we believe there's going to be some opportunities for Vulcan to grow.

[Operator]

Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

[John Tumazos, analyst]

I was very encouraged that the August industry shipments of 8.47 million tons to holiday month, they were the highest in several years. Were Steel Dynamics' shipments higher in September than in August, to signal an improving trend? And do you think the industry will get over 9 million tons for October, which seasonally is the stronger month in the second half?

[Theresa Wagler, executive]

John, I would say that generally our shipments weren't extraordinarily higher nor lower from August to September across the platform. And I don't think that we can get what October will be for the industry.

[Operator]

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

[Mark Millett, executive]

Well, again, as in the past, certainly appreciate your interest and your time today. To our customers that may be on the line, thank you for your business, and hopefully we continue to earn your trust in the business. And to our employees, again, safety, safety, safety. Thanks for all you do. You do a hell of a job. Thank you.

[Operator]

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