Good day, and welcome to the Steel Dynamics’ Fourth Quarter and Annual 2016 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, January 25, 2017, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to Tricia Meyers, Investor Relations Manager. Please go ahead.

Thank you, Donna. Good morning everyone and welcome to Steel Dynamics’ fourth quarter and annual 2016 earnings conference call. As a reminder, today’s call is being recorded and will be available on the company’s website for replay later today. Leading today’s call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and Theresa Wagler, Executive Vice President and Chief Financial Officer. We also have our leaders from the Company’s operating platforms, including our Metals Recycling operations, Russ Rinn, Executive Vice President; our Steel Fabrication Operations, Chris Graham, Senior Vice President Downstream Manufacturing Group; and our Steel Operations, Glenn Pushis, Senior Vice President Long Product Steel Group; and Barry Schneider, Senior Vice President of Flat Roll Steel Group. Some of today’s statement, which speaks only as of this date may be forward-looking and predictive. Physically preceded by believe, expect, anticipates or words with 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 to general business and economic conditions. Examples of these are described in our annually filed SEC Form 10-K under the heading forward-looking statements and Risk Factors found on the internet at www.sec.gov, and is applicable 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 Fourth Quarter and Annual 2016 Results. And now, I’m pleased to turn the call over to Mark.

Thanks, Tricia. Good morning everybody. Welcome to our fourth quarter and full year 2016 earnings conference call. We appreciate you sharing your time with us today, and we all wish every one of you health and happiness in this New Year in 2017. I would like to start the call by recognizing and thanking the entire Steel Dynamics’ team for their dedication and strong performance this past year. They did a terrific job further reducing our safety incident rates, turning in best-in-class financial metrics, producing at record rates, and they continue to expand our production capabilities and product offerings. There’s a tangible momentum that continues to build within our Company and within our industry, supported by underlying market fundamentals for 2017 and likely beyond. Coupled with our existing unique earnings catalysts, lean capacity and intended growth objectives, we’re definitely optimistic heading into the year. But to begin this morning, I ask Theresa to comment on our financial results.

Thank you. Good morning, everyone. I would like to add my thanks and congratulations to the entire SDI team. We have really had a lot of milestones on many fronts this year, and some of those have benefited 2016, but I think many of them have us set up very well for the coming years as well. A few of the items of note are we had record steel shipments this year. We had our third consecutive record year for fabrication shipments and revenues. We had record annual adjusted operating income of $861 million, and we recorded our second highest annual adjusted EBITDA of $1.2 billion. And I will note that the accounting folks have us just about $10 million shy of our record, so very good year. For the full year 2016, our net adjusted income was $472 million, or $1.92 per diluted share. The adjustments included three items. One was in the third quarter, with litigation settlement charges of about $5 million related to our industry-wide Standard Iron Works lawsuit. The fourth quarter, there was debt refinancing and repayment charges of $17 million associated with the refinancing of our 2019 senior notes and the repayment of our senior secured term note and fourth quarter non-cash asset impairment charges of $132.8 million of which $127 million was related to our Idles of Minnesota iron operation. As we noted in our December 2016 guidance, we evaluated the appropriateness of the carry value of the assets in Minnesota, primarily at the Mining Resources joint venture. These are the operations that produced iron concentrate from tailings that we idled in May of 2014. We determined that the estimated fair value did not support the existing book values, and therefore recorded the impairment. On an unadjusted basis, 2016 GAAP net income was $382…

Thank you, Theresa. I think that encapsulates what an incredible performance of the team in all honesty did in 2016, and how successful our business model is going to be through the cycle. But the safety and welfare of our employees remain our number one priority, and nothing surpasses the importance of creating and maintaining a safe work environment. Our safety performance remains significantly better than industry averages, and we continue to work toward a zero incident environment at every location. The team did a phenomenal job this year continuing their success of year-over-year improvement, achieving a record Company wide performance. We reduced the annual recordable injury rate by a further 20%, and 63% of our locations were totally incident free. My sincere thanks to the entire STLD team for their dedication and continued focus. As Tricia outlined, the Steel platform continued to perform at the top of the industry in 2016, achieving numerous operating and financial records. Due to having one of the most highly-diversified and value-added product portfolios in the industry, we maintained an annual utilization rate of 87%. Once again, markedly better than the domestic industry rate of about 71%. 2016 certainly provided a changing landscape to the domestic steel market. Demand from the automotive and construction sectors remained positive. The demand related to heavy equipment, agriculture, and energy while not deteriorating further remained anemic through the year. The year was somewhat of a tale of two cities, flat roll steel versus long products. Domestically, flat roll steel utilization rates were much higher during 2016, compared to long product utilization rates. 2016 flat roll supply dynamics benefited from the decline in year-over-year imports. Hot roll coil import volume was down 25%, while sheet products in total were down 14%. When coupled with the starkly low customer inventory…

Thank you. [Operator Instructions] Our first question is coming from Evan Kurtz of Morgan Stanley. Please proceed with your question.

Good morning, Mark and Theresa.

Morning.

Good morning.

I will ask a question on scrap. Just hearing recently that in Turkey, the scrap has come under a lot of pressure. And I am just wondering how that is influencing the conversations right now in the U.S. scrap market right now? Seasonally, demand is probably picking up a little bit. And I’m wondering if that is going to mute some of the impact from what we’re seeing on the export front?

Evan, this is Russ. I think what we’re seeing and what we see is we think probably December and January markets got a little hotter than they probably should have. So I am anticipating we will see a mild correction in February and maybe a little bit in March, but I think beyond that I think we’re seeing a pretty robust market. I think the demand for our steel products continues. So I do not think we’re going to see the corrections we’ve seen over the last couple of years. I think there will be a mild retrenchment and we will go from there.

And maybe just a…

Just to kind of color that as to SDI specifically, a stable market sort of pricing environment should really aid the recycling profitability of OmniSource. The last two years, 2015 and 2016, you saw kind of prolonged downward trend in pricing. And when you’re working in kind of an inventory based by it one month sell it the next, it is tough to make the spread. So it’s just a stable, stable environment going through the year, I think is going to be positive for us. And I think Russ and the team have done a terrific job. You just look at the fourth quarter, volumes were down, margins were down, but our profitability was flat. And that was driven by a lot of cost containment, much of which was – came from the realignment of assets and we anticipate continued cost efficiencies there of probably $10 million or so. With the idling of the Wilmington shredder, Smithfield shredders, and with the sales of the Carolina and Georgia assets.

Great, thanks for the color. Maybe just one follow-up on that. Since it does seem like scrap may soften a bit in the first quarter and given your comments on some of the positive market dynamics on steel, would you expect metal margins the first quarter to expand versus the fourth quarter?

I think that’s a good assumption.

Great, thank you.

Thank you. Our next question is coming from David Gagliano of BMO Capital Markets. Please proceed with your questions.

Great. Thanks. My question was similar to what Evan just asked. I was curious about metal margins. Just to follow-up on that and as an add-on, can you frame just sort of given the current environment and the outlook for scrap, can you frame roughly the magnitude of the expected expansion metal margins, number one? And then number two, can you also give us some commentary regarding first-quarter volumes relative to the fourth quarter as well?

Well as you know, David, we would refrain from quantifying the margin expansion and again where the first quarter still unraveling. But we would anticipate expanded margin, and we would anticipate from what we see in the marketplace, volume expansion as well. And just to maybe preempt a question on the markets. And if I bifurcate that into flat roll and long products, in sheet, we believe the supply-side tightness will be sustained. When you look at the December eminent CI data, it showed the typical seasonal decline in shipments but inventories remain at historically low levels. But we believe the import volumes will remain constrained with the duties in place. The arbitrage against global price and it’s certainly reversed and there is less import interest out there. Mill lead times for the industry and certainly for ourselves are healthy. Hot roll coil for us is at four to six week tag, and coated and coiled roll sheet is six plus weeks out. And the industry utilization, albeit at 71%, 72%, obviously flat roll is as much higher as an industry in general. So we believe the supply side is healthy and positive. On the demand side, demand remains pretty healthy and I think we should see growth. And again, I am just specifically talking about sheet. If NAFTA order will remain strong and SDI is certainly increasing its market share through the Columbus mill and Mexico activities. Non-residential continues incremental growth, I believe. The ABI has been positive, and it’s been gone for the last three months I think. And Chris’ group, New Millennium Building Systems’ order activity, inquiry and bookings remains very, very strong there, which is good. As Theresa indicated, we have about 1.5 million, 2 million tons of latent capacity that is correlated strongly with non-residential…

That’s helpful. Thank you very much.

Thank you. Our next question is coming from Matthew Korn of Barclays. Please proceed with your question.

Hey, everyone. This is Justin filling in for Matt.

Morning.

I was wondering, have you guys had a chance to interact with anyone from the new administration yet? And if you have, what have the talks been about?

We have not.

Okay.

Have we? Everyone is shaking their head no.

Okay. And then just one more. Did the potential for reopening NAFTA cause any complications with marketing plans with Columbus and the shipments to Mexico at all, or is there anything we’re missing on that?

No, we are continuing to look at Mexico as a strong marketplace for us. There are a lot of existing assets in place there. You just have to travel through the industrial centers there. Consumption is massive, and we’re not looking for a large portion of that. We shipped 200,000 tons into Mexico last year, and the intent is to increase that to around about 400,000 tons. And I think we are confident that it’s going to happen. Again, I think with the new administration, you have got some very, very positive things that they reportedly want to do, tax reform, trade, some sensible regulation. The balance is going to be not to shut down trade with Mexico or Canada or – I guess we need flow going both ways across the borders. But we are going forward, but we are not planned.

Okay. Thanks, everybody.

Thank you. Our next question is coming from Tony Rizzuto of Cowen and Company. Please proceed with your question.

Thanks very much. Good morning, Mark, Theresa, and Russ. Just got a couple questions here if I maybe. The first one is, Mark, on your comments over the latent capacity that you have. Over what time period do you envision that you would be able to operate that more fully and be able to achieve that 1.5 million to 2 million tons?

I think that it’s probably the second half of the year that we’ll ramp into that. We are going to see volume growth through – in the first half compared to the fourth quarter for sure. But from an infrastructure build, that will ramp up obviously. And you have two sectors there, you have the fast track where there’s numerous projects already kind of lined up and they will likely, and we’re starting to see them more I think, but they will likely come on in the second quarter. And then any infrastructure buildout from the new administration, that’s probably a second half and going into…

Okay. And then, if I may, just there’s a lot of things arguably about the new administration, which are very supportive to the steel demand and the steel industry in general. And maybe following up on the question about NAFTA, are there any other areas that worry you about any potential outcomes with new policy? What is most concerning to you potentially?

Again, everything is speculative I think right now, Tony. I think they’ve come out with guns blazing and following up on the some of their promises. And I think tax reform, as I said, tax reform and sensible regulation will certainly help the country have a more positive business climate and boost the economy. And their position on trade, I think – we are already benefiting dramatically from the cases that were approved last year. They can only sort of vulcanize that environment. I think the sensitivities or the balance is trade and not getting into a trade war, and hopefully we have some sensible people advising that new administration and we won’t get that point.

Thanks, Mark. I appreciate that.

Thank you. Our next question is coming from Brett Levy of Loop Capital. Please proceed with your question.

Hey, Mark, hey, Theresa. Is it on your plate at all to consider adding any assets in Mexico, and have you heard anything from competitors or, I don’t know, even substitute products that sort of thing, to add capacity to address the capacity that is already left for Mexico?

I guess our strategy in Mexico currently, Brett, is commercial more than bricks and mortar.

So continue to send stuff that way. I mean, is there any advantage to putting SBQ or any other form of capacity there as opposed to shipping it to them?

We’re not looking at that I would suggest currently. They obviously are steel short. They import pretty much all oil products, but that is not something that we are considering right this second.

All right. Thanks very much, guys.

Thank you. Our question is coming from Seth Rosenfeld of Jefferies. Please proceed with your question.

Good morning. I have a couple questions on the outlook for the long steel market. Can you just comment about more on what you’re currently seeing for long steel import trends into the U.S.? In 2017, have you already seen some countries begin back out of the U.S. proactively following the law into the most recent rebar trade case? And can you give us a little bit of a sense of what level of confidence you have looking forward, both with regards to the Turkey trade case also including two other Asian peers? And also the Mexican tariff review, what impact could that have in the market various scenarios? Thank you.

Good morning. This is Glenn Pushis. The rebar trade case, we are involved in it but we’re just not a real big player in that sector. At this point, we do maybe 50,000 or 60,000 tons in arguably about 9 million ton market here in North America. So it is really hard for me to answer any of those questions, Mark, with much distinct knowledge about that.

Okay, thank you. I guess then looking the other areas of long steel where you’re more focused like SBQ. You commented very positive on the demand trends. Can you just talk about what headwinds you could see the market with regards to other local capacity domestically within the U.S., or if you could see the risk of imports once again coming in should those prices really start to pick up as you mentioned earlier?

Again, our focus at Pittsboro is principally in engineered bar not in commercial commodity type SBQ. The import pressure comes in just 1-inch RAND 1045, 1018 commodity type materials. The team has done a phenomenal job down there building relationships with the Caterpillars and their automotive, the forches whereby it can take 2 or 3 years to get qualified for a certain application. Those cannot be substituted one month in one month out by imports. So I do not believe SBQ is dramatically impacted from – or at least our SBQ business, dramatically impacted from import pressure.

Okay, thank you very much.

Thank you. Our next question is coming from Michael Gambardella of JPMorgan. Please proceed with your question.

Good morning and congratulations on another good quarter.

Thank you, Mike.

You’re welcome, Mark thanks. I was watching CNN on Tuesday, the second day that Trump was in the office, and noticed that the U.S. Steel’s CEO was standing there next to Trump smiling in the White House office. And I was just stunned over the last 35 years of following this industry to think that a steel executive would be invited into the White House the second day a president was in the office just shocked me. What do you think you can expect to get out of Washington on the trade front? Even I would say on the sheet side, even if they could strictly enforce the laws that are on the books right now would be a big positive for you and the rest of the players in the sheet market, and I’m really talking about the diversion that China is doing through Vietnam and other countries to evade the trade tariffs that they have in place. Because legally, you would think China wouldn’t be able to export a pound of sheet steel into the U.S. given the tariffs they have on hot roll, cold roll, and coated, recently. What are your expectations for strict enforcement of the trade laws that we have right now coming out of Washington?

I think you actually likely answered your own question, Michael. I believe there will be vigorous enforcement of the anti-circumvention laws. If you consider the whack-a-mole we saw last year with Vietnam, I think Vietnam ended with 800,000 tons of the coated product coming in which is huge, huge volume. That, and as you know there is a case or intervention pending there and I think that will end positively. Certainly the rhetoric and the trade position that we’re seeing out of Washington right this second gives you a high likelihood or high probability that that will be successful. And that is very meaningful, certainly meaningful for us with the Galvalume product that has been coming in and the building product commodity prepayments coming in. Just the non-market subsidization, and I think a strong point will be just taking action on the currency manipulation by China.

What other benefits could you see coming out of trade in terms of regulations that you – that may have been imposed on you guys over the last five, eight years?

Well if you look in that timeframe, and I do not know whether you are implying or inferring like a section 201 type activity, again, it would just be speculative for us to talk about at this moment.

Okay. All right. Thanks a lot and congratulations again, Mark.

Thank you. Mike, just I guess one thought. Relative to the trade cases that we already have in place, because I think it’s illustrative to look at the downturn in Q4 of 2015 and the recent one in 2016. Both are relatively procurement driven. But you had in 2015, hot roll coil plummeted like $3.20 and that down cycle lasted for the fourth quarter into January. This most recent one, hot roll did come off, only down to about $4.20 and obviously it was almost an eight week dip. And I think that that foreshortening of that cycle and the lessening of the debt is a result of those trade cases in place. And it gives us confidence anyway that for some time to come we’re going to see a different pricing environment for our products, a much stronger pricing environment for our products.

Thanks a lot, Mark.

Thank you. Our next question is coming from Phil Gibbs of KeyBanc Capital Markets. Please proceed with your question.

Good morning.

Good morning.

Just had a question on the mix in sheet products in the quarter, and what that breakout was, Theresa.

Phil, I’m so sorry – yes I have that for you. So for hot band and P&O it was 781,000 tons, cold roll was 112,000 tons, and coated was 673,000 tons for the total of 1.6 billion.

Okay. And can you remind us how much lag there is in the sheet business in terms of how much business is direct spot versus quarterly or monthly indexes?

Yes, so we’re still have right around that 40% to 45% that is contractual, Phil, and that is what I would put a lag on. The rest of it truly is spot business.

Okay, I appreciate that. And the last one I have is on electricity and power rights. I know natural gas itself is not necessarily a big driver for you guys, but electricity is. Have we seen power rates move higher as call it the last 12 to 18 months have gone on with higher call it info cost minimum in oil and natural gas?

Phil, it is nothing that would be significant enough for us to note.

Okay. Thanks very much.

And, Phil, if I may, and it maybe self evident and most of recognize it. But just for perhaps the newcomers on the call, when we talk about contract pricing at 40%, that’s volume driven and pricing is actually against index. So there is no fixed price contracts out there, just for clarity.

Thanks, Mark.

Thank you. Our next question is coming from Jorge Beristain of Deutsche Bank. Please proceed with your question.

Hey, good morning, Mark and Theresa. I had a question about the Columbus mill. Could you just recap again, you said the percentage of value added has increased from when you guys took it over, could you just give me those numbers again?

Well when we actually purchased Columbus in 2014, over 60% of their shipments were what we would call more just straight hot band. And today, they are actually operating at almost full capacity on their galvanizing lines. And we just added a paint line which will add 250,000 tons of really our highest margin product throughout our flat roll operation, and that actually started. And so we expect to ramp that up throughout 2017 with new and existing customers. I would say today, if you look at that same percentage of just straight hot band, it is more in the area of 45% and we hope to get that even down lower. I think we could get it as low as 40% at some point in time.

So would it be fair to say you’ve had about a 20 percentage point increase in value add?

Yes. Absolutely.

Okay. And then just on the energy exposure from Columbus. Because at the time you’d acquired it, energy was heading south at the time. What is the energy exposure there historically, and how much is it for your Firm overall and how quickly could you re-ramp up service to the energy sector if those pipelines come back on?

So from an energy perspective, when we bought Columbus, they had a real strong concentration. It was probably at least 20% that was tied directly into that energy sector, and there’s nothing that they need to do to ramp up capacity it is just different products that they produce on existing equipment. So it is really about the customer base itself, and they have maintained great relationships with those energy customers. And so, Barry, you can jump in if you would like. But I don’t think it’s a matter of ramping it up, it is a matter of keeping a diversified customer base that they stay at high utilization rates.

Absolutely, Theresa. And I think one of the things that I would like to add is that we continually add new products, so we are able to make higher strike steels in wider widths which is what that sector requires. And we do have a capital project this year to upgrade a coiler to allow us to go heavier in gauge. Although a relatively small project, $10 million or so, we want to be able to go after the projects in that sector that make sense for us. So it is always going to be good sector, we just do not want to be 20% dependent on it. So we never want to leave it, we just want to make sure we are providing the best products to that sector as possible.

And the other division that we have leverage related to energy really is in the engineered bar division, and that is what Mark spoke about earlier about the optimism that we see there. And the other thing I just don’t want to leave the call without talking about Columbus as far as a lever, it’s not just the diversification in customer base and product, which has been phenomenal. It is hard to describe the change from even 2015 to 2016 with Columbus, But they still have additional what I would say earnings capability, both regarded to the paint line and other products that they are developing there including in the automotive arena. But additionally, there’s still some cost benefits that I think can be realized as well in 2017 and 2018. So Columbus is not a fully told story in my mind.

Great, thanks very much.

Thank you. Our next question is coming from Matthew Fields of Bank of America Merrill Lynch. Please proceed with your question.

Hello, everyone. Congrats again on the nice year. I just wanted to ask you, and I apologize if I missed this earlier in the call. But one of your competitors that’s been pretty active in the downstream space buying up some fabricators in their pipe and tube sector, would you consider looking at the space and maybe some of the either smaller or larger players that are available?

I think we – I think it is better answered by – just saying we are obviously focused on growth, it remains our first priority from a cash allocation perspective. And we look at an array of opportunities.

When you say growth, is there one particular tilt that you’re preferring whether it is upstream or downstream or anything like that?

I think we – as we have said in the past, two principal areas of focus. One is, as I mentioned, pull-through volume, downstream opportunities that will allow us to support our own mills in times sort of down cycle. That is one specific focus. The second is obviously we’re still makers first and foremost in downstream, so a higher-margin value-add type products is another focus for us.

And is there sort of a size that you’re focused on, or would you not be uncomfortable going to a $1 billion or $2 billion size acquisition?

Matt, I think if you look at the capital structure today and you look at our net leverage and our credit metrics and the cash flow generation, we absolutely can do things that are sizable. But we can also do maybe several meaningful medium-sized transactions as well. So it’s really – we have got – we’re in a great spot to have optionality.

Okay, great. Thanks very much.

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

I think on behalf of the team here, Russ, Barry, Chris, Glenn, and Tricia, and Theresa, we would like to thank you for your time today and for your support. And as importantly to our customers, we will continue to try and provide the greater value to you as the years go on. And to our employees, again, a reminder, safety is absolutely paramount for us. Nothing is more important to us, and so be safe out there and thanks for all you do. So thank you, everyone

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