Good day and welcome to the Steel Dynamics' Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that this call is being recorded today, July 20, 2021, 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 David Lipschitz, Director of Investor Relations. Please go ahead.

Thank you, Daryl. Good morning, and welcome to Steel Dynamics' second quarter 2021 earnings conference call. As a reminder, today's call is being recorded and will be available on our website for replay later today. Leading today's call are Mark Millett, Chairman, President and Chief Executive Officer of Steel Dynamics; and Theresa Wagler, Executive Vice President and Chief Financial Officer. The other members of our senior leadership team are joining us on the call individually. Some of today's statements, which speak only as of this date, maybe 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 to 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'll 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 Record Second Quarter 2021 Results. And now, I'm pleased to turn the call over to Mark.

Thank you, David, and good morning. Welcome to our second quarter '21 earnings call. We appreciate your time and thank you for joining us today. The entire Steel Dynamics team delivered yet another phenomenal performance filled [ph] with operating and financial records, including record sales, operating income, cash flow, and adjusted EBITDA, a tremendous performance driven by the dedication and passion of our teams executing on our long-term strategies that will continue to drive higher through cycle earnings. The team is delivering exceptional results and I'm very proud to be among them. Due to the continued commitment of our teams to one another, our families, and our customers, we continue to operate safely amidst COVID. The health and welfare of our teams is paramount and I thank each of them for their continued commitment to safety. Record financial results are a little important unless everyone goes home safely at the end of each day. The number of injuries and associated severity improved in the first half of '21 compared to last year. The teams have focused on reducing hazards and practices that could result in significant injury. Nothing is more important than the health and safety of our people, it is our number one value. Our safety performance continues to be significantly better than industry averages, but our intent will always be to have zero incidents. To achieve this, we must all be continuously aware of our surroundings and our fellow team members, keeping safety top of mind in order to take control of safety. Our commitment to all aspects of sustainability is embedded in our founding principles woven into the fabric of our Company, valuing the health and safety of our teams, partnering with our customers, supporting our communities, and minimizing our environmental footprint. An extension of this commitment is evidenced in our recent announcement concerning goals for greenhouse gas emissions reduction, and renewable energy milestones, including a goal for our steel mills to be carbon-neutral by 2050. We've been a leader in the area of sustainability for more than 25 years and we plan to stay right in that position. We are starting from a place of strength with already industry-low Scope 1 and 2 carbon emissions, yet, we plan to do more. As we progress on this strategic path, we will plan to share our outcomes with you. But now, Theresa will share insights into our recent performance.

Good morning, everyone. I'd like to add my sincere appreciation and congratulations to our entire Steel Dynamics team. As Mark said, we achieved numerous milestones, attained record second quarter performance with record revenues of $4.5 billion derived from record quarterly steel shipments, record fabrication shipments, and strong product pricing across all of our operating platforms. We achieved record quarterly operating income of $956 million and net income of $702 million, or $3.32 per diluted share and record cash flow from operations of $587 million, with record quarterly adjusted EBITDA of over $1 billion, a truly extraordinary performance. Our second quarter 2021 results included costs of approximately $23 million, or $0.08 per diluted share, associated with the construction of our Sinton, Texas flat rolled steel mill. Excluding these costs, second quarter 2021 adjusted net income was $719 million, or $3.40 per diluted share. Our second quarter revenues of $4.5 billion were 26% higher than sequential first quarter results with growth from all of our operating platforms, but most significantly from our steel operations based on record shipments and continued strong flat rolled steel selling values. Our second quarter 2021 operating income was $956 million, 61% higher than the first quarter results also driven by strong flat rolled steel pricing and robust demand more than offsetting increased scrap costs. As we discuss our business this morning, we continue to see positive industry fundamentals for 2021 and 2022, and we're confident in our forthcoming unique earnings catalysts. Our steel operations generated over $1 billion of operating income in the second quarter, 59% greater than first quarter sequential earnings as flat roll steel selling values continued to strengthen. We also saw expanded margins throughout our long product steel operations due to improved pricing and volume. We achieved record quarterly steel shipments of 2.9 million…

Super. Thanks, Theresa. I would just add a little more color to each operating platform. The steel-fabrication platform delivered a strong performance again, achieving record quarterly shipments and almost tripling sequential operating income. Based on the strength of steel joists and decking demand, increased product pricing is more than offsetting the continued rise in steel input costs. Order activity continues to be extremely strong. We again ended the quarter with a record fabrication order backlog at levels considerably higher than historical peaks. The non-residential construction market is strong, especially in areas that support online, retail, computing activities, and pharmaceuticals, specifically represented by construction of distribution and warehouse facilities. We believe this dynamic will continue for the next several years as we see long-lasting changes in consumer behavior. As we mentioned last quarter, we've hired additional people and expanding operating hours at our several steel and fabrication locations in order to meet increased customer demand. These changes should increase annual production capability by well over 100,000 tons. Our metals recycling operations had an extremely strong quarter with quarterly operating income of $51 million. Strong ferrous demand and increased pricing related to higher domestic steel production drove strong performance. Prime scrap index pricing average increased $60 to $70 per gross ton during the quarter. Prime scrap generation has been solid based on strong North American manufacturing. We expect US scrap generation and alternative iron unit production to keep pace with the increased demand from steel-making in the coming years. Additionally, we believe China's scrap reservoir will grow considerably over the next three to five years, offsetting their expanding EAF capability, while providing additional global raw material supply. We believe metallics pricing in general has peaked and scrap will remain flat in the coming quarter. The steel team had an outstanding quarter, continuing…

Thank you. [Operator Instructions] Our first questions come from the line of Emily Chieng with Goldman Sachs. Please proceed with your questions.

Good morning, Mark and Theresa, and thanks for the update here. My first question is around the four value-add coating lines. I thought last quarter that the expected CapEx for these value-add lines ranged between $400 million and $425 million, but I think you've outlined a budget of $450 million to $500 million today. So would be curious as to what has changed around the scope of the project or the timeline that has may be driven this increase here?

I think two things as we delved into it, we got a clearer picture, firstly, of the cost structure, but I think more importantly, it's just the expansion of line capability that added a little bit more.

It also is being priced on current steel values and so that appreciates the total project cost as well.

That's clear. And maybe just to further this sort of line of questioning around growth, it sounds like you've got a pretty constructive view of the US steel industry, clearly providing some further opportunities for growth in the coming years. What else do you think there could be planned for Steel Dynamics longer-term beyond these four coating lines as it relates to growth within your capital allocation budget? Should it be further organic growth in the downstream, additional capacity, how should we think about how you could be allocating capital here?

Sure. I think you will see going forward a continued plan to invest downstream and value-added downstream processing. That has been a key part of our strategy to date and will continue to do so. And as one looks across our operating platform on the steel side, we see continued organic growth capability there. I do believe also we have an incredibly strong balance sheet, strong liquidity, our cash flow generation capability continues to improve through cycle and there will be, I think, a good balanced cash allocation strategy. Transactional growth will certainly be part of that. There appears to be a strong pipeline of opportunity in both pull-through manufacturing type operations on the market today along with steel assets.

Great. That's helpful color. Thank you.

Thank you. Our next question comes from the line of Carlos de Alba with Morgan Stanley. Please proceed with your question.

Thank you very much, everyone. Mark, perhaps for you, you mentioned that you expect metallics prices to have peaked already. Any views on the steel prices given what you said about metallics?

No, I think, Carlos, we remain incredibly bullish of the market for the rest of this year and into next year. On the demand side, it's just incredibly strong. You have a tight supply side right now. Inventories are at record low levels, I think MSCI data is 1.8 months, incredibly, incredibly low and there is no restocking capability there currently because there's just lack of availability to meet present demand. Mill lead times are stretched. You have -- imports have ticked up a little, but they're still moderated, and in all honestly, despite the large arbitrage availability, near-term availability for imports is still very, very, tight. So I don't see there being any ability for a surge there to take things over the top. And if you look at the second half of this year, there are a myriad of mill outages, both for just regular maintenance outages, but also for installation of new equipment [indiscernible] and those mills as they plan on their future expansion. So there's going to be a lot of steel actually coming offline in the second half, which is going to just tighten the supply/demand balance even more. So, I think for the rest of this year, it's a bullish market for us.

All right. Thanks for that. So, basically, you expect increasing margins perhaps as scrap prices go down and the steel prices remain high. What are the implications maybe there for working capital given that it was -- the cash generation was very solid, but working capital obviously -- for obvious reasons, the consumer -- cash during the first half. Do you continue to see that basically at the same level in terms of days of working capital, maybe accounts receivables and inventories in terms of days of sales and cost at similar levels than what we experienced in the second quarter?

I think we should see that moderating because from the perspective of pricing, Mark's correct, we've had very strong steel pricing and volumes have increased, but now that we're at this level, I don't see there being significant draws for the second half of the year, although, we will be increasing working capital as Sinton ramps up. So Sinton could be as much as $150 million to $200 million of working capital in the next, call it, six to nine months. But I don't think that you're going to see as significant of a draw in working capital in the second half of the year as we experienced in the first half of the year.

All right. Excellent. Thank you very much.

Thank you. Our next questions come from the line of Sathish Kasinathan with Deutsche Bank. Please proceed with your question.

Yes, hi. Good morning, Mark and Theresa. Thanks for taking my questions. My first question is on the steel fabrication segment. The second quarter '21 shipments were at record levels, but if you look at on a quarter-on-quarter basis, the shipments were only up 3% despite the record backlogs and your guidance in April on adding more crews. So just wanted to get a sense of what was there, any weather-related impact in 2Q and how should we look at the shipment progression for the rest of the year?

Well, as you point out, it did increase albeit incrementally quarter-over-quarter, but the additional folks that we've brought on board, obviously, they've been ramping up and they need to be trained, and you won't see or wouldn't have seen a massive increase second quarter, but you will see that ramping up third and fourth quarter.

Okay. Thank you for that. And you mentioned about planned outages at some of your peers. I just wanted to get a sense of if you have any outages planned within your system for the second half of 2021?

Both, I believe Columbus and Butler will take their normal kind of full-day outages in the third, fourth quarter.

Third and fourth quarter, okay. Thank you for that and good luck for the next quarter.

Thank you.

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

Great. Thanks for taking my questions. Just on the capital allocation side of it, first of all, historically, the mix over the last five years has been kind of 65, 35 between growth versus shareholder returns. Should we expect that mix to change meaningfully in the out years? And a related question, I noticed long product utilization rates are now creeping up close to 90%, which is pretty amazing, and I'm just wondering if you can speak to, as you think about capital allocation plans, are you interested in expanding in your long-products capacity given the utilization rates at this point and the positive outlook? And if so, would that more likely be organic or inorganic opportunities? That's my first question. Thanks.

Good morning, Dave. From a shareholder distributions and capital allocation, so first and foremost, we definitely are a growth-oriented Company, and we intend to stay that way. But we believe, it's important during these periods of excess cash flow generation to provide increased distributions to shareholders. And as we've said in the past, we like to keep our dividend in a very manageable level. When Sinton is up and operational, you will see a significant increase in the dividend at that point, because we're going to have significantly higher through cycle cash flow. But until that time, and as we're generating excess cash, we will be utilizing the share buyback program as well. We think that's an important tool. However, we are very much focused on growth. As Mark mentioned, there are transaction opportunities today. There is quite an extensive pipeline, the teams are very busy, again, focused on manufacturing businesses, as well as potentially steel production assets as well. You're correct, the long-products utilization has improved nicely and we're seeing a lot of both good demand, and then also the commercial teams have been doing a good job of cross-selling those products and we've gotten some market share gains out of that as well. Mark, would you like to address the question, whether or not we want to grow in long products?

Yes. But just to touch on, David, you're right, the long-products markets have got incredibly hot here off late. Certainly, you're seeing that in the margin expansion. There has been a change there, whereby pricing tended to be adjusted in lockstep with any change in scrap, but as you've seen over the last few months, it's become a market-based, demand-based pricing scenario and margins have increased 150%, sometimes 200% on some products. So it is a very, very strong market for us today for sure across the space, merchants, beams, rail is stellar and engineered bar and honestly, I think we're pretty well closed there from an order book perspective for the rest of the year and going into next year; so a great market. That said, if you look at the kind of capacity in merchant shapes and beams in particular relative to through cycle consumption, that's one area, that is -- it's a kind of an overcapacity situation through the cycle. And therefore, I wouldn't envision us having any meaningful increase in hot side production of shapes. I think you will see us utilize excess hot metal capability that we've got in a couple of our mills on the long-product side, but again, it won't be a massive increase in capacity.

Okay, that's helpful. Thanks. And then just my second or -- yes, my second question on -- switching gears a little bit, on the cost side. If we kind of try to back into conversion cost and obviously, there's different moving parts there, but it does look like they've crept fairly meaningfully higher. I was wondering if you just speak to the cost creep there, was that mix driven, or are there underlying cost pressures? And how should we be modeling conversion costs relative to what we just saw this quarter on a forward-looking basis? Thanks.

So David, I know how you try to back into conversion costs and in the world where now we have a lot more processing versus just steel production, it's going to be harder and harder for you back into that number that way. So we had a considerable amount of more substrate coming into the system and having it coated versus directly from the steel production itself. And so where in as that makes it look like there is an increased conversion cost, there's actually not. It's just that we are processing more outside tons because there's such strong demand. And we can maybe try to unpack that a little bit better from quarter to quarter, but there were no significant increases in conversion costs.

Okay, that's helpful. Thank you.

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

Hey, guys. Thanks for taking the question. I just wanted to get your thoughts on comments made by the President yesterday that the economy is booming. And looking at some of the survey data that came out of Michigan last week with respect to home buying trends and car buying trends, home buying trends being the worst based on the survey since the '90s, same for cars. Clearly, things are great right now, but do you guys see any potential for some pullback in the second half? And then I have a follow-up.

Well, the simple answer to that is, no. The demand is incredibly strong across all our sectors. We can't make enough steel. There's massive pent-up demand, particularly on the automotive side. And as I said earlier, if you look at inventories right now, they're at very, very, very low levels on a historic basis and there is a pent-up demand. And if you talk to the large dealers out there, they just cannot get enough product and they would suggest there's going to be a couple of years before they actually catch up. So, we remain incredibly bullish for the rest of this year and going into next year. There is absolutely no doubt about it. There's a lot -- there seems to be this cloud over people's minds or heads, but we are in the trenches, we're talking to customers each and every day. I'm talking to customers each and every day. I think we have a good finger on the pulse and it's got legs, there's no doubt about it.

Okay, that's helpful. And then, on the flip side, there's been fears around and this is in my turn, but I think we all know it well, Steelmageddon and a lot of the incremental capacity that a lot of people expect to come online, but based on our estimates, a lot of that capacity is either redundant or has been pushed out. Do you guys share that view? And on the positive side, do you see the potential for maintenance, Cliffs has taken a mill down here pretty soon, it's going be down for a while. There are some other mills coming down. Do you guys not see the potential for prices to move even higher from here? Thank you for the questions.

Well, we've had a -- as many of you on the call know, I've had a very long-standing contrasting view to the overcapacity issue or situation. And what people have not been able to figure out or understand is that the US is one of the few if not the only countries that is steel short. Additional capacity is not our problem. In fact, our industry is doing the right thing. It needs to reinvest, it needs to get state-of-the-art equipment on board, both from a global competitive perspective because if you look at China, 85% of Chinese capacity today is less than 15 years old, it's modern. So our industry needs to invest and it needs to continue to invest in electric arc furnace-type production routes from a sustainability standpoint. So, in my humble opinion, when you have an industry that arguably has somewhere 95 million tons to 100 million tons of production capability, and a need in a normal market of at least 120 million tons, production capability is not the issue, imports are the issue and controlling them. And I think as I said earlier, we do believe the tools are in place. Section 201 will maintain a sort of barrier, even if the 232 tariffs get eroded. So I am not concerned about overcapacity one little bit. Some of the older antiquated high-cost integrated capabilities will remain offline and I think will offset the somewhat 6 million tons or so of new flat roll coming into our marketplace.

Thanks, again for the questions.

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

Hey. Good morning. Congrats on all the progress.

Thanks, Phil.

Mark, I just have first question just on the demand side with automotive and oil and gas. I know auto has been a strong, kind of the first to lead us out of the whole last year, but recently, IHS has kind of taking down their forecast on demand and the semi-chip issues. Wondering just what you're seeing there in terms of pull from your customers? And then, secondarily, you did mention oil and gas getting better at the margin. Maybe just expand upon what you're seeing there and if your customers are trying to prepare you for a strong bounce back in '22?

So again, Phil, from our intelligence, people are looking at a 17 million ton build rate this year and next year -- next year, sorry. That's an incredibly strong number. And I think as I suggested, when we talk to the dealers out there, when we look at the inventories, that is going to be -- the demand or the -- it's a pent-up demand there that's going to sustain things. The chip shortage for some maybe sort of hindering shipping capability. As I said earlier, very few of our auto platforms have been affected to date. So we've been fortunate, but if you think about it, okay, so chip shortages slow things down a little bit, the demand is still pent up, is still there, and it's just going to help expand this incredible cycle that we're on or in.

And then, on the oil and gas side, Mark?

Yes. Theresa whispered that across, sorry.

No worries, not in hurry.

On the energy side, it's a little bit of a mixed bag. Obviously, global pricing, energy prices have come up a little, rig counts are coming up a little. We're seeing improved kind of downhole OCTG requirements, so engineered bar, for instance, we supply rolled bar into the seamless tube market, that has been picking up, a little slower though on the kind of the infrastructure. The distribution pipeline is still very, very soft and the cancellation of a couple of pipelines here over the last few months have left inventory in the supply chain that's trying to get sort of reallocated across the country. So, OCTG, downhole strengthening, infrastructure, distribution line pipe is going to be a little soft for probably at least another 12 months.

Okay, I appreciate that. And then just a follow-up here on the CapEx side. I think Theresa you said CapEx of $350 million to $400 million in the second half. Was there something pushed out into next year because I thought last time you had talked about making some pre-stage investments for your tandem lines?

Yes. Based on engineering and some of the more detailed plans that we've received on the four lines, some of that's likely to be pushed from the fourth quarter into the first quarter. So next year without doing our detailed planning, you're likely to see capital expenditures of probably somewhere between $550 million and $600 million.

Terrific. Thanks so much. Appreciate it.

Thank you. Our next questions come from the line of Tristan Gresser with Exane BNP. Please proceed with your questions.

Yes. Hi, good morning and thank you for taking my question. Regarding the new environmental targets, is there any CapEx associated to those targets, and what's the timeline, if you have already identified new initiatives to cut emissions by 2025 and 2030? And if you can, what is roughly the contribution from each focus area? I mean, I think you talk about new technology, efficiency, but also renewable, if you have that split that would be helpful as well. Thank you.

Good morning. Thanks for the question. That was a very detailed question, I'm not sure I might be able to go into all of it at this point in time. We do have some things that we can't discuss yet. They're very exciting on the renewable energy side of the equation. There will be some capital dollars, obviously, spent as we look at efficiency projects and as we move toward more renewable energy and the carbon reduction itself. We really don't have estimates to be able to discuss this morning because there's still a lot of projects that are being vetted. We will be disclosing those items as we move forward but we have a very -- and this is the thing that we want everybody to understand how we're trying to differentiate ourselves in our carbon goals and in our renewable energy goals, is that, we are being very transparent. There is a clear path on how we're going to achieve 2025 and 2030, and as we're able to disclose some of these projects, we absolutely, Tristan, will be sharing these projects, but at this point in time it's just too early to do so.

All right, no problem. And maybe a follow-up on raw material. Can you talk a bit about how your raw material strategy will evolve in both the context of capacity expansion, but also decarbonization as it has an impact on, for instance, Scope 3? How do you think your raw material mix will evolve in coming years? Thank you.

Well, the raw material strategy really is consistent from the perspective at least of what we're looking at today and that's we use really only about 20% to 25% pig iron in our flat roll mills, and so it's not as much as being advertised by maybe some of our peers today and that is being sourced obviously internationally. So, today, we use a mix of HPI as well and we'll continue to do that moving forward, but I don't see this strategy at this point in time or at least over the next near term changing dramatically. Mark?

No, I think, again, we're executing on our plan that we've had in place for some time. Fortunately, we have a very, very good foundation through our omni-source recycling platform that has the capability of some 6 million tons, 7 million tons of capability. So supply of scrap is not going to be an issue for us for sure. And we're adding to that capability, as I said, in Mexico and some of those tons will flow up to Sinton and to our Columbus mill. So, I think we're in good shape on the scrap side of things. As Theresa suggested, we are using HPI and have been using a little bit more of that of late. We have IDI that people seem to forget. That's a very, very effective use for our Butler mill in particular, it's making about 260,000 tons of liquid iron that we put into our electric arc furnace each year. And just to emphasize, if you look across our steel platform, in total, pig iron is only -- I think, it's less than 8% of the total input. So yes, it's an impact, but not a massive one.

Thank you.

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

Congratulations on $0.7 billion in a quarter. Looking at your CapEx strategy for the next two years, it looks like the focus is to maximize Sinton, complete the painting lines, the Galvalume galvanizing, get all the squeal out of the pig. Is it fair for us to expect your next big capital expenditure initiatives to be 2024, 2025 completion, maybe the outlays begin a little sooner, but where you are focused right now is making hay while the sun shines and getting everything out of the 3 million ton new mill?

Thank you, John. It's good to hear from you. There is absolutely no doubt that the team's focus has been the execution of Sinton and it's a very large-scale facility. Actually, if you jump on our website, we have a drone video that gets updated I think once a month and it's a colossal, phenomenal facility that's being built by the team down there. And so, the focus for sure has been execution, execution, execution. Nonetheless, we have other folks on our team that continue to look at transactional activity, and also, the individual mills, we have very talented teams that continue to look at areas of organic growth. So I think you'll certainly see just a continuation of that organic growth that you've seen in the last 25 years or so. From a Sinton standpoint, the new lines that you mentioned that parallels or just supports our long-term strategy of fully utilizing or building high levels of through cycle utilization. And so not only are those four new lines very effective uses of CapEx with very, very, very good returns, it allows those capital intense steel mill assets to run at a high utilization, as I said, through the cycle. And I think we've demonstrated clearly that that strategy allows us to have superior shipments, production capabilities in any market environment.

So, there could be a big project before '24, '25, or a transaction?

We would imagine -- I think I've said it in the past, we don't see a Sintonasc greenfield project on our horizon. Transactional activity, there could be something meaningful there.

Thank you very much and congratulations $3 billion annual rates, amazing for profits.

Thank you, John. We've got a great team. A little bit of a market tailwind is not hurting either, but…

Thank you. Our next questions come from the line of Michael Glick with JPMorgan. Please proceed with your questions.

Thanks for sneaking me in. You mentioned talking to customers and auto customers in particular but inventories across or beyond auto are also pretty low. Any sense as to what the game plan is for your non-auto customers in terms of rebuilding those inventories once they have access to more supply?

Well, I don't think there's really any desire right now to rebuild. Firstly, people just can't get enough steel to satisfy their immediate needs, number one, domestically. And number two, the speculative risk associated with accumulating inventory in today's market environment is a -- it'd be a pretty gutsy call. Imports, as I said, despite the high arbitrage, there is very little available currently. The global markets are very, very strong and most of the material is being consumed within those markets. So there is not much available even if they wanted to. That said, the speculative risk of material flowing in and import delivery times are November, December, January, today. You don't want to take that risk. So, I don't see any rebuild in the near term and again, that's just another factor that's going to extend this cycle.

Understood. And then, I think you noted $475 million to $500 million of incremental through cycle EBITDA once the value-add lines are complete. Could you walk us through some of these spread assumptions there so we can understand the moving parts a bit better?

Michael, we won't go through the details spreads themselves. We will tell you that the spreads are based on mid-cycle spreads, so definitely not what we're experiencing today. And we're starting with a base hot roll to prime scrap kind of mix spread and then we build the value-added product mix off of that. And we are using what we've experienced historically, and then also looking forward at what the expectations are in those individual markets on a mid-cycle basis. So I'm sorry, we can't give you specific spreads, but it is showing that certain -- our expectations are that the volume operates very much like our Columbus and Butler facilities operate, that means that production and shipments tend to be at or near capacity on a mid-cycle basis.

Got it. Thank you.

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

Hi, Mark and Theresa, and congratulations on another great quarter here. Just a couple of housekeeping items and I apologize if you've mentioned these, but taxes, I recognize you had a shield related to Sinton. I think it's supposed to continue to work in your favor. Can you maybe touch on that and sort of expectations for working capital for the year, please?

Yes, absolutely. So, yes Sinton will -- still expected to provide a tax shield this year as we're able to -- of the year of operations, be able to expense that successive investment. It likely will shield upwards of $350 plus million. However, our earnings are so strong, that we're still having tax payments that are required, this year. And I think we're estimating our effective tax rate to be about 15%. From the perspective of working capital, Sinton is likely to build working capital as it starts operations in the next six to nine months of somewhere between $150 million and $200 million. Outside of that, I would expect the rest of our operations working capital to remain fairly steady just given that our volumes have already picked up and pricing has been really strong as well. So, I don't see a lot of additional movement in working capital.

Great, thank you. That's helpful. And then, just in terms of opportunistic use of cash flow, you have $1 billion of cash on the balance sheet. You're going to continue to generate cash going forward. You've, obviously, done a nice job outlining the various ways you can use that cash, but I guess my question is, do you think it's prudent to keep a solid cash balance there should an opportunity arise, or should the market turn at some point just so that you have the ability to go out and make these transactions?

It's a good question. Our balance sheet is extraordinarily strong. So even if you look at our net leverage or our gross leverage, either metric is solidly in the investment-grade arena. We have significant additional debt capacity and the capital structure, and so where in as, yes, it makes sense to keep some cash on the balance sheet, we also have things that we can spend that money on whether it's additional share repurchases as we expect to make in the second half of the year and it still won't hinder all of the growth expectations or projects that we think are available to us on the transaction side. So yes, we do keep dry powder at the same token, and there's still debt capacity as well.

And I would just add, if you look -- hopefully, when you look at our experience of growth over the years, it's always been very, very intentional I would say. I would say, it's also very disciplined, and we won't do a transaction at ludicrous numbers. We always look at through-cycle. So if we were to do a transaction today, it will be a good investment through the cycle not just based on today's crazy profitability that some may have.

Right. No, that makes sense. I feel like you've demonstrated that over time as you've scaled this business up, it's not always easy to do that. I guess just my last question, just touching on something you said earlier, Mark. When you think about the US market sort of being in a deficit -- deficit for years, I guess philosophically do you believe that eventually domestic producers will evolve to fill that demand gap, or do you think we will always have a component of imports coming into this country?

I think there will always be some element of imports for sure. It has been a long, long, long time. I think I don't know, mid-'70s or '80s or whenever, when imports were de minimis. We're not going to be a country that self-satisfies its demand in total. So imports are always going to be there. Today, we typically need -- 20% of demand is an import need. We just don't need 30 million tons or 30% imports. But I think if you -- all the discussion has been relatively near term, when I say near term six, nine months into next year. But people are not, I don't believe anyway, recognizing that the industry is in transition. And I think there is some paradigm shifts occurring that are going to retain a lot higher sort of health -- market health in our industry and a much higher margins going forward. You look at the leadership mindset today and the consolidation, the integrated industry is really focused on returning shareholder value. They are totally focused on consolidating and rationalizing their assets to make good business sense. And that's going to bring I think market health and market strength long term. USMCA has, I think, certainly for us been a market change in dynamic, where you see particularly the European automakers, a shift in their supply chain from imports to domestic sourcing. Again, we've been a very, very large beneficiary of that. So the market is changing for sure in this country, and as I said earlier, it needs more capacity, it needs state-of-the-art technological capability, low cost, sustainable low carbon footprint production routes. And so I am not fearful for a second about the capacity coming online, it's needed and it will benefit the North American manufacturer base in spades going forward.

I appreciate that. It's a very thoughtful answer to a pretty difficult question, but thank you very much and good luck going forward.

Thank you.

Thank you. That does conclude our question and answer session. I would like to turn the call back over to Mr. Millett for any closing remarks.

Thank you, Daryl. I would just emphasize, well, firstly, thank you for those that are still on the call. Thank you for listening today to our thoughts and opinions anyway. It was an incredible quarter. We believe next quarter is going to be better even so. And that is driven certainly by the market tailwinds that we're experiencing, but it's also more importantly driven by the most phenomenal steel metals team in the world. They are an incredible bunch of individuals. We number 10,000 there. If you include their wives and partners and kids, we've got, I don't know, 25,000 people in the SDI family today. They all contribute to our success. So thank you to each and every one of them. Thank you to our customers. We can't do what we do without you. We've had some incredibly loyal support and I wish we could support them even more today because they are -- we are struggling to meet all their needs. So, thank you, everyone. Make it a great day, and be safe. Take care.

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