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Steel Dynamics, Inc. (NASDAQ: STLD) |
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October 1, 2012 Issue |
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The Most Powerful Name In Corporate News and Information |
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CURRENT ISSUE | COVER ARCHIVES | INDEX | CONTACT | FINANCIALS | SERVICES | HOME PAGE |
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As a Low-Cost Steel Producer, as well as one of the Most Efficient and Diversified Producers, There is clearly a Benefit to Investing in Steel Dynamics, Inc. |
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Steel Dynamics, Inc. is one
of the largest domestic steel producers and metals recyclers in the United
States based on estimated annual steelmaking and metals recycling
capability, with annual sales of $8.0 billion in 2011, over 6,500 employees,
and manufacturing facilities primarily located throughout the United States
(including five steel mills, six steel processing facilities, two iron
production facilities, over 70 metals recycling locations and six steel
fabrication plants). Theresa is a director of the Steel Dynamics Foundation, which focuses heavily on education, children’s resources and development, and community support for those areas in which the company’s employees work and live. Theresa is also a trustee of Trine University. She is personally involved in numerous charitable and community organizations. |
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Interview conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – October 1, 2012
Ms. Wagler: We are a diversified vertically integrated metals company and our main earnings drivers come from our steel segment, which consists of five steel mills all electric-arc-furnace based, and six processing facilities. Our vertical integration was derived from the desire to control our primary steelmaking raw material—recycled ferrous scrap materials. We now have over seventy locations that recycle both ferrous and non-ferrous metals. We also have six locations that are steel fabrication facilities that produce steel joist and decking. In 2011 we had revenues of $8 billion, our operating income was $585 million, we operate with about 6500 employees and we consider ourselves the lowest cost steel producer in the industry. We are also a Fortune-500 company.
Ms. Wagler: It boils down to our core competitive strengths. We are in a cyclical industry and it is critically important that we maintain the lowest cost structure possible. We have been able to do that both through vertical integration and through the variability of our cost structure. On the steel and the metals recycling side of our business, over eighty-five percent of our costs are what we would consider variable in nature. Much of that has to do with our culture and how we incentivize our people. We are basically a non-union steel company, only 10% of our workforce is unionized. What that allows us is the flexibility in our compensation structure to in good times actually pay much better than market to our employees, and the company still does very well. Yet as markets deteriorate, our compensation also automatically comes more in line with our profitability, which allows for longevity. We compensate our steel employees through a base wage, and on top of that base wage, if they are producing prime materials to specifications, they can get up to anywhere between another 100-140% of base wage in bonus. We just do not have people producing to produce, we also have a conversion cost bonus and that can be up to an additional 40% of their base wage. The conversion cost bonus operates in a manner that every department has their own cost hurdle, and if they do better than that cost hurdle, they get a bonus which is paid either weekly or monthly so that the teams understand the direct correlation between their performance and what is coming home to them in a salary. The other thing is that we want our employees to be owners of the company, so something that is very unique to Steel Dynamics is that every employee whether it is the person that is taking care of the grounds or whether it is the person sitting in the CEO chair, everybody gets an annual equity award. Currently we are using restricted stock units and they vest in two years, so the goal is to have every employee be an owner of the company so that they operate and think as owners of the company. The fourth component of our compensation structure is profit sharing. Our profit sharing is linked directly to the profitability of the company, so that as we do well the employees do well. If we do not, then it decreases but everyone understands that is the nature of the steel industry and we have had the benefit of not having to lay off any of our non-union steel workers even though we have had some pretty anemic times in 2009 and 2010. The other component to our low cost structure is the fact that we are vertically integrated and 55% to 60% of our total cost of steel manufacturing is tied to metals recycling. That is the reason we entered the metals recycling ranks, it has really helped us to provide better raw materials to our steel mills at more effective pricing.
Ms. Wagler: From the founding of the company in 1993, the structure of having a production bonus and a conversion cost bonus as well as profit sharing and equity has always been a there. The three founders of Steel Dynamics originally provided leadership at Nucor Corporation, which had production bonus and the profit sharing but they did not have the conversion cost component That was something unique that started with Steel Dynamics. The reason why we can pay our employees so well is because they are so efficient. A metric we like to look to at one of our divisions is the amount of man hours it takes to produce a ton of steel, which we can do for less than 0.3 man hours as compared to our integrated steel competitors at around 1 ˝ man hours per ton. You can see that with the efficiency of our mills, we are able to pay our employees very well and still have incredible bottom line benefits that go to the shareholders.
Ms. Wagler: We constructed and started a small copper rod facility in July that uses recycled copper as its primary raw material. It will be a small component of our overall earnings but the strategy is to provide greater value-add to a product that we already collect through our metals recycling operations. We are actually one of the, if not the largest collector of non-ferrous scrap materials in the United States and as such we collect a lot of #2 copper or copper scrap. We are in partnership with a company from Barcelona Spain that already successfully produces copper wire and copper rod from scrap copper.
Ms. Wagler:
Our strategy is to grow. We have been a tremendous growth company for the
first twenty years of our existence and we expect to continue to that path
of growth. Growth could be through acquisition as well as Greenfield. We
look at all opportunities. Ms. Wagler: The strategy is basically a five-prong strategy and it includes first and foremost strategic growth. We want to intentionally expand our margins, but also have them be more consistent through the cycle given the cyclicality of the steel industry in and of itself. In addition, we would like to diversify into more product sectors and market sectors so as to minimize some of that volatility, but we will definitely stick to what we know which is in the metals arena. The second thing is to drive innovation. The company has always been known as being an innovator both through process and technology and we believe that is another key to our low cost posture, so we will continue to try to drive that innovation working into new technologies and looking at how to provide the next product for which the customer is looking. We want to enhance our customer relationships and commitment. We want to become even more customer focused and try to anticipate their needs. Throughout the cycle, we want to be the company they are choosing to always do business with. We need to maintain our superior operating culture as well and that culture is really driven by our people, so we will continue to form that relationship with them, continue to use the incentives as we do both from an ownership perspective and a motivational perspective. It is really foundational and it is the idea of having employees feel like they are the entrepreneur and the owner. Finally, we definitely want to maintain our financial strength and our capital structure flexibility to support that growth. Today our capital structure and our balance sheet are stronger than they have ever been and we have over $1.5 billion dollars of liquidity. We also have just executed a recent refinancing of some of our senior notes, which has allowed us to gain more flexibility by increasing the maturity schedule of our senior notes while reducing overall interest expense.
Ms. Wagler: We started the foundation in the summer of 2008 and it was initially funded with $15 million from Steel Dynamics. The foundation’s mission is to support the communities in which our employees work and live. The support is generally focused on education, on children’s needs, and sometimes on social support, as well the arts. However, the primary focus is on education and making sure that the US manufacturing base stays ahead as much as possible.
Ms. Wagler:
One of the things we focus on is how you maintain your culture. Your culture
is your people and it is your business, it is the most important asset that
we have. One of the ways in which we do that is to empower the individuals
at the division. We are decentralized to a large extent and we have people
that we trust in place at a very high level that have the autonomy to make
pretty important decisions and they are held accountable for those
decisions. There is oversight and consequences to the decisions but because
of that, there is a real sense of ownership and it is amazing, they push
themselves harder and hold themselves to a higher standard than you could
possibly imagine. We are a very flat organization and we want to make sure
that the people that are making the decisions are the ones that are closest
to the issues and that really helps for checks and balances. We also have
very strong internal controls and we have very strong documentation of
processes. We have an internal audit function that really is not used as a
police force, it is used as a conveyer of best practices. These aspects have
allowed us to feel comfortable with the decentralization of the employee
workforce. CEOCFO: Do you find other companies or even government agencies coming to you asking you how you are so successful with your unique compensation structure and corporate culture? Ms. Wagler: I just had two owners of a local company that I met with earlier this morning and it was specifically related to employee culture and our incentive structure. Their business is also cyclical and they recognized that it is not sustainable for them to stay under the current practices, so they are trying to understand our incentive structure and employee culture. A critical element is that executive management is treated the same as other employees in the company, we are not differentiated and that is part of the trust factor that you build. The variability between our base wage and our potential total compensation really is in direct relation to that of the employee. It was inspiring and gratifying to be able to spend time with that group today and that does happen quite often. We have had several companies from within and without the metals industry that have tried to replicate all or portions of our incentive compensation structure.
Ms. Wagler:
As the economy recovers, we are uniquely structured to take advantage of
that. There are a few specific drivers. The acquisition of our metals
recycling platform and many of the cost reductions that we made within those
operations have never been fully exploited in an economy that is what I
would call healthy. Many changes took place between 2009 and 2010, which we
have not been able to fully exploit, including over one million tons of
additional steel-making capacity that we have had and we have not been able
to utilize. As the economy recovers, it is potentially a very powerful
earnings driver. The second thing that I would point to is that we are being
proactive. The non-residential construction market may remain weak for some
time. We are diversifying the product mixes of our facilities that are tied
directly to non-residential construction so that they will be exposed to
different markets, including railroad, energy, and construction equipment
markets, which are some of the stronger markets today. Instead of waiting
for markets to return, we are doing what we can to gain exposure to markets
that are stronger. We are the low-cost steel producer, we are one of the
most efficient producers and we are one of the most diversified producers in
the industry. There is clearly a benefit to investing in Steel Dynamics. |
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We are the low-cost steel producer, we are one of the most efficient producers and we are one of the most diversified producers in the industry. There is clearly a benefit to investing in Steel Dynamics. - Ms. Theresa E. Wagler |
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