Steel Dynamics’ Growth Buoyed By Fantastic Culture

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PART ONE: Steel Dynamics’ Quarter Century of Growth

Through good times and bad, Steel Dynamics has proven to its industry that growth is possible no matter the economic situation.

“I am more optimistic than I have been for some time concerning the domestic steel industry as a whole and Steel Dynamics’ unique advantages within it,” said Mark Millett, CEO of Steel Dynamics, Inc. (SDI).

“Several key factors seem to be aligning that could provide the landscape for improved domestic steel mill utilization in the coming years. With steady-to-growing demand, lower than historically normal customer inventory levels, and trade protection in place, the flat roll supply/demand environment is positive, and we expect these factors to continue.”    

Much of the steel demand in the U.S. is made up of two key markets. Construction utilizes between 40 and 45 percent of the steel in the country, and the automotive industry follows at about 25 percent.

Steel Dynamics, Inc.—one of the U.S.’s youngest and largest steel producers—serves both markets. While the company provides steel for many other markets, such as manufacturing, transportation, heavy and agriculture equipment, pipe and tube, and energy, 36 percent of its steel products in 2016 went to construction-related end markets, and 15 percent went to the automotive industry.  

With over 1.5 million tons of existing and unused annual steelmaking capacity that is highly levered to the construction sector, SDI is poised to take advantage of the expected growth, especially for the larger public sector infrastructure projects. Should any federal infrastructure spending be approved, domestic steel consumption could be even higher than currently anticipated in the next several years.

Additionally, the location of the Columbus Flat Roll Division provides SDI a freight advantage into Mexico, which allows the company a competitive advantage, as Mexican automotive production continues to grow with current assets in place.

From sheet products ranging from hot-roll steel to a variety of coated steel products and painted products, SDI’s product ends up becoming steel siding and garage doors, cars, HVAC, appliances, truck trailers, and so much more.

In construction, SDI produces structural steel beams and piling used in high-rise buildings, hospitals, and bridges. In transportation, the company produces standard- and premium-grade rail used in railroads, and specialty steel sections including industrial truck components, truck-trailer cross-members, and guardrail posts used in truck beds, semi-trailers, off-highway construction equipment, mobile homes, and RVs.

“Our steel fabrication operations produce steel building components including steel joist, girders, trusses and steel deck material, including specialty deck,” shared Theresa Wagler, CFO of SDI. “Our primary steel fabrication customers are non-residential steel fabricators.

“Other customers include metal building companies, general construction contractors, developers, brokers, and governmental agencies. You can find our steel in buildings such as schools, hospitals, warehouses, retail buildings, and big box retail stores.”

It’s unusual for a company not even a quarter of a century old to reach the size and scale of SDI. And yet, this $8 billion company not only survived the steel industry’s roughest patch in decades, but it has thrived.

So how did this young company not only find its footing but also grow to the size it is today, through one of the most difficult economic times in recent history? Strategically-timed diversification through acquisitions in key markets was one of the fundamental strategies to cover a larger portion of the industry.   

“From the start of the company, there has been an intentional focus on mitigating the risk of cyclicality and imports through strategic, disciplined growth to diversify end customer markets and product mix not only across the company, but within each facility, as well,” said Millett. “This focus on diversified end markets and product mix contributes to higher steel mill utilization, which is critical to our low cost operating platform.”

Early GrowthThe company began operations in 1996 with its flat roll steel greenfield mill—the Butler Flat Roll Division. This division expanded with value-added lines to produce a broader mix of higher margin products. This enabled the development of longer-lasting customer relationships.

SDI runs the only North American steel mill with paint lines contiguous to its steel mills, providing the customer with freight and time savings. The company continues to innovate with capital effective projects to increase value-added capacity.

2000 saw the company diversify with a joint venture to own and operate a greenfield fabrication plant. This allowed for pull-through volume from its Butler Flat Roll Division, as the fabrication plant uses flat-roll steel as a raw material input.

“Our fabrication operations have expanded and diversified through the acquisition of joist and decking assets, diversifying their product mix and expanding the geographic footprint allowing for a national presence,” said Wagler.

“The product diversification and expansion of the geographic footprint has driven market share growth.”

Structural and Rail Division ExpansionFurther expansion occurred merely two years later, this time into the company’s Structural and Rail Division. Several other capabilities were added to company facilities over the next several years, including a second caster in 2008, a second rolling mill in 2010, and added premium rail capability in 2015.

This diversified the Structural and Rail Division’s end markets. Not only did SDI diversify the end market and product mix, but they company was when expanding into this product.

The Structural and Rail Division can produce rail in lengths up to 320 feet versus peers at 80 feet. With the company’s on-site rail-welding facility, SDI can weld rail in lengths up to 1,600 feet.

“This offers substantial savings to the railroads both regarding initial capital cost and through reduced maintenance, as a result of fewer welds necessary (four welds vs. 19 welds), which also generates significant time and logistical savings,” said Wagler.

“The innovativeness of the longer rail lengths has allowed the Structural and Rail Division to gain market share and create competitive advantages.”

New Century Acquisitions Since the early 2000s, SDI has been bullish on acquiring specialized businesses in the steel industry. Each of these acquisitions is then met a few years later with investment and organic growth strategies to complement the acquisition and create as much value as possible out of the transaction.

“In the very beginning, there was a focus on greenfield growth and then we moved towards organic capital investments and inorganic growth through acquisitions,” said Millett. “Acquisitions have been an incredibly significant part of our growth strategy.”

In 2004, the company expanded through its Engineered Bar Products Division through the startup of a special-bar-quality mill that was acquired.

“At the time, the facility was shut down due to bankruptcy.  Through the right people, modifications to the equipment, and hard work, the mill has become one of the most successful SBQ mills in the U.S.,” said Millett.

As recently as 2015, the mill increased annual production capacity from 625,000 tons to 950,000 tons. This further diversified the product portfolio into high-quality smaller diameter products and end markets, and proved the value of not just acquisition but expansion.

This product diversification allows for increased mill utilization and cost compression during challenging heavy equipment and energy demand environments.

SDI acquired two steel mills—the Roanoke Bar Division and SWVA—in 2006, further diversifying the product mix into merchant bar products and specialty steel products. The company purchased The Techs galvanizing lines in 2007 to bring more value to its flat roll steel product mix.

The same year saw the organization acquire OmniSource Corporation, its metal recycling platform.

“By adding one of the largest ferrous and nonferrous scrap recyclers in the United States with locations strategically located near our steel mills, we were able to secure high-quality ferrous scrap for our mills and provide steady sales volumes to our metals recycling platform,” said Millett.

Columbus Flat Roll Division Acquisition

Perhaps the most important acquisition in SDI’s short history is its purchase of its Columbus Flat Roll Division in 2014.

“We were able to purchase one of the most modern, state-of-the-art steel mills in North America at an attractive purchase price of $1.625 billion, increasing our steel making capability by 40 percent. This brought our annual steel shipping capacity to 11 million tons,” said Wagler.

This also added further diversification in its flat roll steel products and geographic footprint.  The company immediately began diversifying the mill’s product mix into higher value-added products and the customer base into additional end markets.

“The Columbus acquisition provided product diversification of width, gauge, and strength, and geographic diversification into the Southeastern U.S., and low-cost direct rail access into Mexico. It had a similar culture that would benefit from our highly incentivized compensation structure,” said Millett.

When the organization was acquired, about 40 percent of its product mix related to the steel pipe and tube market, of which about half was tied to the energy sector. Like SDI had done through its other acquisitions and expansions, the company moved to expand market and product diversification within this specific segment.

Since this move, Columbus has added over 100 new customers, transforming its end markets with approximately four percent going to the energy sector in 2016, and increasing shipments to construction related and automotive end markets.

Additionally, the company has been successful in transforming the product mix from about 60 percent unprocessed hot roll in 2014 to merely 44 percent unprocessed hot roll in 2016 moving toward a mix of higher margin value-added products.  

“It’s abundantly clear that acquiring the Columbus mill was an incredible opportunity for SDI,” said Millett. “Leveraging synergies across two ‘highly-efficient’ flat roll steel mills and eleven coating lines provides us a unique opportunity to increase value for all of our stakeholders significantly.”

The team completed construction of a $100 million paint line in the fourth quarter of 2016, which now provides 250,000 tons of annual coating capability and further diversification into some of its highest-margin products.

“We have two existing paint lines in Indiana, but this new line truly is a state-of-the-art facility, allowing for high-quality, double-wide steel, and facilitates access to the southern U.S. and Mexican markets.  Our existing customer base is excited to have the geographic and product diversification optionality.  The startup is going well,” said Millett.    

With a focus on a diversified product mix and end markets to protect from imports and market cyclicality, a secure raw material platform, and “pull through volume,” SDI has grown into the highly diversified, vertically integrated company it is today.

Continued InvestmentSDI is one of the lowest-cost steel producers in the country, boasting the lowest conversion costs in the industry and outstanding variability in its cost structure.

“Over 85 percent of our steel and metals recycling costs are variable, which is critical for a cyclical industry such as ours. Our product diversification, vertical integration, and higher steel production utilization contribute to our low-cost profile,” said Wagler.

“Coupled with our highly variable operating cost structure and focus toward continued operation innovation and efficiency, we can generate strong cash flow in all market environments.  Our strong cash flow generation and a solid financial foundation have allowed us the ability to exercise on growth opportunities that we find attractive during all market cycles.”

Investment into growth isn’t ending anytime soon either. In addition to the $100 million paint line at the Columbus Flat Roll Division, SDI has completed and initiated several other investments over the past year.

The company has invested $22 million in its Butler Flat Roll Division for an additional 600,000 tons of annual flat roll pickling capability, which came online in January of 2016. Another $15 million is being invested to increase annual galvanizing productivity by 180,000 tons at the facility.  

“We anticipate commissioning this summer, with increased production capability through the second half of 2017,” said Millett.

These investments continue to increase higher margin, value-added production capacity.

In August 2016, the company acquired Vulcan Threaded Products for $113 million, a company which utilizes steel from its Engineered Bar Products Division as a raw material. This is aligned with SDI’s strategy to increase “pull through” volume.

Another multimillion dollar investment, this time at Roanoke Bar Division, will go to cost-effectively utilizing excess melting and casting capability by adding equipment that will allow for the annual production of up to 200,000 tons of multi-strand rebar. Operations are anticipated to begin no later than the start of 2018.

With end of year record liquidity of over $2 billion and its proven ability to generate strong cash flows, SDI continues to be poised for growth.

Going forward, SDI will continue to focus on adding value-added products to its portfolio that help insulate the company from imports and create long-lasting customer partnerships—such as its painted flat roll steel, highly engineered SBQ, and longer-length rail. In addition, the “pull-through” steel volume strategy remains one of its focuses for ongoing inorganic growth.

But, as you’ll learn in Part Two of our feature on Steel Dynamics, this incredible level of growth has only been possible for one reason: its culture.

“Our entrepreneurial culture is at the core of our success and is driven by our highly-levered, performance-based compensation philosophy for those on the plant floor all the way to top.

This has fostered a team environment squarely aligned with the company’s strategy and has allowed us to acquire underperforming assets and turn them around,” said Millett.

PART TWO: Driving the Growth: Steel Dynamics’ Stellar Culture

We know what it takes to grow a company like Steel Dynamics, now learn the “how”.Steel Dynamics, Inc. (SDI) is an $8 billion steel producer—one of the biggest and youngest in the country. You don’t grow this large in such a short amount of time without on-point business strategies, a hard-working, innovative, motivated, and dedicated team of talented individuals, or a management team with the ability to lead others to consistently achieve excellence.

But you certainly don’t see this kind of success without a culture that’s strong and committed to the mission.

“The only way this level of success has been possible is the culture,” said Mark Millett, CEO of SDI. “It’s not the bricks and mortar or the tech that drives success; it’s the people who are committed to realizing this vision.”  

Decentralized, Flat Management Approach

According to Millett, SDI has a simple culture. The flat and decentralized management approach isn’t new, but the company’s application of it allows SDI to stand out in the industry.

“We build a true environment for trust and respect between employees and management,” said Millett. “There’s no us vs. them. We’re in this together.”

SDI accomplishes this in many different ways. Given that the company is the fourth largest steel company in the U.S. with over 7,500 employees, you may be surprised to learn that it only has four levels of management. That includes the folks on the manufacturing floor all the way up to the executives.

The corporate office provides guidance and oversight, but at the end of the day, each division has both the responsibility and autonomy to operate. The autonomous structure, Millett shared, lacks the bureaucracy often found at large companies.

There’s another large advantage to this approach: nimbleness.

“Having a flat, decentralized approach means we’re fast to react,” said Millett. “Innovation is the product of nimbleness.”

Employee EmpowermentWhat is the best way to empower employees? In a potentially dangerous setting like steel mills, creating safe environments to work is at the top of the list.

“We don’t just talk safety,” Millett said. “We’re actually committed. And our employees recognize that.”

SDI, according to Millett, has a much better than average safety performance that continues to improve year over year. And, he said, it proves how the company feels about its employees.

“The team is family,” he said. “We have over 7,500 employees, but there are over 20,000 people in this family when you include families and loved ones.”

From family picnics to formal holiday parties for each division, Millett shared that the corporate team wants to continuously support the idea that they are all in this together.

Incentives for Quality Work

The key way that SDI empowers its employees is through its highly performance-driven incentive program.

“Our employees are incentivized to excel at every level,” he said.

For example, if a steel team is not producing at optimal levels due to market conditions, or the equipment for one division is down, that team makes a base wage. But when they are producing at a good pace, Millett said the employees on that team can make up to 120 percent on top of that base.

Over 60 percent of compensation is at risk for workers on the steel manufacturing floor. But this also means that there is a lot of room to make more money than the industry standard.

The at-risk compensation is measured on a shift basis. That way, employees know who on their team is affecting their compensation, which encourages employees to step in and solve a team problem before it escalates to a management issue.

And, Wagler shared, depending on the cost of production—and productivity efficiency— teams can make an additional monthly conversion bonus. This aligns productivity with cost effectiveness.

Additionally, to unite employees of all business segments and promote what is best for SDI as a whole, SDI provides company-wide profit sharing of eight percent of pretax earnings. Also, the company issues a form of equity to each non-union employee to align their interests with that of its shareholders.

“This approach really connects the employee to how he or she is contributing to the company as a whole, and gives a form of equity to all employees.”

Executive officers also have at-risk compensation: over 85 percent.

“Every employee benefits. As they contribute, work hard, and build value for the shareholder, they also build value for themselves,” said Millett.

Success Through EmpowermentThis level of empowerment at Steel Dynamics leaves room for the people who know what’s really going on to make decisions that can positively affect the entire company.

For example, one of the business’s most profitable segments today is pre-painted steel, where steel is uncoiled, painted, and recoiled. Before Steel Dynamics incorporated this service into its business, it was shipping significant amounts of steel to outside companies for the coating process.

But an employee well-tuned to the market brought to the executives’ attention just how much money the company could save if the steel painting step was brought in house.

Employees took ownership of another situation, this time during Hurricane Katrina. The infamous storm knocked out a hydrogen plant in Louisiana, filling the space with 20 feet of water.  When the team realized that there were only two real hydrogen generating plants in the area, and the other one was on a maintenance outage, they got to work.

Hydrogen is a component in the steelmaking process. To make sure that this division of the company could stay up and running while the two hydrogen plants were down, the team learned there was older hydrogen-producing technology that was available for sale and only about 500 miles away.

“It was about two days before we realized how valuable the equipment really was, and how long those hydrogen plants were going to be out of commission. Because of our motivated employees, we could keep producing at normal levels,” Millett said.

“There were no hoops the division had to jump through, they didn’t need every manager in the company to sign off on it. This ability to let the employees closest to the situation make decisions without undo bureaucracy has proven itself time and time again,” Millett shared.

In-House UniversityEven further proof of the company’s commitment to employee empowerment is its in-house university, which offers a wide-ranging, ever-changing myriad of topics.

“Our culture is weaved throughout the entire program,” said Theresa Wagler, CFO. “Mark will address each group, emphasizing its importance as well.”

From leadership, communications, and strategic thinking to conflict resolution, self-awareness, and even finance, Steel Dynamics’ in-house university covers the whole gambit.

“Why do we empower people? How do you create that level of ownership? Why do we offer the incentive system? How does that come together to drive positive spirit? The underlying theme of our development programs is that it truly all comes back to the culture. Our culture drives us, and our new employees especially—young engineers and future professionals—need to understand that,” said Wagler.  

Talent Acquisition

Important to the continuation of Steel Dynamics’ success is a sharp focus on talent acquisition. The internship program the company propagates is aimed at encouraging professional talent to pursue the steel industry.

“The steel industry isn’t always viewed as the most attractive industry, and we’re trying to change that. We have internships geared towards engineering, maintenance, finance, IT, safety, and other relevant fields.”

Millett shared that once these young professionals get in, they realize that steel can be exciting.

“They come from good schools, and are exposed to the great culture here and who we are. They get to be excited with the association with us. It’s a successful program—several of our high-level managers came through the program.”

“It takes a certain personality to identify with and have the type of ownership our culture requires. But this is a conduit for numerous types of talent. We’re dependent on every employee—they drive our success. We’re always looking for a positive spirit, not necessarily the perfect resume,” said Wagler.

“If you have an individual with a positive can-do spirit, there’s nothing that cannot be accomplished. You can develop skill, but it’s difficult to change attitude.”

Sustainability and Social PracticesSteel Dynamics may be one of the country’s largest producers of steel, but it’s also one of North America’s largest recyclers of ferrous and nonferrous metals. This scrap is derived from scrap generated as a byproduct of manufacturing and scrap recycled from end-of-life automobiles, appliances, railroad cars and railroad track materials, agricultural machinery, and demolition scrap from obsolete structures, containers, and machines.  

In 2016, SDI’s metals recycling brand OmniSource processed 5.1 million gross tons of ferrous metals and 1.1 billion pounds of non-ferrous metals.

Ferrous metals are the principal raw material of the company’s steel operations. In 2016, approximately 61 percent of its ferrous shipped tons went to its steel mills, where the company recycled the scrap to make new steel products. Company-wide, Steel Dynamics recycled 11 million tons of ferrous scrap in 2016.

Additionally, SDI utilizes steel mill secondary or waste stream products at its Iron Dynamics facility to produce liquid pig iron, which serves as a raw material in its Butler Flat Roll Division’s metallic mix.

Iron Dynamics also provides its steel mill with inherent economic benefits in the steelmaking process, such as reduced energy cost, reduced materials cost, and quicker melting cycles.

And Steel Dynamics goes beyond recycling.

“We strongly believe in making a positive social impact on the communities where we work and live, through supporting organizations in which our employees are involved and by empowering and encouraging community leadership at each of our locations,” said Wagler.

The company collaborates with its employees and communities to determine areas of need and identifies those organizations that most effectively provide solutions to address those needs. This has included financial support for United Way, Habitat for Humanity volunteerism, local family holiday season adoption, American Red Cross blood drive support, local school system maintenance and clean-up programs, among many, many more.

“We are proud, grateful and humbled by our team’s generosity,” said Millett.  

Culture: The Key to Success

Growth like Steel Dynamics’ is impossible without the culture and the passion the company’s employees bring to the job everyday. The company, which is less than a quarter of a century old, has proven its ability to be in the industry for the long haul. Expect big things—big growth, and big innovation—from Steel Dynamics in the future.